IMPACTS OF GROUNDWATER MANAGEMENT AND ALTERNATIVE

IMPACTS OF GROUNDWATER MANAGEMENT AND ALTERNATIVE

IMPACTS OF GROUNDWATER MANAGEMENT AND ALTERNATIVE

IRRIGATION TECHNOLOGIES ON WATER CONSERVATION IN

FINAL COUNTY AGRICULTURE: AN ECONOMIC ANALYSIS by

Irwin Anthony Akpoborie

A Dissertation Submitted to the Faculty of the

DEPARTMENT OF HYDROLOGY AND WATER RESOURCES

In Partial Fulfillment of the Requirements

For the Degree of

DOCTOR OF PHILOSOPHY

WITH A MAJOR IN WATER RESOURCES ADMINISTRATION

In the Graduate College

THE UNIVERSITY OF ARIZONA

1983

THE

UNIVERSITY OF ARIZONA

GRADUATE COLLEGE

As members of the Final Examination Committee, we certify that we have read the dissertation prepared by

Irwin Anthony

Akpoborie entitled Impacts of Groundwater Management and Alternative Irrigation

Technologies on Water Conservation in

Pinal County Agriculture:

An Economic Analysis and recommend that it be accepted as fulfilling the dissertation requirement for the Degree of

Doctor of Philosophy

Date

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Date

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623)91 (53

Final approval and acceptance of this dissertation is contingent upon the candidate's submission of the final copy of the dissertation to the Graduate

College.

I hereby certify that I have read this dissertation prepared under my direction and recommend that it be accepted as fulfilling the dissertation réEfIrement.

STATEMENT BY AUTHOR

This dissertation has been submitted in partial fulfillment of requirements for an advanced degree at The University of Arizona and is deposited in the University Library to be made available to borrowers under rules of the Library.

Brief quotations from this dissertation are allowable without special permission, provided that accurate acknowledgment of source is made. Requests for permission for extended quotation from or reproduction of this manuscript in whole or in part may be granted by the head of the major department or the Dean of the Graduate College when in his judgment the proposed use of the material is in the interests of scholarship. In all other instances, however, permission must be obtained from the author.

SIGNED:

ACKNOWLEDGMENTS

I am indebted to my dissertation director,

Dr.

James C. Wade, for providing me with the opportunity to participate in the research effort of which this dissertation is a contribution, and for his guidance and infinite patience throughout the course of the research. I am also grateful to

Dr.

Erick A.

Monke, with whom I worked very closely, and who provided crucial suggestions, as well as critically reviewed several drafts of the manuscript. I also sincerely appreciate the moral support and kindness extended to me by my academic advisor,

Dr.

Judith M. Dworkin.

I finally would like to thank Ms. Mary Shelley for typing the initial drafts, and Ms. Erika Louie not only for an excellent job of typing the final manuscript, but also for being especially accommodating during several periods of difficulty.

This research was financed in part with funds provided by the

U.S. Department of the Interior, through Project Number

B-094-ARIZ,

Agreement Number

14-34-0001-1202.

Lii

TABLE OF CONTENTS

LIST OF TABLES

LIST OF ILLUSTRATIONS

ABSTRACT

CHAPTER

1.

INTRODUCTION

The Problem

Research Objectives

Outline of the Dissertation

2.

PINAL COUNTY AGRICULTURE, WATER RESOURCES AND THE

ARIZONA GROUND WATER MANAGEMENT ACT: AN OVERVIEW

The Structure of Irrigated Agriculture

Water Resources

Water Law

Surface Water

Groundwater

Summary

3. ANALYTICAL FRAMEWORK

Definitions of Water Conservation

An Overview of Benefit-Cost Analysis

Review of the Theory

Applications in Water Resources

Review of Related Studies

Groundwater Basin Management

Irrigation Systems

Water-Production Function Research

Studies on Pinel County Agriculture

The Methodology of This Study

Common Pool Problems

Basin-Wide Management Models

The Burt Model: Temporal Allocation of Groundwater iv

Page

vii

xi

22

22

23

24

27

28

28

30

34

35

36

37

39

40

6

6

10

13

14

15

20

1

1

3

5

TABLE OF CONTENTS -- Continued

The Profitability of Crops and Systems

Effect of Change in Output Prices and

Discount Rate on Profitability

Farm Enterprise Private Net Benefits

Average Per Acre Net Benefits: Traditional

Crop Mix

Average Per Acre Net Returns: Alternative

Crop Mix

Page

Potential Effects of Management on Water

Conservation in the

PAMA

45

Farm-Level Water Conservation

Shadow Prices and Externalities

51

Social Net Benefit Evaluation

53

56

Private Net Benefit Evaluation

58

61

4.

