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Economic Effects of a Reduced Water Year
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Analysis, Returns over All Costs for Different Irrigation Scenarios C.
S. McIntosh, N. Fullmer, J. Stark, B. King, R. Oborn Introduction
Irrigation is required for the profitable production of commercial
potatoes in Idaho. However,
drought is a fact of life in the Western U.S.A., and when severe can
result in producers having to adopt sub-optimal irrigation practices due
to restrictions on water availability.
Potatoes have a relatively shallow root zone and therefore a lower
tolerance for water stress than most other crops grown in Idaho.
Precise irrigation management is essential as this drought
sensitive crop is typically produced in coarse textured soils with limited
water holding capacity. The
practice of deficit irrigation where deliberate and planned water stress
occurs during the growing season is generally not considered a viable
economic alternative in irrigated potato production. The minimal cost savings from reduced irrigation does not
begin to cover the income loss due to lower tuber yield and quality.
However, when restricted water availability reduces potato
production potential, options for increasing water use efficiency need to
be considered. The
economic analysis conducted here is based on the University of Idaho, 2003
Costs and Returns Estimates. The
specific budget used for constructing the economic impact of drought as
measured by the various irrigation scenarios are those constructed for
South Eastern Idaho, the region encompassing Bannock, Bingham, and Power
counties (Patterson and Smathers, 2003).
The budgets are estimated for production of Russet Burbank potatoes
and are not available for each variety in the study, but production
practices are similar for all varieties and the Burbank budget captures
the typical production practices used in the region.
It
is important to note that the costs used in this study, as in the budgets,
are economic costs, rather than accounting costs.
The resources in the budget are valued based
on market price or opportunity cost.
An opportunity cost, simply defined, is the value of an asset or
investment, were it to be employed in the best alternative use, other than
the current use. Thus
opportunity costs reflect foregone income (lost opportunity) and represent
a more accurate reflection of the true cost of investment.
The costs and returns estimates used are typical for growing
irrigated Russet Burbank commercial potatoes in the higher yielding
counties of eastern Idaho that fumigate. Production practices are based on
producer surveys conducted in Bingham, Bannock, and Power counties.
Although production practices may be similar for individual farms, each
farm has a unique set of resources with different levels of productivity,
different production problems, and therefore different costs. Farm size,
crop rotation, age and type of equipment, and quality of management are
all crucial factors that influence costs.
See Patterson and Smathers (2003) for specific details regarding
the assumptions used in construction of the budget.
Note that the Russet Burbank budget served as the basis for this
comparison. The costs associated with other varieties may differ
slightly. The costs
used in this analysis include both operating costs and cash and non-cash
ownership (fixed) costs. The
operating costs include: irrigation, agricultural chemicals, custom
application, seed, crop insurance, storage costs, machinery fuel and
lubrication, and interest on operating capital.
Cash ownership costs include: general
overhead, land rent, management fee, property taxes, property insurance,
and investment repairs. The
non-cash ownership costs include depreciation and interest on: the
commercial storage facility, commercial storage equipment, and other
equipment. The bottom
line after all these costs have been accounted for is termed “returns to
risk”. The budgets have
accounted for variable costs, fixed costs, management, land and labor. The
only thing that is not accounted for in the costs is risk.
The returns to risk (if positive) is the amount left to pay the
owner for his or her bearing the financial risk inherent in the production
process. The specific numbers
used in the budgets are available in Patterson and Smathers (2003).
The costs
and returns estimates are based on a model 1,500-acre farm with 500 acres
in potatoes. The typical crop rotation is one year of potatoes followed by
two years of grain. Corn may substitute for grain, while sugar beets and
alfalfa are grown in longer rotations. The farm uses a center pivot
irrigation system and surface water delivered from an irrigation district.
The irrigation district charges a flat fee per acre for water. The only
changes made for this analysis from the published budgets were changes
relating to the quantity of irrigation water applied to the crop. This is reflected in adjustments to the charges for
irrigation power, labor, water assessment and irrigation repairs cost, as
well as resulting changes in interest on operating capital. Revenue Estimates Yield
and quality data from the experimental plots for 2002 and 2003 were
summarized combined and average values between the two years served as the
basis for computing the returns to production.
The yield and quality results were very consistent between the
years. Quality is a major
determinant of the price value of the crop.
It is also impacted by the timing and amount of irrigation. While
some of the varieties are grown predominantly for the frozen process
market, data regarding variety specific price differentials (which also
take into account size, specific gravity, and bruising) are unavailable.
The prices quoted in this study, therefore, are derived from a
fresh market pricing scheme. Though
this may not provide the most accurate measure of returns to risk for some
varieties, it does allow for a consistent basis for comparison between all
varieties capturing changes in the composition of the total yield.
U.S. number 1 potatoes, particularly those of the size appropriate
for carton packing are the most valuable in the fresh-pack market.
Changes in production practices that result in a lower number of
U.S. number 1 potatoes, or an increase in the non-size A potatoes will
dramatically lower the value of the per acre yield. The assumed
per-hundred-weight prices and packing costs used in determining the
per-acre and per-acre inch revenue estimates are contained in Table 1. Table 1.
Price and Packing Costs by Quality $/cwt.
Based
on the yield and quality data from the experimental plots, the prices and
packing costs in Table 1, and the budgets used, the returns over total
costs (returns to risk) for each of the varieties and irrigation scenarios
were calculated. These
results are shown, by potato variety, in Table 2 though Table 7.
Table 2.
Comparison of Yield, Price, Costs and Returns for Russet Burbank.
Table 3.
Comparison of Yield, Price, Costs and Returns for Russet Norkotah.
Table 4.
Comparison of Yield, Price, Costs and Returns for Alturus.
Table 5.
Comparison of Yield, Price, Costs and Returns for Summit Russet.
Table 6.
Comparison of Yield, Price, Costs and Returns for GemStar Russet.
Table 7.
Comparison of Yield, Price, Costs and Returns for Ranger Russet.
Russet Norkotah, an early maturing variety, performed relatively well in treatments where irrigation was cut-off in early August. However, Russet Norkotah showed significant drought susceptibility when stressed throughout the growing season. GemStar Russet and Ranger Russet exhibited the highest degree of drought tolerance and highest returns overall during drought. By comparison, Russet Burbank showed a relatively high susceptibility to drought and low returns in most drought scenarios, while Summit Russet and Alturas exhibited moderate drought susceptibility and lower returns during drought than GemStar Russet or Ranger Russet. In
a drought situation, it is also useful to consider costs and returns on
the basis of the scarce resource, water.
Thus the returns to risk are summarized for each variety and
irrigation scenario on a per-acre-inch of water applied basis (Table 8).
For three varieties (Russet Burbank, Alturas, and Ranger Russet)
the step down scenario represented the best option when measured in terms
of returns to irrigation water used during drought.
In the case of the Ranger Russet, the step down treatment actually
achieved a greater return than the 100% ET, though the difference is very
small. Both GemStar Russet
and Ranger Russet produced relatively high returns to risk per inch of
water used in most of the drought scenarios, while Russet Burbank, Alturas
and Summit produced returns that were considerably lower in response to
drought. Russet Norkotah did well when irrigated fully until early August,
but showed significant drought susceptibility when stressed throughout the
growing season. Table 8.
Returns to risk per acre-inch of water applied for six potato
varieties.
The returns per acre and per acre-inch were summarized for each
variety across the irrigation scenarios in the following graph sets.
All are
displayed with identical scales, respectively, so that the bars are
directly comparable between the figures.
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