dynamics of simulated effects of irrigation over dryland farming in saskatchewan

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WATER RESOURCES BULLETIN VOL. 26, NO.3 AMERICAN WATER RESOURCES ASSOCIATION JUNE 1990 DYNAMICS OF SIMULATED EFFECTS OF IRRIGATION OVER DRYLAND FARMING IN SASKATCHEWAN' R. A. Schoney, W. J. Brown, and S. N. Kulshresht ha2 ABSTRACT: Irrigation development in Saskatchewan was initiated as an instrument to bring forth regional stability through drought proofing and diversification in the agricultural sector. This develop- ment has been surrounded by controversies. Particularly, some crit- ics questioning its economic value to the farmer. In this study, irrigation on a farm is compared as a growth alternative to the expansion of dryland farming. Under relatively conservative machine replacement policies, modest family withdrawals, govern- ment subsidized irrigation loans, and relatively favorable gross operating margins, irrigation can be a profitable undertaking in the South Saskatchewan River Basin. (KEY TERMS: ex-post feasibility; Saskatchewan; simulation.) BACKGROUND Irrigation development in Saskatchewan has been surrounded by controversies. Irrigation proponents view irrigation development as an important tool in stimulating growth and economic diversification, resulting in regional growth and stability. Opponents of irrigation development suggest that irrigation has not only been a major financial disaster for the farmer, but a nonoptimal allocation of scarce public funds as well. The latter becomes a focal issue in the context of large-scale irrigation development projects such as the South Saskatchewan River Irrigation District (SSRID) or multipurpose water development projects with a significant irrigation component. The South Saskatchewan River basin is located in a semi-arid area (see Figure 1) in Saskatchewan. The average annual precipitation in the basin varies from about 13 inches in the south to 20 inches in the north, with a high proportion of the annual precipitation occurring during the growing season. Moisture defi- ciency is the most important single constraint to farming in this region. While dryland farming is practiced, low productivity and high risk of crop fail- ure make financial progress extremely precarious. Moreover, this area has an ample supply of irrigation water from the South Saskatchewan River. Thus, it is not surprising that this area has long been considered a candidate for irrigation development. The irrigation in the vicinity of the South Saskatchewan River Project has been the subject of several studies. Initial studies by Van Vliet et al. (1950), concluded that irrigation development would be unprofitable. Later studies by Sonntag (1965) and Hutcheon (1967) were more optimistic and led the Saskatchewan government to initiate irrigation devel- opment in the 1970's. However, the SSRID project has remained controversial and has been studied several times since its inception. While many of these studies reaffirmed the profitability of irrigation, many people still feel the profitability and feasibility of irrigation in the SSRID is questionable. This study reconsiders the farm level feasibility analysis of SSRID irrigation using historical data. More specifically, this study is concerned with irriga- tion as a growth alternative to expansion of dryland farming in the South Saskatchewan River basin area based on actual historical data. The relative feasibili- ty and riskiness of irrigated to dryland farming is compared based on historical land use, prices, yields, and technologies. In addition, it is hypothesized that the timing of exercising the expansion option may lead to a change in the relative profitability and feasi- bility of irrigation over dryland farming. This study is confined to the SSRID, and for the period from 1968 to 1986. 1Paper No. 89091 of the Water Resources Bulletin. Discussions are open until February 1, 1991. 2Respectively, Associate Professors and Professor, Department of Agricultural Economics, University of Saskatchewan, Rm. 314, Kirk Hall, Saskatoon, Saskatchewan S7N OWO. 509 WATER RESOURCES BULLETIN

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WATER RESOURCES BULLETINVOL. 26, NO.3 AMERICAN WATER RESOURCES ASSOCIATION JUNE 1990

DYNAMICS OF SIMULATED EFFECTS OF IRRIGATIONOVER DRYLAND FARMING IN SASKATCHEWAN'

R. A. Schoney, W. J. Brown, and S. N. Kulshresht ha2

ABSTRACT: Irrigation development in Saskatchewan was initiatedas an instrument to bring forth regional stability through droughtproofing and diversification in the agricultural sector. This develop-ment has been surrounded by controversies. Particularly, some crit-ics questioning its economic value to the farmer. In this study,irrigation on a farm is compared as a growth alternative to theexpansion of dryland farming. Under relatively conservativemachine replacement policies, modest family withdrawals, govern-ment subsidized irrigation loans, and relatively favorable grossoperating margins, irrigation can be a profitable undertaking in theSouth Saskatchewan River Basin.(KEY TERMS: ex-post feasibility; Saskatchewan; simulation.)

