Transcription

Economic Impact of the Ability ofNebraska Agriculture to IrrigateThe Case of 2012PreparedFor:PreparedBy:November 16, 2012

Table of ContentsExecutive Summary. 3Background . 4Drought of 2012 . 4Current State of Irrigation in Nebraska. 6Methodology & Assumptions . 8Framing the Research Question. 8Planting for Irrigation . 8Estimation of Irrigated & Dryland Acres . 10Estimation of Expected Yields, Acreage, and Prices . 102002-2003 Nebraska Drought as a Reference . 11Estimation of Actual Harvest Revenue . 11Determination of Harvest Revenue . 12Estimating Economic Impact . 13Results . 14IMPLAN Model Assumptions and Inputs . 15Total Impact Results. 16Top 10 Impact Tables . 16Output (Sales) Impacts. 18Employment Impacts . 18Total Value-Added Impacts . 19Labor Income Impacts. 19Conclusion . 202

Executive SummaryWith the harsh 2012 growing season behind for Nebraska crop producers, sights are now on theprospects for 2013. An exceptional drought gripped much of the United States from mid-June to theend of the growing season. In many regards, the drought persists in many parts of the country. Withoutsignificant moisture accumulations prior to spring planting 2013, drought conditions may continue intonext year’s growing season.Since the drought of 2012 became a cause of concern in mid-2012, there have been discussionsregarding ways to limit the use of water for agricultural purposes. Many of these discussions will resultin the introduction of various policy proposals and regulations at the state, watershed, and countylevels. In an effort to provide context regarding the importance of the ability of Nebraska cropproducers to irrigate their crops, the Nebraska Farm Bureau has retained the services of DecisionInnovation Solutions to estimate the state level economic impact of crop producers’ ability to irrigate.Using methodology and assumptions outlined in this report, an estimated loss of 7.1 billion in directeconomic activity would result from the inability of Nebraska’s crop producers to irrigate their land in apredictable, well-defined manner. While 7.1 billion is in and of itself a very large figure (represents8.8% of 2011 Nebraska GDP), the losses multiply when the backward linkages of this loss are considered.In fact, when all rounds of economic activity are considered, the estimated losses to the State ofNebraska would be the following: Impact TypeDirect EffectIndirect EffectInduced EffectTotal Effect31,221 fewer jobs 11.0 billion in lower Output 5.5 billion in lower Total Value-Added 3.3 billion in lower Labor IncomeEmployment(13,550)(17,672)(31,221)Labor Income( 2,131,837,655)( 529,417,314)( 643,189,735)( 3,304,444,704)Total Value-Added( 3,307,799,895)( 1,070,608,174)( 1,150,415,492)( 5,528,823,562)Output( 7,083,745,522)( 1,938,585,249)( 1,947,118,568)( 10,969,449,338)As can be seen in the above results summary, the impact of the inability to irrigate Nebraska cropproduction is significant. Additionally, there are unintended consequences associated with limiting orpreventing irrigation of Nebraska’s crop land, many of which are not necessarily identified with thisanalysis. Due to the significant impact of the ability of Nebraska’s farmers to irrigate their crops,extreme due diligence should be undertaken to understand all the implications and unintendedconsequences surrounding limiting agriculture’s ability to irrigate, especially in a drought environmentsimilar to that endured in 2012.3

BackgroundWith the 2012 growing season behind for Nebraska crop producers, sights are now on the prospects for2013. An exceptional drought gripped much of the United States from mid-June to the end of thegrowing season. In many regards, the drought continues to persist in many parts of the country.Without significant moisture accumulations prior to spring planting 2013, drought conditions maycontinue throughout next year’s growing season.Because water is a limited resource, there is concern for its allocation, especially in times of drought.There are many distinct users of water who have unique needs for its use. When water is in shortsupply, these users’ concerns come into sharp focus and can often become the topic of pointed debateregarding its use. The drought of 2012 is certainly not an exception to this reality.Drought always brings to the forefront the competing uses of water in Nebraska--agriculture, domestic,industrial and stream flows for wildlife and environmental reasons. As a result, periods of drought leadto discussions of how to balance these competing uses for water. Often times, because agriculture is alarge user, these discussions include the various ideas to regulate or restrict the use of water.Since the drought of 2012 became a cause of concern in mid-2012, there have been discussionsregarding ways to limit the use of water for agricultural purposes. Many of these discussions will resultin the introduction of various regulations and policy proposals at the state, watershed, and countylevels. In an effort to provide context regarding the importance of the ability of Nebraska cropproducers to irrigate their crops, the Nebraska Farm Bureau has retained the services of DecisionInnovation Solutions to estimate the state level economic impact of crop producers’ ability to irrigate.Drought of 2012Beginning in early 2012, Nebraska’s 2012 crop growing season looked promising. Due to an early springand favorable planting conditions, crops were planted well ahead of historical averages. For example, inearly May 2012, seventy-four percent of corn was planted, which was twenty-four percentage pointsahead of the 2007-2011 average. As a result of the early planting and generally favorable emergenceand early growing conditions, the crops showed early signs of strength. By the end of May, the corncrop was ninety-seven percent emerged, which was twenty-two percentage points ahead of the 20072011 average. Similar early season planting and growing conditions favored other key Nebraska crops,such as soybeans, wheat, and alfalfa.While early growing conditions were certainly welcomed by Nebraska’s crop producers, these favorableconditions soon gave way to a progressive deterioration of crop producing conditions. By the end ofJuly, most of Nebraska was classified by the U.S. Drought Monitor (UNL) as an “Extreme Drought”.As the summer continued to progress, Nebraska, as well as a significant portion of the continentalUnited States, continued to see conditions worsen. By the end of September, most of Nebraska wasclassified by the U.S. Drought Monitor (UNL) as an “Exceptional Drought”. Figure 1 depicts the extent ofthe drought as of September 25, 2012.4