DATA ANALYSIS

Assumptions and Data Sources

Farm Sizes

Irrigation Systems

Sprinkler Systems

Drip (Trickle) Systems

Furrow Irrigation and Laser Levelling

Crops and Crop Mixes

Production Costs

Fixed Costs

The Discount Rate

Fixed Costs: Farm Machinery

Fixed Costs: Wells

Crop Water Requirements and Well Fixed

Costs

Fixed Costs: Irrigation Systems

General Farm Maintenance

Variable Costs—,

Labor

Machinery Repair, Maintenance and Fuel

Costs

Variable Costs of Pumped Water

Land

Additional Data Requirements for Social

Profitability Estimation

Output Prices

61

63

65

65

69

69

70

72

72

73

74

83

86

89

95

95

96

99

101

104

105

108

5.

ANALYSIS OF RESULTS 110

111

119

120

122

131

V

TABLE OF CONTENTS -- Continued

Page

On-Farm Water Use

Well Fixed Costs

Irrigation Energy

134

137

138

6. SUMMARY, CONCLUSIONS AND IMPLICATIONS

141

Summary

141

Conclusions

144

Implications for Policy

147

APPENDIX A

REFERENCES CITED

151

159 v i

LIST OF TABLES

Table

2.1.

Annual water use in the Pinal Active Management Area in acre-feet

2.2.

Reported annual cropped acreage in the Pinal Active

Management Area

2.3.

Summary of size of farms in the Final Active

Management Area

2.4.

Well lifts and yields in Final County, Arizona

4.1.

Farmland use in Final County,

1964

4.2.

Arizona:

1982 irrigation survey data

4.3.

1982

Irrigated acreage by system in Arizona

4.4.

Machinery and implements required on a typical

PAMA farm

4.5.

Machine use and trade-in schedule: traditional crop mix

4.6.

Machine use and trade-in schedule: alternative crop mix

4.7.

Summary of farm per acre acreage machine costs

4.8.

Summary of per acre machine costs: individual crops

4.9.

Fixed costs: wells

4.10.

Water needed to satisfy consumptive requirements with different irrigation systems, in inches of water

4.11.

Number of wells required to satisfy consumptive use requirements and associated fixed costs per acre foot

4.12.

Fixed costs: drip systems

4.13.

Fixed costs: laser levelling

Page

7

8

88

10

12

64

66

67

90

91

92

75

78

79

81

82

85 vii

viii

LIST OF TABLES

-- Continued

Table

4.14.

Fixed costs: ditch lining

4.15. Fixed costs: center pivot system

4.16.

Calendar operations eliminated when different irrigation systems are used

4.17.

Custom and repair cost allocation schedule for social profitability estimation

4.18. 1982

Normalized prices

5.1.

Indicators of private and social profitability: furrow irrigation

5.2.

Indicators of private and social profitability: center pivot systems

5.3.

Indicators of private and social profitability: laser levelling

5.4.

Indicators of private and social profitability: cotton under drip irrigation system

5.5. NSPs associated with a 3% discount rate

5.6. Average per acre annual costs and net returns summary: traditional crop mix

5.7. Average per acre annual costs and net returns summary for a combination of drip and alternative systems: traditional crop mix

5.8.

Average net returns to water per acre-foot of water applied to farm

5.9 Percent per acre increase in short-run and long-run average net returns to water due to change from furrow to alternative systems: traditional crop mix

5.10.

Average net returns to water per acre-foot less average per acre-foot water costs

5.11.

Net returns per acre-foot of water applied with alternative grains or safflower in place of wheat, in traditional mix

Page

93

94

97

107

109

112

113

114

115

121

123

124

126

127

130

132

LIST OF TABLES --

Continued

Table

Page

5.12.