BACKGROUND

Irrigation development in Saskatchewan has beensurrounded by controversies. Irrigation proponentsview irrigation development as an important tool instimulating growth and economic diversification,resulting in regional growth and stability. Opponentsof irrigation development suggest that irrigation hasnot only been a major financial disaster for thefarmer, but a nonoptimal allocation of scarce publicfunds as well. The latter becomes a focal issue in thecontext of large-scale irrigation development projectssuch as the South Saskatchewan River IrrigationDistrict (SSRID) or multipurpose water developmentprojects with a significant irrigation component.

The South Saskatchewan River basin is located ina semi-arid area (see Figure 1) in Saskatchewan. Theaverage annual precipitation in the basin varies fromabout 13 inches in the south to 20 inches in the north,with a high proportion of the annual precipitationoccurring during the growing season. Moisture defi-ciency is the most important single constraint to

farming in this region. While dryland farming ispracticed, low productivity and high risk of crop fail-ure make financial progress extremely precarious.Moreover, this area has an ample supply of irrigationwater from the South Saskatchewan River. Thus, it isnot surprising that this area has long been considereda candidate for irrigation development.

The irrigation in the vicinity of the SouthSaskatchewan River Project has been the subject ofseveral studies. Initial studies by Van Vliet et al.(1950), concluded that irrigation development wouldbe unprofitable. Later studies by Sonntag (1965) andHutcheon (1967) were more optimistic and led theSaskatchewan government to initiate irrigation devel-opment in the 1970's. However, the SSRID project hasremained controversial and has been studied severaltimes since its inception. While many of these studiesreaffirmed the profitability of irrigation, many peoplestill feel the profitability and feasibility of irrigationin the SSRID is questionable.

This study reconsiders the farm level feasibilityanalysis of SSRID irrigation using historical data.More specifically, this study is concerned with irriga-tion as a growth alternative to expansion of drylandfarming in the South Saskatchewan River basin areabased on actual historical data. The relative feasibili-ty and riskiness of irrigated to dryland farming iscompared based on historical land use, prices, yields,and technologies. In addition, it is hypothesized thatthe timing of exercising the expansion option maylead to a change in the relative profitability and feasi-bility of irrigation over dryland farming. This study isconfined to the SSRID, and for the period from 1968to 1986.

1Paper No. 89091 of the Water Resources Bulletin. Discussions are open until February 1, 1991.2Respectively, Associate Professors and Professor, Department of Agricultural Economics, University of Saskatchewan, Rm. 314, Kirk Hall,

Saskatoon, Saskatchewan S7N OWO.

509 WATER RESOURCES BULLETIN

LAKEDIEFEN BAKER

Schoney, Brown, and Kulshreshtha

GRAINLAND

Figure 1. Location of the South Saskatchewan River Irrigation Projects.

IRRIGATION DEVELOPMENTIN THE STUDY AREA

Irrigation development patterns are shown inFigure 2 by the type of irrigation system. Irrigationdevelopment follows the classic shape of rapid

WATER RESOURCES BULLETIN 510

increases followed by slower and slower growth.However, in the SSRID irrigation growth was notslowed by depletion of irrigable land but by the gener-al downturn of the western prairie farm economy.While flood irrigation was popular the first few years,initially, later sprinkler irrigation and in particular

SASKATOON

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SSEWS CANAL

WATROUS

DELISLE.SWANSON

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WESTSIDE

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BRIDGEFORD - TUGASKE

e::.:.PRESENTIRRIGATION AREAS

FUTUREIRRIGATION AREAS

Dynamics of Simulated Effects of Irrigation Over Dryland Farming in Saskatchewan

Figure 2. Irrigation Development by Year and Irrigation 1rpe, SSRID: 1968-1985.

center pivot irrigation, became more popular, totallydominating new development by the early 1970's. Theactual patterns of irrigation development are impor-tant to this study because they delineate the alterna-tive irrigation systems.