Figure 1, Drought Conditions Sept 25, 2012 (Source: Drought Monitor, UNL)As the drought of 2012 worsened for Nebraska’s crop producers, dryland acres began to show signs ofstress. It became apparent that there would be yield losses associated with crops grown on these acres.Those crops under irrigations, however, were able to mitigate much of the yield losses persistentlypresent on dryland acres. There have been periods of time throughout Nebraska’s rich agricultural pastwhere the value of irrigation is readily apparent. In most cases, the effects of abnormally dry weatherhave historically been alleviated through the ability of farmers to apply supplemental moisture to cropsat critical growth phases.Other times, in spite of the ability to irrigate crops in drought years, yield prospects diminish, albeit at alower rate than those crops in dryland areas. These lower yields come from two broad sources: 1) thedrought is extreme enough that continuous irrigation cannot overcome the effects of extreme heat andlack of moisture, and 2) pumping restrictions come into effect, either due to aquifer levels or restrictionson levels of electric power (for pumping) availability (i.e., high use of electricity for residential coolingpurposes) during daytime hours.The type of extreme drought which causes yield losses in irrigated acres was last experienced inNebraska in 2002. Due to the extreme nature of that drought and the continued lack of moisture overthe following winter, the effects of the 2002 drought continued throughout 2003. This was due to thefact that much of the subsoil moisture was not sufficiently replenished. Yields in much of Nebraskawere diminished for both irrigated and dryland crops for both 2002 and 2003.From all indications witnessed to date, the drought of 2012 has many of the same characteristics as thedrought of 2002. While the coming winter moisture totals won’t be known for 3-4 months, there is aconsiderable moisture deficit to make up if Nebraska is to avert a scenario similar to the persistingdrought conditions endured in 2003.5

Current State of Irrigation in NebraskaLike many Midwestern, Plains, and Western states, Nebraska has considerable irrigation capabilities.According to the 2008 Farm and Ranch Irrigation Survey conducted by the USDA/National AgriculturalStatistics Service (NASS), there were 8.4 million acres under all types of irrigation (pivot, linears, solidsets, wheel moves, travelers, and hand sets) in 2007. With this degree of irrigation, Nebraska has thehighest level of acreage under irrigation for all states. The next closest state is California, where 7.3million acres are under irrigation. Since the year 2007, the number of acres under irrigation of all typeshas likely increased, but at a decreasing rate. From a national perspective, in 2008, there were 54.9million acres under irrigation, which was a 2.4 million increase since 2003.A second set of data pertaining to the degree of irrigation to consider is from the Nebraska Departmentof Natural Resources. According to this data set, there are 86,593 irrigation wells permitted forirrigating up to 10.3 million acres. Depending on the pace at which irrigation has increased since therelease of the 2008 Farm and Ranch Irrigation Survey, there is likely a degree of excess irrigationcapacity in the state, meaning there are sufficient wells and pumping permits to adequately irrigatedesired acreage. However, with new well drilling restrictions in some key watersheds in Nebraska, theability of irrigators to keep ahead of irrigating demands will continue to diminish in the near term.Figures 2 and 3 show the degree of irrigation in Nebraska, both in terms of number of wells and thenumber of acres they are permitted to irrigate.Figure 2, Irrigation Wells by County (Source: Nebraska Department of Natural Resources)6