Average per acre annual costs and net returns summary: alternative crop mix- 133

5.13.

Percent per acre increase in average net returns to water/acre-foot associated with a change in

crop mix

135

5.14.

Average per acre farm water use (acre-inches) with alternative systems 136

5.15.

Energy use (KwH) under alternative systems: traditional crop mix

139 ix

LIST OF ILLUSTRATIONS

Figure

3.1. Marginal social costs and

Pigouvian taxes

Page

48

ABSTRACT

The decline of groundwater levels in Final County, Arizona has not only resulted in land subsidence, but has entailed higher pumping costs for irrigation water. The

Pinal

Active Management Area

(PAMA) is thus one of four critical groundwater overdraft areas in which water conservation is to be enforced by mandate of the Arizona Groundwater

Management Act.

The Groundwater Management Act as it relates to the PAMA is evaluated with respect to an accepted theoretical groundwater management model in order to determine its potential effectiveness in achieving basin-wide water conservation. The indications are that implementation problems may greatly reduce the effectiveness of the

Act.

The potential for farm-level water conservation is evaluated by performing a detailed benefit-cost analysis of four alternative on-farm water conservation measures. These include laser leveling, which improves the water application efficiency of traditional furrow irrigation systems from 60 to 85 percent, the installation of center pivot or drip irrigation systems, with potential water application efficiencies of

75 and 90 percent respectively, and the introduction of lettuce, a high-value and less water-intensive crop, into the traditional crop mix.

xi

xii

The social and private profitability measures obtained from the analysis indicate that only cotton and lettuce show a profit in the long run with respect to all the irrigation systems, and these profits are highest when farms are laser leveled. The remaining traditional crops, namely alfalfa, wheat, barley, sorghum and safflower, all indicate losses. The magnitude of these losses is least in laser leveled farms. When crops are combined in a farming enterprise so as to simulate more realistic conditions, laser leveling yields the highest net returns to water in the long run.

These results lead to the conclusion that the effectiveness of the Groundwater Management Act can be considerably enhanced by providing incentives that encourage farmers to invest in laser leveling.

CHAPTER

1

INTRODUCTION

The

Problem

Pinal is a rural and agricultural county, located approximately midway between the metropolitan centers of Phoenix and Tucson. In spite of the semi-arid climate it enjoys, it contains some of the largest farms in the United States.

Large-scale farming is made posible by the presence of prime lands and vast groundwater reserves which provide most of the water used for irrigation.

Extensive pumping since

1940 has resulted in a consistent decline of water levels, such that the underlying aquifer is in a state of overdraft. This decline has meant deeper irrigation wells, increased energy use, and, ultimately, more expensive water.

Other negative effects like land subsidence and the development of cracks have been documented

(Arizona

Groundwater Commission, 1980;

Bookman-

Edmonston

Engineers,

1981).

Predictably, one of the solutions that has been sought to alleviate this problem is the provision of additional water supplies from outside of the groundwater basin. This is to be accomplished by the multi-billion dollar Central Arizona

Project aqueduct which is expected to convey up to 1.1 million acre-feet of water from the Colorado River to Central and

Southern

Arizona.

1

In addition, prior to the passage of the Ground Water

Management Act of 1980

(ARS 45), water law in Arizona was an amorphous

2 conglomeration of legislative Acts and case-by-case court decisions such that groundwater extraction proceeded in an unregulated manner.

However, the Groundwater Management Act has, among other things, invested to some degree, control of groundwater extraction on a state agency, and of particular relevance to this study, designated Active

Management Areas within which groundwater rights are quantified, increases in farmed acreage are prohibited (outside of Indian lands), and water conservation by all groundwater users is mandated.

The economy in Final is heavily dependent on irrigated agriculture, and presently groundwater provides the bulk of irrigation water.

Reductions in water use in the absence of changes in technology, better irrigation management, or introducing new crops which require less water than the traditional crops, will automatically mean reductions in cropped acreage, lower per acre yields, and subsequently reduced agricultural income (Kelso, Martin and Mack,

1973; Stults, 1968;

Burdak, 1970; and

Boster, 1976).