PROCEDURE

The investigation of the feasibility of irrigation inthe South Saskatchewan River basin is based on real-time simulation of annual farm cash flows and growthof representative dryland and irrigated farms over theperiod of 1968 to 1986, under alternative expansionpolicies. Implicit in this analysis is that the decisionmaker's sole objective is to maximize terminal net

wealth; personal consumption is invariant over time.Thus, the comparative profitability of irrigation overdryland farming can be measured by growth in networth and the corresponding annual growth rates.Risk is not an explicit variable and does not enter inthe analysis through the traditional cropping deci-sions, except as the region as a whole makes suchchanges. The relative riskiness of each alternative isevaluated by examining the variability in annual netcash flows.

In general terms, the real-time simulation modeloperates in the following fashion. Annual farm crop-ping plans are constructed for each representativefarm according to historical land use. The total farmcrop production, gross returns, and direct operatingcosts are based on historical prices and publishedcropping budgets. Federal and provincial income

511 WATER RESOURCES BULLETIN

40

IRRIGATION DEVELOPMENT

SSRD, BY TYPE OF SYSTEM, 1968-1985

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Schoney, Brown, and Kulshreshtha

taxes are based on net cash operating returns lessdepreciation. Machine purchases, principal payments,family living withdrawals, and other cash incomefrom savings are then used to generate annual cashflows. Cash flow deficits are financed according totheir underlying causes; cash deficits generated bymachine purchases are financed by intermediateloans. Likewise, land expansion is financed by long-term financing. All other cash deficits are financedwith operating loans. Cash surpluses are reinvestedat the prime rate less 1.5 percent. At the end of eachyear, all assets are revalued at their farm marketvalue and all liabilities are adjusted for changes indebt position.

A study of economics of irrigation versus drylandfarming can be based on either actual farm data, oron representative farm data. In Saskatchewan, actualfarm data are not available. Such studies have yet tobe carried out. Furthermore, at least inSaskatchewan, only a portion of the farm area is irri-gated, the remainder being nonirrigated. Here onefaces problems of determining the time cost of irriga-tion since some of the common expenses must be allo-cated between irrigation and dryland enterprises.

Representative farms are constructed for two ini-tial sizes of farms and three types of irrigated agricul-ture and one type of dryland farming, giving a total ofeight potential representative farms. Not all combina-tions of farm size and irrigation system are represent-ed; the large gated pipe (gravity systems) and wheelroll irrigation systems are not considered on largefarms because of their large labor requirements andtheir restrictions as to land topography and location.A total of six representative farms are delineatedaccording to farm size and type of irrigation: (1) smalldryland, (2) large dryland, (3) small irrigated centerpivot, (4) small irrigated gated pipe, (5) small irrigat-ed wheel roll, and (6) large irrigated center pivot. The

initial farm size and debt levels are displayed in Table1. Initial debt levels are adjusted to give the samestarting net worth.

Each of these representative farms are simulatedthrough three expansion strategies: (1) no expansion,(2) expansion in 1975, and (3) expansion in 1975 andagain in 1981.

The dryland farms expand by purchasing land andthe irrigated farms expand by converting currentlyowned land from dryland to irrigation, either pivot,wheel roll, or gated pipe according to the initial sys-tem type. Expansion strategies are based on expand-ing by a similar amount of land, approximatelyone-quarter section. In the case of dryland farming,160 acres is purchased; wheel roll and gravity eachexpand by converting 160 acres from dryland to irri-gated agriculture. Center pivot irrigation, because ofthe loss of acres due to the geometry of the pivot,expands by units of 132 acres, the surface under astandard pivot. Each expansion is financed with debtcapital under the terms and conditions associatedwith FarmStart (irrigation investment) and FCC(land purchase). No attempt has been made to stan-dardize farm expansion investments between drylandand irrigated farms to the same amount of capitalexpansion. If expansion investments are standard-ized, the character of the farms would change dramat-ically, particularly in the case of gravity irrigation. Inaddition, standardizing the investment amounts mayresult in unrealistic or unfeasible situations. Formany farms, gravity irrigation is likely to be limitedby available land amenable to that type of irrigation.Moreover, as is evident in Figure 2, the historicalexpansion of irrigation by wheel roll or gravity wasseverely limited. Finally, allowing all farms to pur-chase equivalent investments in land would tend tocreate severe cash flow problems.

TABLE 1. Representative Farm Sizes, Expansion Phases and Initial Loans.

