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 EnterpriseIrrigation, mmML/hectare Wheat Lucerne Poppies Potatoes

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 Added costs, clearing, keyway, spillway, outlet pipe. Approvals, surveys & reports etc. Dam typeS/E RatioEarthworks 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$3.94 On-Peak$ X OP Average electricity (50% Off & On peak) $ X OP Diesel (fuel plus oils & filters)$ X OP

Electricity V Diesel ElectricityDiesel Energy costsLowerHigher MaintenanceLowerHigher Capital costsLower for motor Aurora line high Higher for diesel engine Location flexibilityLinked to supplyVery portable Pivot driveConvenientRequires hydraulic pivot or gen-set Pivot controlsVery convenientMore 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

Cost, $ 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

Cost, $ 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 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 IncomeGM, $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 $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 7.5% $48,491 Loan payments, Water Right % $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 $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.