It has been suggested that an important way of conserving water and at the same time maintaining agricultural income, possibly at current levels, is a change from water-intensive flood irrigation, which is predominant in the county, to more sophisticated and efficient irrigation systems. Such changes in irrigation technology mean heavy capital investment to the farmer. The economic impact of such an investment on a typical Final County farm are not clearly understood.

A rational farmer would consider a change from the traditional irrigation system, which he understands and trusts, if he can obtain satisfactory answers to several questions, among which are:

1.

Which of the available systems is efficient enough to allow savings in water so that the total acreage allowed by law can be utilized, while keeping within the quantity restrictions mandated by authority of the Groundwater Management Act?

2.

Would water savings in terms of energy and repair costs arising from the conversion exceed or at least balance investment plus the opportunity cost of using this capital in alternative endeavors?

3

These questions are also of relevance to the water agency, which is required to devise policies which will not only lead to mandatory water conservation, but which should also maintain "agricultural economies" in the county for as long as possible.

Research

Objectives

As part of a statewide investigation into the economic impacts of changes in irrigation technologies in Arizona agriculture for the purpose of energy and water conservation (Wade and Flug, 1980), the main objective of this research is to determine the possible effects of centralized groundwater management and alternative irrigation systems on water conservation in Final County agriculture and to evaluate the economic impacts arising from the adoption of these conservation methods.

Related to this main objective are several policy questions.

The goal of groundwater management in the Pinel Active Management Area as specified by the Arizona Groundwater Management Act is water conservation such that agricultural economies in the area are maintained for as long as possible, consistent with the need to preserve water supplies for non-irrigation uses. As such, the more specific objectives of this study may be grouped into three categories:

1. Basin-wide objectives: a.

Examine theoretical models of groundwater basin management and compare suggested decision rules with the range of policy tools that may be used for groundwater management in the Pinel Active Management Area within the limitations of the Groundwater Management Act.

b.

Evaluate the effects of these management tools on farmers' decision making with respect to the adoption of conservation measures.

2.

Farm-level objectives: a.

Estimate measures of net social profitability and domestic resource cost ratios for different crops under different irrigation systems so as to determine the degree to which society will benefit from various water conservation measures.

b.

Estimate the short-run and long-run private benefits associated with alternative irrigation systems when used on traditional crop mixes, and compare these with private benefits obtained from an alternative crop mix.

4

c. Estimate and compare savings in water and energy associated with different irrigation systems and the alternative crop mix.

3.

On the basis of research findings, make policy recommendations

5 for the promotion of the most socially profitable water conservation measures.

Outline of the Dissertation

In the next chapter, the structure of Final County agriculture is reviewed, the water resources are described, and an overview of the

Groundwater Management Act, especially as it relates to this research, is presented. Following a conceptual definition of water consevation, an analytical framework for studying the problem is described in

Chapter

3.

In the same chapter, a model for optimal groundwater basin management is presented and compared with the Groundwater Management

Act so as to determine its potential effectiveness in achieving conservation. Farm-level opportunities for water conservation are identified, and the procedure for their economic evaluation based on the analytical framework which was presented earlier, is described.

Chapter

4 contains the presentation and analysis of the data used, and this is followed by a presentation and discussion of the results in Chapter 5.

A summary and conclusions appear in the final chapter.

CHAPTER 2

PINAL

COUNTY AGRICULTURE, WATER RESOURCES

AND THE ARIZONA GROUND WATER MANAGEMENT

ACT: AN OVERVIEW

Detailed descriptions of Final County agriculture, its water resources and the Arizona Ground Water Management Act are available elsewhere (Arizona Groundwater Commission,

1980; Stults, 1968;

Kelso,

Martin and Mack, 1973;

Arizona Revised Statutes,

1980; and Johnson,

1980); but for the sake of completeness and in order to highlight the areas of special interest to this study, the following brief and general overview is presented.

The Structure of Irrigated Agriculture

The major concentration of irrigated areas in Arizona is centered in both Maricopa and Final counties. Data obtained from the

Arizona Department of Water Resources in Casa Grande indicate that there are about

1,314 farms in the Pinal

Active Management Area,' which between 1975 and 1979 pumped from underground sources over ninety percent of all irrigation water used (Table

2.1). Other irrigation water is obtained from surface sources.