FarmBeginning

SizeExpansion Initial Debts

Land Irrigation Current Intermediate LongID No. Description (acres) (acres) (acres) (dollars) (dollars) (dollars)

1 Small Farm, Dryland 960 160 0 1,000 5,000 10,0002 Large Farm, Dryland 1,280 160 0 2,000 10 .000 10,0003 Small Farm, Center Pivot 960 0 132 1,000 26,199 20,0004 SmallFarm,WheelRoll 960 0 160 1,000 28,104 10,0005 Small Farm, Gravity 960 0 160 1,000 24,873 20,0006 Large Farm, Center Pivot 1,280 0 132 2,000 31,199 20,000

WATER RESOURCES BULLETIN 512

Dynamics of Simulated Effects of Irrigation Over Dryland Farming in Saskatchewan

REPRESENTATIVE FARM DATA

The dryland cropping patterns are based on thecrop mixes typical of Rural Municipalities 254 and284 and included barley, flax, hay, and hard wheat.This area features relatively high amounts of fallowand hard wheat in a two-year rotation. It is assumedthat dryland cropping patterns remain similar to theRM averages regardless of the amount or type of irri-gation system. Irrigated cropping patterns are basedon historical data collected by the SaskatchewanWater Corporation. Historically, wheat is the mostimportant crop in both dryland (80 percent) and irri-gated production (25-65 percent). While drylandwheat production has been based on traditional hardred spring wheat varieties, when wheat prices are lowor hard red spring wheat quotas are constraining,irrigators have switched to high yield, soft wheat vari-eties that are not constrained. This occurred in 1970-74 and 1983-86. While alfalfa is not a significantdryland crop it is a significant irrigated crop, usuallyaccounting for 20 to 26 percent of the total irrigatedarea (Saskatchewan Water Corporation, 1987).

GROSS FARM INCOME

Gross farm income is the sum of crop revenues andproceeds from the Saskatchewan Crop InsuranceCorporation (SCIC), Western Grains StabilizationPrograms (WGSP), and the Special Canadian GrainsPrograms (SCGP) where applicable (Kulshreshtha etal., 1988). The SCGP dryland payments are $13.16,$9.69, and $8.82, respectively, for wheat, barley, andflax; irrigation payments were 150 percent of drylandpayments. Crop revenues are based on the percentageof each crop times the total crop acres time the yieldtimes the price. Yields are based on average, RM 284yields as established by SCIC and estimates by exten-sion personnel (Bohrson, 1987). Commodity prices arebased on historical Saskatchewan prices. In a numberof years, not all grains produced could be delivereddue to board quotas; thus a price penalty for over pro-duction of 1.5 years times the corresponding annualinterest rate was invoked.

CASH OPERATING EXPENSES

Variable cash expenses include seed, chemicals, fer-tilizer, twine, fuel, electricity, water taxes (whereapplicable), and crop insurance. Paid labor is a

separate calculation based on the total hours above1,200 hours of family labor. An additional 15 percentis added to variable costs to cover farm overhead costssuch as power for the shop, legal and accounting fees,insurance and fuel, and repairs for pickup trucks.Fixed cash expenses include property taxes and inter-est payments. Interest rates on debt capital are basedon the type of asset being financed. After 1975, irriga-tion investment loans are based on FarmStart rates;land interest rates are based on FCC rates, and allother loans are based on prevailing commercial inter-est rates. All interest charges are based on the unpaidbalance. Savings rates are based on the prime rateless 1.5 percent. Family living withdrawals are thesame for all farm types, based on a family of four, setat $18,000 (in 1986 dollars), and indexed to the CPI.Income taxes are based on the net taxable income,which is defined as net farm operating income lessCCA claims plus interest on savings. The marginalincome tax rate is held constant at 25 percent.

MACHINE REPLACEMENT POLICIESAND INVESTMENTS

Machine replacement policies are based on an eco-nomic life of 12 and 25 years, respectively, for fieldmachines and irrigation equipment. Field machinereplacement schedules are based on a uniformreplacement of all machines at an annual replace-ment rate, net trade in, of 6.08 percent of the currentnew investment requirement. In contrast, irrigationinvestment is "lumpy" and thus, reflects economies ofsize. Expansion in cropland, in either irrigation ordryland, is matched by a corresponding investment innew machines based on the proportionate increase inaverage acres of cropland.

