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 pasture Around 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 Wheat Lucerne Poppies Potatoes Irrigation, mm 200 - 300 400+ 250 - 300 400 - 600 ML/hectare 2 - 3 4+ 2.5 - 3 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 costs

Earthworks costs

Dam type

Ring tank – Turkeys Nest Gully dam – average sites Exceptional gully dam site

S/E Ratio

3:1 – 5:1 5:1 - 10:1 20:1 – 50:1

Earthworks cost, $/ML

$1,333 - $800 $800 - $400 $200 - $80  Added costs, clearing, keyway, spillway, outlet pipe.

 Approvals, surveys & reports etc.

Pumping costs

Energy source

Off-Peak electricity On-Peak Average electricity (50% Off & On peak) Diesel (fuel plus oils & filters)

$/ML per 10m head

$3.94

$8.97 $6.46 2.3 X OP 1.6 X OP $13.98 - 3.5 X OP

Electricity V Diesel

Energy costs Maintenance Capital costs

Electricity

Lower Lower Lower for motor Aurora line high Location flexibility Linked to supply Pivot drive Convenient Pivot controls Very convenient

Diesel

Higher Higher Higher for diesel engine Very portable Requires hydraulic pivot or gen-set 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 - Pivot

Cost, $

Dam, 51 ML Pipe to dam Pump station & pump Mainline Centre Pivot TOTAL $55,660 $2,500 $25,000 $44,450 $100,000 $227,610 ($9,896/ha)

Capital costs - Traveller

Capital costs - Traveller

Cost, $

Dam, 40 ML Pipe to dam Diesel pump-set Mainline & Al pipe Hard Hose traveller TOTAL $43,560 $2,500 $20,000 $74,025 $40,000 $180,085 ($10,005/ha)

Economic analysis

Analyse the Centre Pivot example

Economic analysis

Components 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 Costs

Electricity – pumping Labour Water TOTAL COSTS

Irrigation GM

GM, $2,300/ha, 23 ha 50% OP $120/ML

$52,900

$2,970 $575 $11,040 $14,585

$38,315

Economic analysis

Irrigation GM

Less GM foregone, 8 dse/ha @ $20 Less wages & overheads MARGIN before Interest & Deprec.

$38,315

$3,680 $3,832

$30,804

Economic analysis Profitability

$30,804 MARGIN Less fixed costs

Interest on the Water Right (1,100/ML) Depreciation Interest on average capital Aurora meter Maintenance TOTAL FIXED COSTS

PROFIT (above 6% real rate of return)

$6,072 $8,578 $11,083 $883 $4,111 $30,727

$76

Economic analysis – Cash Flow

$30,804 MARGIN Less fixed costs

Maintenance Aurora meter Loan payments, equipment 6 yrs @ 7.5% Loan payments, Water Right 10 years @ 7.5% TOTAL

MARGIN after Loan Payments

$4,111 $883 $48,491 $14,743 $68,228

$-37,424

Summary

 Consider the fixed and variable costs Fixed (interest, deprec, maintenance): $1,336 ha  Variable costs: Water, 4 ML @ $120/ML Electricity Labour $480 $129 $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.