Return on investment in on farm storage reservoirs: A landscape perspective

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1 Return on investment in on farm storage reservoirs: A landscape perspective Tyler Knapp, Kent Kovacs 2016 Delta States Farm Management Group Annual Meeting May 25 27, 2016 Vicksburg, MS

2 Aquifer Irrigation storage reservoir Tail-water recovery structure

3 Cones of depression from well pumping are evident in the Alluvial Aquifer.

4 Aquifer Irrigation storage reservoir Tail-water recovery structure

5 Objectives What are the possibilities of achieving important economic objectives? Evaluate: Land in reservoirs and return on investment provided economic returns and irrigation choices groundwater supply crop-specific sections of the landscape

6 Rice region Soybean region Overall Landscape Number of sites % of site in crop >35% >35% -

7 Methods Farm profit optimization determines: Acreage of crops (rice, soybeans, corn, etc.) Amount of groundwater and on farm reservoir water used Depth and volume of the aquifer Return on investment in conjunctive water management

8 Economic Returns Objective Profit w/o irrigation costs Reservoir construction cost Reservoir water pumping cost Ground water pumping cost max : L, RW, GW ij _ t i _ t i _ t T m n r rw t prj yij ca j Lij _ t c LiR_ t c RW i_ t GC i_ tgw i_ t t 1 i 1 j 1

Ground water pumping cost max : L, RW, GW ij _ t i _ t i _ t T

9 Dynamics of land and water use Land balance j L L ij _ t ij _0 j Water balance Aquifer stock j wd L GW RW j ij _ t i_ t i_ t AQ AQ p GW nr i_ t i_( t 1) k ik k_ t i m

10 Value of economic and irrigation model parameters Cost of reservoir 1 Water storage 2 Baseline Low cost, high storage High cost, low storage Annual capital cost in dollars per acre amortized at a 5% rate over 30 years. 2 Max. acre feet of water that an acre of reservoir can annually hold

5 Low cost, high storage 285 11 High cost, low storage 777 4 1 Annual capital

11 Percentage Area of Crops in 2033 Rice Soybeans Double crop soybeans Non irrigated sorghum CRP Land Reservoirs 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Reservoirs No reservoirs Reservoirs No reservoirs Rice Intensive Soybean Intensive

90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Reservoirs No

12 30 Year Farm Net Returns Rice Intensive Area Soybean Intensive Area Overall Landscape ,219 3,390 3,282 3, Net returns (millions of dollars) ,775 1,787 1,779 1, Baseline High cost and low storage Low cost and high storage No reservoirs Reservoirs

dollars) 2500 2000 1500 1000 658 1,775 1,787 1,779 1,791 738 765 684 500 0

13 2033 Aquifer Volume Rice Intensive Area Soybean Intensive Area Overall Landscape 80,000 70,000 66,733 68,725 63,058 62,987 Volume of the Aquifer (thousand acre feet) 60,000 50,000 40,000 30,000 20,000 10,000 11,520 32,835 32,998 32,813 33,275 13,473 14,323 11,468 0 Baseline High cost and low storage Low cost and high storage No reservoirs Reservoirs

50,000 40,000 30,000 20,000 10,000 11,520 32,835 32,998 32,813 33,275 13,473 14,323

14 Return on Investment by Scenario Soybean Intensive Area Rice Intensive Area Overall Landscape 35% 30% 25% 20% 15% 10% 5% 0% Baseline High cost and low water storage Low cost and high water storage

15 Percentage of land in reservoirs in 2033 for particular sections of the landscape and the entire landscape Rice Intensive Soybean Intensive All Sites Number of observations Number of observations with reservoirs > Percent land in reservoirs

Intensive All Sites Number of observations 539 1219 2714 Number of

16 Parameter Estimates: Percentage of Land in Reservoirs Rice intensive sites Soybean intensive sites All sites Intercept * 3.77 Aquifer 1.63E E-02** Depth 0.15** 0.19** 0.17** Natural recharge -0.33** 2.01** -0.19** Net returns rice -1.29E ** -4.21E-02** Net returns irrigated soybean -5.47E * 7.92E-03 Net return double crop soybean 2.64E-02** E-02** Net return sorghum -1.28E-02* E-02**

33** 2.01** -0.19** Net returns rice -1.29E-02-0.21** -4.21E-02** Net returns irrigated soybean -5.47E-03-0.

17 Return on investment in reservoirs in 2033 for particular sections of the landscape and the entire landscape Rice Intensive Soybean Intensive All Sites Number of observations Number of observations with ROI >

Intensive Soybean Intensive All Sites Number of

18 Parameter Estimates: Return on Investment in Reservoirs Rice intensive sites Soybean intensive sites All sites Intercept -1.37** ** Aquifer -3.33E ** -6.05E-3** Depth 4.87E-3** 1.69E E-2** Natural recharge 6.89E ** 0.02** Net returns rice 3.07E-3** -9.09E-3** -2.26E-3** Net returns irrigated soybean Net return double crop soybean -1.53E E E-3* 2.16E-3* -5.40E E-3** Net return sorghum -1.01E E E-3**

26E-2** Natural recharge 6.89E-3 0.19** 0.02** Net returns rice 3.07E-3** -9.09E-3** -2.