RESULTS

Annual cash flows and annual net worth are simu-lated from 1968 to 1986 for each representative farmand each expansion policy. Since all representativefarms within a given size group start with the sameinitial net worth, and family living withdrawals areheld constant, increases in net worth are a measure ofthe profitability and the average annual compoundedrate or return on equity or growth rates can be com-pared across farm types and sizes. Farm viability andrisk exposure can be evaluated through the examina-tion of cash flows: chronic and excessive cash

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shortfalls can cause financial instability and eventu-ally firm insolvency. Cash flows are measured byavailable cash for additional investment, savings, orpotential consumption.

SMALL FARMS

The small dryland farms do not fare well, particu-larly at the beginning and at the end of the period. Ascan be expected, the variability in cash flows isextremely high even under no expansion, $11,662 innominal terms and $40,882 in real terms (Table 2).All of the land expansion strategies encountered cashflow problems in the 1967-68 and the 1984-86 periods;cash shortfalls were $30,038, $48,801, and $107,887in 1986 for the no expansion, one-quarter-expansion,and the two-quarter expansion, respectively.Likewise, the initial farm net worth was eroded seri-ously in the 1967-1971 period before increased com-modity prices and the corresponding growth in landvalues reversed this trend. The dryland farm ismarginally viable only under the no expansion alter-native, but federal assistance and provincial loan

programs would have assisted these farms, likelyensuring their viability during 1986 and perhapslater. However, its business survival is definitely atrisk under the two land expansion alternatives. Thescenario involving two purchased quarter sections(one in 1975 and the other in 1981) is clearly a case ofoverlevered debt financing. Financial difficulty is alsoclosely mirrored by low profitability and thus, nomi-nal rates of farm growth, 4.95 percent to 5.35 percent(Table 2). When compared to the average compoundrate of increase of 7.05 percent in the CPI during thissame time period, wealth in terms of real buyingpower, as shown in Table 3, decreased at a real rate ofapproximately 1.48 percent to 1.86 percent per year.

Cash flow and growth patterns of the irrigatedfarms are in sharp contrast to the dryland farms.While all of the irrigated farms experienced moresevere cash shortfalls the first five years, when com-modity prices start to increase they are in a much bet-ter position to respond with much higher growthrates. Nominal growth rates vary from 7.72 percent to10.66 percent per year, which translates into realgrowth rates of 0.73 percent to 3.53 percent (Table 3).Since irrigation expansion is based on the conversionof existing land to irrigated agriculture, the growth in

TABLE 2. Mean and Standard Deviation, Simulated Cash Flows, Small Farms,by System and Expansion Strategy, 1968.1986.

Dryland Center Pivot Wheel Roll GravityYear NE EXP1 EXP2* NE EXP1 EXP2 NE EXP1 EXP2 NE EXP1 EXP2

NOMINAL DOLLARS

Mean 2,712 387 (8,353) 10,533 16,210 16,606 16,441 25,733 26,950Std. Dcv. 11,662 16,285 31,070 14,908 19,290 19,746 16,273 23,596 24,898

17,78515,837

28,16723,806

29,41625,116

REAL 1986 DOLLARS

Mean 9,508 1,355 (29,280) 36,922 56,822 58,210 57,633 90,205 94,471Std. Dev. 40,882 57,086 108,913 52,259 67,618 69,217 57,043 82,713 87,279

62,34555,516

98,73683,452

103,11488,043

aExpansion Strategies: NE = No Expansion; EXP1 = Expand in 1975; and EXP2 =Expand in 1975 and 1981.

TABLE 3. Mean and Standard Deviation, Simulated Annual Net Worth,by System and Expansion Policy, Small Farm, 19681986.*

Dryland Center Pivot Wheel Roll GravityYear NE EXP1 EXP25 NE EXP1 EXP2 NE EXP1 EXP2 NE EXP1 EXP2

GAIN IN REAL NET WORTH -1986 DOLLARS

Gain (103,264) (82,044) (122,338) 38,476 133,175 130,020 125,551 279,755 289,234Rate —1.48% —1.09% —1.86% 0.73% 1.83% 1.80% 1.75% 3.20% 3.28%

139,0671.89%

310,2353.45%

320,3193.53%

Expansion Strategies: NE = No Expansion; EXP1 = Expand in 1975; and EXP2 =Expand in 1975 and 1981.