Figure 3, Permitted Acres by County (Source: Nebraska Department of Natural Resources)In addition to the considerable use of irrigation in Nebraska, the state is also home to companies whichmanufacture, install, and maintain irrigation equipment such as Reinke Manufacturing, ValmontIndustries, T-L Irrigation, and Lindsay Manufacturing, among others. While these and other irrigationcompanies located in Nebraska likely provide much of the necessary equipment for Nebraskaagriculture, they also serve key customers both outside the State of Nebraska and the United States.7

Methodology & AssumptionsConsiderable thought was given to first understand and then to quantify the intricacies regarding theability of Nebraska crop producers to predictably irrigate their crops. Below is a description of therationale for assumptions and the methodology utilized for estimating the ability of Nebraska cropproducers to irrigate their crops.Framing the Research QuestionFraming the research question is really quite straightforward and is based on a few key assumptions:1. Crop producers have advance notice as to whether they will have the ability to irrigate theircrops.2. For the purposes of this analysis, we are only looking at the decision making process for irrigatedacres and crops that are typically grown on them. This is because a dryland crop producerplants for no irrigation (lower plant populations) regardless of anticipated growing conditions inthe coming growing season.3. If crop producers knew going into the planting season they would have the ability to irrigate,they would “plant for irrigation” (higher plant populations). Otherwise they would plant for noirrigation.With the application of these three assumptions, the results of the scenario are determined from thecomparison of two rational planting perspectives: A crop producer who plants their crop “for irrigation” suffers some yield loss from the drought.They harvest their crop and take advantage of elevated commodity prices and will likely have avery profitable year.A crop producer who plants their crop for no irrigation suffers significant yield loss from thedrought. They harvest their crop and take advantage of elevated commodity prices and willlikely have significant losses, especially if no crop insurance was purchased.Once the above assumptions are applied, the ability to understand the respective estimated revenues ispossible. The difference in the revenues from the two perspectives is then modeled for an estimation ofeconomic impact to the State of Nebraska.Planting for IrrigationA farmer using irrigation will plant the maximum sustainable plant populations. The impact is mostsignificant with corn and somewhat less for soybeans and other irrigated crops. The farmer can do sowith the confidence that water will be available for the crops when needed.A farmer on dry land cannot predict weather patterns so a plant population that is sustainable in atypical year is chosen. Consequently maximum potential yields are never realized even in very favorablegrowing conditions.8

As a result, the use of irrigation holds statewide yields at a more stable level year to year. The followingscenarios, while not specific in economic terms, illustrate the relative impact of variances in weatherpatterns from year to year.1. Better than average growing conditions - The irrigated farm achieves maximum yields. The dryland farm achieves the best possible yield considering the plant population used, but could haveproduced a higher yield if a higher plant population was chosen. The result: Overall yields are better than average Farm incomes are better than expectedoMargins are improved for the irrigated farm due to lower operating costs(reduced irrigation inputs)oMargins are improved for the dry land farm due to above average yieldsoSome downward pressure on crop prices due to all farms achieving better thanaverage yields.2. Average growing conditions - The irrigated farm achieves maximum yields. The dry land farmachieves an average yield due to the average plant population used. The result: Overall yields are average or better Farm incomes are average or better Margins are at expected levels for the both irrigated farms and dry land farms3. Marginal growing conditions - The irrigated farm achieves maximum yields. The dry land farmachieves a less than average yield due to the plant population at levels anticipating an averageyear. The result: Overall yields are somewhat below average Farm incomes are adversely impactedoMargins for irrigated operations are reduced by higher irrigation input costsoMargins for dry land operations are severely reduced due to reduced yields4. Drought conditions - The irrigated farm achieves something less than maximum yields sinceirrigation by itself cannot completely offset other drought stressors such as extreme heat. Thedry land farm achieves very poor yields due to plant populations at average levels. The result: Overall yields are below average Farm incomes are adversely impactedoMargins for irrigated operations are reduced by both lower yields and higherirrigation input costsoMargins for dry land operations (not covered by crop insurance) are negative.9