19 Conclusions Reservoirs should occupy 5% of farm area in rice intensive areas and 0.4% of the farm area in soybean intensive areas. ROI from reservoirs is about 15% in rice intensive areas and 2.2% in soybean intensive areas. Reservoirs should be built at around 60 feet depth in rice intensive areas, though other explanatory factors may change this. ROI in rice intensive areas depends positively on depth, net returns to rice, and net returns to double crop soybeans. ROI in soybean intensive areas depends positively on aquifer and natural recharge and negatively on rice net returns.

Reservoirs should be built at around 60 feet depth in rice intensive areas, though other explanatory factors may change this.

20 Results: two sections of the overall landscape Rice region Soybean region Overall Landscape Number of sites % of site in crop >35% >35% -

21 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Percentage area of crops in 2033 Reservoirs No reservoirs Reservoirs No reservoirs Reservoirs No reservoirs Reservoirs No reservoirs Rice Corn Soybeans Cotton Rice Corn Soybeans Cotton Double crop Non irrigated Reservoirs

22 700 Overall profits [millions $] Reservoirs No reservoirs Reservoirs No reservoirs Reservoirs No reservoirs Reservoirs No reservoirs Rice Corn Soybeans Cotton Rice Corn Soybeans Cotton Double crop Non irrigated

23 25000 Volume of the aquifer Volume (Acre-feet) Rice area Corn area Irr. Soybean area Cotton area Reservoirs No-reservoirs

24 Baseline: TK2 medium reservoir construction cost and high water storage. Crop Sites with reservoirs Rice 69.87% Corn 26.67% Soy 10.00% Cotton 10.33%

25 Slide 24 TK2 I chose not to include the scatter plots from the appendix of the paper. There are only charts for ROI and % land in reservoir, which seem somewhat redundant to the bar graphs already included. If you would like them included, can you please send me the color versions that you would like me to add (they are black and white in the paper draft)? Tyler Knapp, 5/9/2016

26 Rice Region Reservoir cost Low Medium High Sites with reservoirs 79.1% 69.9% 50.8%

27 Corn Region Reservoir cost Low Medium High Sites with reservoirs 35.9% 26.7% 20.1%

28 Soybean Region Reservoir cost Low Medium High Sites with reservoirs 13.5% 10.0% 6.7%

29 70% Return on investment in conjunctive water management 60% Return of investment 50% 40% 30% 20% 10% 0% Rice Corn Isoy Cotton Crop

30 Parameter Estimates: Percentage of Land in Reservoirs Intercept Aquifer Depth Natural recharge Net returns rice Net returns irrigated soybean Net return double crop soybean Net return sorghum Rice intensive sites Irrigated soybean intensive sites All sites (-1.55) 1.63E-02 (0.83) 0.15** (14.57) -0.33** (-3.32) -1.29E-02 (-1.13) -5.47E-03 (-0.53) 2.64E-02** (2.59) -1.28E-02* (-2.08) 43.42* (2.00) 0.10 (1.04) 0.19** (3.67) 2.01** (3.39) -0.21** (-2.88) -0.13* (-2.14) 0.11 (0.78) (-1.48) 3.77 (1.94) -5.02E-02** (-4.72) 0.17** (25.55) -0.19** (-3.1) -4.21E-02** (-7.26) 7.92E-03 (1.29) 3.17E-02** (3.88) -4.13E-02** (-7.41) Number of observations Number of observations with reservoirs >

31 Parameter Estimates: Return on Investment in Reservoirs Intercept Aquifer Depth Natural recharge Net returns rice Net returns irrigated soybean Net return double crop soybean Net return sorghum Rice intensive sites Irrigated soybean intensive sites All sites -1.37** (-4.01) -3.33E-4 (-0.20) 4.87E-3** (5.95) 6.89E-3 (0.82) 3.07E-3** (3.16) -1.53E-3 (-1.74) 2.16E-3* (2.42) -1.01E-3 (-1.87) 1.27 (1.24) 0.02** (3.22) 1.69E-3 (0.51) 0.19** (4.38) -9.09E-3** (-2.98) -4.24E-3 (-1.52) -5.40E-3 (-0.83) -3.11E-3 (-1.08) -0.60** (-2.69) -6.05E-3** (-4.82) 1.26E-2** (17.29) 0.02** (3.05) -2.26E-3** (-3.31) 1.59E-3* (2.29) 5.09E-3** (5.20) -4.66E-3** (-7.06) Number of observations Number of observations with ROI >

University of Arkansas Division of Agriculture. Department of Agricultural Economics & Agribusiness

2012 University of Arkansas Division of Agriculture Department of Agricultural Economics & Agribusiness Vuko Karov, Eric J. Wailes, and K. Bradley Watkins [Assessment of STAX (Stacked Income Protection