WATER RESOURCES BULLETIN 514

Dynamics of Simulated Effects of Irrigation Over Dryland Farming in Saskatchewan

equity was not primarily due to inflating land valuesas in the case of dryland farming, but to increases inshort and intermediate term assets and reduced lia-bilities. However, interest rates for irrigation weremuch lower than the prime rate, and thus, were anextremely important factor in maintaining such highgrowth rates.

Of all the irrigation systems, the gravity systemprovides the best cash flow and highest increases innet worth. The gravity system had the lowest capitalinvestment requirements; in 1975, the gravity systemcapital investment requirement was 81 percent of awheel roll and 51 percent of that associated with acenter pivot, but it had considerably higher laborrequirements per acre. The next best system is thewheel roll system, which also features relatively lowinvestment requirements but its development costsrose much more sharply than those associated withthe gravity system, so that its comparative profitabili-ty drops. Center pivot costs rose sharply, making thesecond expansion less profitable in terms of gains innet worth than the first expansion.

LARGE FARMS

The larger dryland farms are an economically moreviable unit than the smaller dryland farm. This isparticularly true of the no-expansion and the one-quarter section expansion alternative; the two-quar-ter section expansion alternative encountered severecash flow problems in 1984 and would probably beforced to make dramatic changes in farm machineryreplacement policies to maintain farm viability (Table4). The nominal increases in net worth were $303,025,$314,963, and $276, 135, respectively, for the noexpansion, one-quarter purchased expansion, and thetwo-quarter purchased expansion (Table 5). The corre-sponding nominal growth rates were 6.45 percent,6.60 percent, and 6.10 percent for the no, one-, andtwo-quarter expansion, respectively. Real growthrates were all negative (Table 5).

Unlike the small farm, only the center pivot irriga-tion was examined for the large farm. The large, cen-ter pivot expansions generated similar growth rates

TABLE 4. Simulated Cash Flows, Large Farms, by System and Expansion Strategy 19681986.*

Dryland Center PivotYear NE EXP1 EXP2* NE EXP1 EXP2

NOMINAL DOLLARS

Mean 11,347 10,774 3,074 16,374 22,167Std. Dcv. 10,654 11,853 22,391 18,046 22,321

22,58222,587

REAL 1986 DOLLARS

Mean 39,776 37,767 10,775 57,397 77,704Std. Dev. 37,346 41,549 78,490 63,258 78,243

79,15979,177

tExpansion Strategies: NE =No Expansion; EXP 1 = Expand in 1975; and EXP2 =Expand in 1975 and 1981.

TABLE 5. Mean and Standard Deviation, Simulated Annual Net Worth,by System and Expansion Strategy, Large Farms, 19681986.*

Dryland Center PivotYear NE EXP1 EXP2t NE EXP1 EXP2

GAIN IN NOMINAL NET WORTH

Gain 303,025 314,963 276,135 436,116 531,607Rate 6.45% 6.60% 6.10% 7.95% 8.83%

529,5568.81%

GAIN IN REAL NET WORTH -1986 DOLLARS

Gain (57,071) (45,134) (83,962) 76,019 171,511Rate —0.43% —0.29% —0.76% 0.97% 1.79%

169,4601.77%

Expansion Strategies: NE = No Expansion; EXP1 = Expand in 1975; and EXP2 = Expand in 1975 and 1981.

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as the dryland farms, with nominal growth ratesranging from 7.95 percent (no expansion) to 8.83 per-cent (two-pivot expansion) and the corresponding realrates of growth ranging from 0.97 percent to 1.77 per-cent (Table 5). Because the initial equity was higher,the corresponding increases in net worth were alsohigher than the dryland farms, ranging from $436,116to $531,607. Nevertheless, as in the small farms, thefirst few years of irrigation were difficult, withsubstantial cash flow deficits occurring during the1968-1972 period. While the cash flow deficits mayhave been manageable, the erosion in net worth dur-ing this period would have alarmed many of theircreditors, possibly preventing expansion during thefollowing more favorable periods.

Of course, the absolute amount of risk as measuredby the standard deviation is considerably higherunder irrigated agriculture. The standard deviation ofthe viable dryland farms ranges from $10,654 to$11,853, while the corresponding standard deviationsassociated with irrigated farms are $18,046 and$22,321 (Table 4). The relative risk, as measured bythe coefficient of variation (CV), associated with dry-land is somewhat more than the risk associated withirrigated agriculture. The dryland-no expansion CVwas 94 percent while that associated with the corre-sponding irrigated farming was estimated to beslightly lower (73 percent).