Since the farmer using irrigation can plant for maximum potential yields every year with confidence thestate can expect a more stable level of crop yields resulting in a relatively stable level of farm income.Stable farm incomes benefit communities and all of the businesses supporting agriculture.Estimation of Irrigated & Dryland AcresMajor crop acreages and yields for each county grown in Nebraska were identified, using USDA/NationalAgricultural Statistics Service (NASS) data, to determine the direct effect that irrigation has on theNebraska economy. Irrigated crops included corn for grain, corn for silage, soybeans, alfalfa, wheat, dryedible beans, and sugarbeets.Estimation of Expected Yields, Acreage, and PricesOnce data were obtained regarding yields and acreages for the crops in question, we calculated timeseries regression equations for each crop in every Nebraska county (where the irrigated crops wereproduced) using historical data from 1991 to 2011. These regression equations were used to estimatethe irrigated and dryland crop yields, assuming normal precipitation, for 2012. Of note, all analysis ofyields and acreage were done at county level and then rolled up to the state level for impact analysis.This was done to ensure variation in yields at the county level was captured. In the process ofestimating 2012 county level yields for relevant crops, we double constrained the regression analysis byonly considering counties which had a minimum threshold of data points in the 1991-2011 timeframeand had production in the recent past.Because county specific data had not yet been published as of the writing of this study, crop acres wereestimated for each county. In the process of estimating 2012 county level acreages for relevant crops,we double constrained the regression analysis by only considering counties which had a minimumthreshold of data points in the 1991-2011 timeframe and had production in the recent past.Prices used to determine harvest revenue were obtained from announced crop insurance prices.Because of the timing of this report, all harvest crop insurance prices have been announced and areshown in Table 1. In most cases, these harvest prices are elevated due to the effects of the drought.Due to the unavailability of data for corn silage, a multiple (7) of corn price was used as a proxy. Usingthis approach to placing value on corn silage is common in the dairy and other livestock industries.CropCornCorn SilageSoybeansAlfalfaGrain SorghumDry BeansSugarbeetsWheatYield UnitbutonbutonbulbtonbuTable 1, Harvest Crop Insurance Prices10Harvest Price/Yield Unit 7.50 52.50 15.39 225.00 7.31 0.38 60.00 8.70

2002-2003 Nebraska Drought as a ReferenceBecause actual yield estimates are not yet available for 2012, the impact of the 2012 drought onirrigated and dryland crops are not known with a high degree of certainty. To overcome this limitation,we use the 2002-2003 Nebraska drought as a reference. Recall that the drought which began in 2002carried over into 2003 because of the lack of subsoil moisture replenishment during the 2002/03 winterand spring 2003. Because the drought persisted into 2003, we used both 2002 and 2003 to express thefull impact of that particular drought.In determining what the impact of the 2012 drought will have on relevant crops and acreages, wecalculated a regression equation to determine the 10-year trend line yield estimate for the year 2002.Similar to calculating trend line yield estimates for 2012, we double constrained the regression analysisby only considering counties which had a minimum threshold of data points in the 10-yr time frame andhad production in the recent past leading up to 2002.Once expected yield for each county was calculated for the year 2002, a percent deviation from trendline was calculated for all counties and crops for both irrigated and dryland production. This percentdeviation was then applied to 2012 yield expectations.Estimation of Actual Harvest RevenueTo estimate what actual harvest revenue was for 2012, we use crop insurance harvest priceannouncements for the relevant crops. Crop budgets for each of the identified crops were obtainedfrom The University of Nebraska Lincoln to determine the cost of production for both irrigated anddryland acres. In estimating harvest revenue for both irrigated and dryland production a few additionalconsiderations were made. They are: Some irrigated crops would not normally be grown in a dryland environment (dry edible beansand sugarbeets). To address this issue, we assume irrigated dry edible beans would be plantedto dryland wheat and irrigated sugarbeets would be planted to dryland soybeans.While all crops have the potential to receive crop insurance indemnities, those crops planted forno irrigation are more likely to receive crop insurance indemnities in a drought situation.For acreage which would likely receive crop insurance indemnities, these estimated indemnitieswere added back into crop revenue for comparison.To simplify the application of crop insurance indemnities, a weighted coverage level wascalculated from 2012 data from the USDA/Risk Management Agency (RMA). These weightedaverage coverage levels were between 71% and 73%, which can be seen in Figure 5.11

Figure 3, 2012 Nebraska Crop Insurance Purchases (Source: USDA/Risk Management Agency)Determination of Harvest RevenueThe methodology used to determine harvest revenue for both producers who plant for irrigation andproducers who plant for no irrigation are below. Results from applying the above equations are shownin Table 2:Producers who Plant for Irrigation(((Exp Irr Yld2012*(1 Perc Deviation2002-03))*Harvest Price2012 ) Crop Ins Indem2012) * Irrigated Acres2012Producers who Plant for No Irrigation(((Exp Dry Yld2012*(1 Perc Deviation2002-03))*Harvest Price2012 ) Crop Ins Indem2012) * Irrigated Acres2012CornCorn SilageAlfalfaGrain SorghumSoybeansWheatDry BeansTotal State RevenueIrr Yld Drought Rev 7,747,405,434 93,027,028 440,727,171 9,524,564 2,375,947,382 107,047,359 94,726,682 10,868,405,621Dry Yld Drought Rev 2,338,654,475 30,684,845 213,238,766 2,854,224 1,125,211,058 48,168,354 25,848,234 3,784,659,957Table 2, Estimated Harvest Revenue12 3401,250,736,32458,879,00568,878,4487,083,745,664

