Irrigation & Economics

David Armstrong

AK Consultants

Robin Badcock

Badcock Irrigation Services

February 2010

Issues to discuss

The cost of the water Costs of storage Costs of pumping

Electricity v Diesel Equipment costs Economic analysis

Will an investment be profitable? Is the investment affordable?

How much water do I need?

Depends on the area and type of crops:Generally 4-6 megalitres/ha for pastureAround 3 ML/ha for spring crops

What is a Megalitre (ML)?

1 ML = 1,000,000 litres

1 ML = 100 mm on 1 hectare

Crop water requirements

Enterprise Irrigation, mm ML/hectare

Wheat 200 - 300 2 - 3

Lucerne 400+ 4+

Poppies 250 - 300 2.5 - 3

Potatoes 400 - 600 4 - 6

Cost of water

TIDB – Water to Oatlands & Jordan River: $98-$120/ML (delivered 365 days/year).

So storage of 50-60% will be necessary.The biggest factor in dam construction costs is the Storage Ratio

Dam costsEarthworks costs

Added costs, clearing, keyway, spillway, outlet pipe. Approvals, surveys & reports etc.

Dam type S/E Ratio Earthworks cost, $/ML

Ring tank –Turkeys Nest

3:1 – 5:1 $1,333 - $800

Gully dam – average sites

5:1 - 10:1 $800 - $400

Exceptional gully dam site

20:1 – 50:1 $200 - $80

Pumping costs

Energy source $/ML per 10m head

Off-Peak electricity $3.94

On-Peak $8.97 - 2.3 X OP

Average electricity (50% Off & On peak)

$6.46 - 1.6 X OP

Diesel (fuel plus oils & filters) $13.98 - 3.5 X OP

Electricity V Diesel

Electricity Diesel

Energy costs Lower Higher

Maintenance Lower Higher

Capital costs Lower for motorAurora line high

Higher for diesel engine

Location flexibility Linked to supply Very portable

Pivot drive Convenient Requires hydraulic pivot or gen-set

Pivot controls Very convenient More restricted

Irrigation Equipment Centre pivot, fixed or towable

Depends on soils, rotation, economics

• Linear or lateral move machines Square paddock layout More labour Higher cost

• Gun type irrigators, hard or soft hose Low capital investment Higher labour cost Higher pumping cost Suits odd shaped irrigation areas Very portable Potentially poor uniformity

Capital costs - Pivot

Capital costs - PivotCost, $

Dam, 51 ML $55,660

Pipe to dam $2,500

Pump station & pump $25,000

Mainline $44,450

Centre Pivot $100,000

TOTAL $227,610 ($9,896/ha)

Capital costs - Traveller

Capital costs - TravellerCost, $

Dam, 40 ML $43,560

Pipe to dam $2,500

Diesel pump-set $20,000

Mainline & Al pipe $74,025

Hard Hose traveller $40,000

TOTAL $180,085 ($10,005/ha)

Economic analysis

Analyse the Centre Pivot example

Economic analysisComponents of the analysis• Income from the irrigated area (Gross Margin income)• Subtract irrig. costs (water, electricity, labour)• Subtract the dryland Gross Margin• Subtract extra wages and overheads.• Deduct interest, deprecn. & maintenance = PROFIT MARGIN

• OR deduct Finance Payment = CASH FLOW MARGIN

Centre Pivot, 23 ha/year

Centre Pivot system

Towable pivot, 1 circle/year, 23 ha. Dam 51 ML. Design 4 ML/ha per year. Electric pump-set; total head 50m. Pumping 50% OP. Water cost $120/ML

Economic analysis

Income GM, $2,300/ha, 23 ha

$52,900

Costs

Electricity – pumping

50% OP $2,970

Labour $575

Water $120/ML $11,040

TOTAL COSTS $14,585

Irrigation GM $38,315

Economic analysis

Irrigation GM $38,315

Less GM foregone, 8 dse/ha @ $20 $3,680

Less wages & overheads $3,832

MARGIN before Interest & Deprec. $30,804

Economic analysis - Profitability

MARGIN $30,804

Less fixed costs

Interest on the Water Right (1,100/ML)

$6,072

Depreciation $8,578

Interest on average capital $11,083

Aurora meter $883

Maintenance $4,111

TOTAL FIXED COSTS $30,727

PROFIT (above 6% real rate of return) $76

Economic analysis – Cash Flow

MARGIN $30,804

Less fixed costs

Maintenance $4,111

Aurora meter $883

Loan payments, equipment 6 yrs @ 7.5%

$48,491

Loan payments, Water Right 10 years @ 7.5%

$14,743

TOTAL $68,228

MARGIN after Loan Payments $-37,424

Summary

Consider the fixed and variable costs Fixed (interest, deprec, maintenance): $1,336 ha

Variable costs: Water, 4 ML @ $120/ML $480 Electricity $129 Labour $25

With most irrigation schemes fixed costs are much greater than variable costs. So…

Summary

There is a difference between Profitability and affordability.

This Centre Pivot scheme was profitable at GM of $2,300/ha.

But at that GM the annual cash flow losses for the first 6 years is around $37,500. After that the cash flow position is eased. Can the business afford such cash flow losses?

Summary

All schemes are different, so be careful about generalisations.

But in the Midlands we will generally need crops with relatively high Gross Margins for schemes to be profitable and affordable.

So, is the opportunity too expensive?

Depends on your situation: Business & personal situation Land and soils Topography for irrigators and dams

The capital costs in your situation

What you can grow The crops you can contract Expected yields

So…

Do your homework

Find out where and what you can irrigate.

Work out a design, get it costed.

See what cash income you can generate.

Then do the sums and consider the risks.