CONCLUSIONS AND LIMITATIONS

As typical of Saskatchewan under current economicconditions, profitability and growth in dryland farm-ing in the South Saskatchewan River basin is heavilydependent upon continual inflation in land values.Even though the period studied included a period ofrelatively high inflation in land values, dryland farm-ing in the South Saskatchewan River basin generatedrelatively low rates of return to equity. Based on therelative poor net returns, dryland farming in this areais relatively tenuous and financially vulnerable todroughts and poor commodity prices.

Under relatively conservative machine replace-ment policies, modest family living withdrawals, gov-ernment subsidized irrigation loans, and relativelyfavorable gross operating margins, irrigation couldhave been a profitable undertaking in the SouthSaskatchewan River basin. This seems contrary tothe popular perceptions of irrigation. The results areheavily dependent upon the above assumptions;changing these assumptions could have placed theirrigated farms at risk. For example, it may havebeen the case that, when many irrigated farmersexpanded, they also upgraded their machinery by

WATER RESOURCES BULLETIN 516

more than that assumed here; for example, changingmachine replacement policies to a five-year replace-ment program would have severely strained cashflows in the early 1980's causing later problems todevelop. In addition, the cash flow deficits associatedwith the early years of irrigation were eventuallyovercome by the "boom" years of 1973 and 1975.However, if quotas were more severely binding thanassumed here, then sufficient losses could have beengenerated that would have been difficult to overcome.

Gross margins based on extension budgets andexpert producer panels may tend to overestimateenterprise profitability, particularly for alfalfa. Someirrigators would be expected to achieve less thanthose yields or prices, otherwise they might not begrowing the same mix of profitable crops, therefore,encountering potential profitability problems. Finally,the shift from a dryland to an irrigated culturerequires dramatic increases in management ability,both agronomic and business management. The grossoperating margins may assume that shift in agronom-ic management had taken place, and thus, the transi-tion problems are never encountered.

While the gross operating margins may be too high,they are based on the best knowledge available, whichis only secondary, not primary, data. This study con-cludes that irrigation could have been a profitableenterprise using typical production coefficients.However, a number of factors either singly or collec-tively could lead to farm viability problems. Theseinclude low yields, high investment costs, and over-leveraged financing. Thus, this study cannot identi1rfactors that actually cause poor economic and finan-cial performance of irrigated operations. The answersto these questions must rely on actual farm data. TheSouth Saskatchewan River basin should provide fund-ing for ongoing monitoring and research as to theactual profitability of irrigation farming and associat-ed farm management practices.

ACKNOWLEDGMENTS

The authors with to thank Agriculture Canada, Audit andEvaluation Branch, for financial assistance for this study.

LiTERATURE CITED

Bohrson, L., 1988. Soil Capability Assessment of SSRID#1Correspondence (March 1988).

Hutcheon, A. D., 1969. Costs and Returns on Seven IrrigationFarms in the South Saskatchewan River Irrigation Project,1968. Saskatchewan Department of Agriculture, Economics andStatistics Branch, Regina, Saskatchewan (mimeo).

Dynamics of Simulated Effects of Irrigation Over Dryland Farming in Saskatchewan

Kulshreshtha, S. N., K. D. Russell, and K. K. Klein, 1988.Summary Report — Social Evaluation of the South Saskatche-wan River Project: Estimation of Economic, Social andEnvironmental Effects. Canada Department of Agriculture,Ottawa, Canada.

Saskatchewan Water Corporation, 1987. History of the SouthSaskatchewan River Irrigation Project. Irrigation ServicesOperations Division, Moose Jaw, Saskatchewan.

Sonntag, B. H., 1965. Supplemental Irrigation in the ProposedSouth Saskatchewan River Irrigation Project. CanadaDepartment of Agriculture, Economics Branch, Saskatoon,Saskatchewan.

Van Vliet, H., G. Haase, and R. A. Stutt, 1950. An EconomicAppraisal of the Irrigation Phase of the Proposed South Sas-katchewan River Development. University of Saskatchewan,Department of Agricultural Economics, Saskatoon, Sas-katchewan.

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