Estimating Economic ImpactThe term “Economic Impact Study” implies a change has taken place within a local economy. Thechange in a local economy typically comes from one of the following sources: Entrance/departure of a new business or industryExpansion/contraction of an existing business or industryIn the case of this project, we are dealing with the contraction of an existing industry; therefore, wewould expect a negative economic impact from the change. The economic magnitude of theseeconomic activities is largely related to the degree to which industries within the local area are able tosupply needed inputs. To quantify the degree of impact from a particular project, we commonly use thefollowing measures: output (sales), employment (jobs), labor income, and value added. The resultssection of this report show impacts in terms of these economic measures.When estimating the total impact of a contraction in the relevant crop production sectors, we mustunderstand the series of economic activities (impacts) which will no longer take place. Whenquantifying the economic impact of a contraction in the crop production, the lack of direct purchase ofsupplies and equipment are known as direct effects. The suppliers and vendors used during theproduction of commodities purchase their respective inputs to support the production of commodities;these are known as indirect effects. Those who work in the production of commodities, as part of theoperations of those who support the production of commodities (suppliers and vendors) then use theiradditional income to make household purchases; these are known as household, or induced effects.Taken together, the sum of direct, indirect and induced effects are known as total effects and accountsfor the total multiplier effect present from the production of commodities. The results section of thisreport will summarize direct, indirect, and induced effects.When conducting economic impact analyses, an analyst following industry practice typically relies onprimary sources of data, such as the project sponsor and others with first-hand knowledge of theproject, and pertinent information obtained from independent sources. Additionally, an analysttypically makes use of any number of software packages to understand the linkages among industriespresent in the study area. These software packages rely heavily upon periodically reported governmentstatistics and surveys and other secondary sources data. The purpose of these data sources is to identifyand quantify the inputs a particular industry must obtain in order to produce its specific good(s) and/orservice(s).For the purposes of this analysis, we have utilized IMPLAN software, which is software designed tocapture the total effects of a particular change in a local (State of Nebraska) economy. With theassumptions and methodology detailed in previous sections, it is now appropriate to report on theresults of estimating the economic impact of Nebraska crop producers having the ability to irrigate theircrops.13

ResultsThe results of this analysis are reported in general terms. An extensive amount of results andsupporting data are available for further understanding the implications of a change in Nebraska’seconomy of this magnitude. In the discipline of economic impact study, the results shown in thisdocument are those results which are most commonly reported. These measures of impact are: Outputo The most broad measure of economic activity – sometimes referred to as “sales”Employmento A measure of job positions without regard to whether they are full-time equivalentsLabor Incomeo A measure of Employee Compensation (work for hire) and Proprietor Income (selfemployed)Total Value-Addedo A combination of Labor Income, Other Property Income, and Indirect Business Taxes,which represents the additional value a business adds to purchased inputsPrior to reporting on the results of this analysis, a few points of additional clarification on the results ofthe economic impact estimates are appropriate: Impact figures for impact types are not additive and should be presented and analyzedindependently.In terms of looking at various forms of economic activity measures:o Output (Sales) is the broadest measure of economic activity and includes all others(excluding employment) listed in tables in this document.o Value Added is a sub-component of output; value-added includes: EmployeeCompensation, Proprietor Income, Other Property Income, and Indirect Business taxes.o Labor Income is a sum of Employee Compensation (work for hire) and ProprietorIncome (self-employed) and is a sub-component of value-added.14

IMPLAN Model Assumptions and InputsAll IMPLAN data come with base assumptions from software authors regarding the relationships amongindustries. In some cases, these base assumptions may need to be adjusted. For this analysis weutilized the 2009 IMPLAN data for the State of Nebraska. For the sectors impacted (crops), adjustmentswere made to reflect current levels of economic activity. While the adjustments did have an impact onthe overall results of the study, they were in line with expectations.With base model assumptions adjusted to current levels of economic activity, the model was loadedwith data from Table 4, which were derived from data in Table 3. Background on how

In addition to the considerable use of irrigation in Nebraska, the state is also home to companies which manufacture, install, and maintain irrigation equipment such as Reinke Manufacturing, Valmont Industries, T-L Irrigation, and Lindsay Manufacturing, among