Major crops grown include cotton, barley, sorghum, wheat, sugarbeets, and alfalfa. A general distribution of crops by acreage is shown in Table

2.2.

1.

The Final Active Management Area is hereafter referred to as the PAMA.

6

Table 2.1.

Annual water use in the

Pinal Active Management Area in acre-feet.

Source of

Water

1975 1976

1977 1978

1979

Groundwater for

Irrigation

Surface

Water for

Irrigation

1,003,856 1,039,861

1,052,475

89,189 50,953 21,030

967,523

75,122

1,002,278

155,402

Groundwater:

Other

Uses

Effluent

25,743 25,016 19,430 21,752 16,309

4,561 4,018 4,290 4,569 4,519

1,123,358 1,119,848

1,097,225 1,068,786

1,178,509

Total Irrigation

Use

Total

Groundwater

1,029,599 1,064,877 1,071,905

Use

989,095

1,018,587

7

Almost no double-cropping is practiced in the area.

Total cropped acreage has been experiencing a decline since a record high of

315,000 acres in

1952. Cotton acreages vary with the conditions of the prevailing cotton program, and Table

2.2 indicates a consistent increase in the acreage devoted to this crop.

Table 2.3 indicates the range of farm sizes.

The largest farm size class is between

160 and

640 acres, while those farms larger than

640 acres constitute about fifty-two percent of the total irrigated acreage.

Stults (1968) recognized size economies in Final County farming and attributes these economies to better farm management, higher irrigation efficiencies, and less use of custom services that is practiced in these larger farms.

Table 2.2.

Reported annual cropped acreage in the Final Active

Management Area.

Type of Crop 1975 1976 1977 1978

1979

Cotton

Wheat

Barley

Grain sorghum

Safflower

Sugar beets

Alfalfa

Pasture

Sudan grass or sod

Bermuda grass

Pecans

Grapes

Lettuce

Watermelons

Cantaloupes

Citrus

Jojoba

Guar

Corn

Carrots

Rappini

Millet

94,725.2 105,064.4 125,796.1 127,152.0 138,701.9

47,706.9

60,718.5

26,908.4

22,184.4

21,574.3

17,703.7

14,351.9

13,888.9

15,054.8

11,420.8

5,315.0

3,640.1

1,339.1

2,979.8

4,235.3

15,906.7

336.9

3,781.7

3,271.1

4,406.1

2,689.5

2,645.3

2,308.4

2,535.8

2,825.6

14,739.7

14,814.6

11,691.7

10,624.3

9,603.5

6,575.2

5,924.1

6,867.9

6,364.6

6,082.2

1,274.3

1,012.8

839.6

657.7

664.8

1,132.3

1,200.8

1,044.6

1,017.9

1,110.5

1,756.4

2,671.0

2,409.9

2,792.4

2,880.4

240.5

269.9

102.5

132.5

132.5

2,644.0

2,494.6

2,191.7

2,144.1

1,789.3

818.6

881.1

660.0

688.3

220.0

198.1

768.3

225.0

7.0

246.1

1,114.5

1,137.5

0.0

1,32.5

1,138.0

1,129.0

30.0

35.8

1,165.1

0.0

736.1

0.0

555.1

0.0

366.5

0.0

178.0

41.6

197.0

324.2

150.0

220.0

220.0

106.1

0.0

191.0

220.0

328.1

209.8

341.2

265.4

99.9

0.0

100.0

0.0

8

Table

2.2 --

Continued

Type of Crop

1975 1976

1977

1978

1979

Cover crops

Beans

Okra

Misc. vegetables

Pistachio

Saltbush

Milo

Onions

Soybeans

Oats

Cactus

Orchard (stone fruit)

Rye grass

Broccoli

Cauliflower

169.5

0.0

0.0

254.7

165.9

0.0

407.9

89.2

0.0

27.5

40.0

11.4

25.0

0.0

0.0

211.6

0.0

0.0

321.5

172.5

0.0

765.3

110.6

145.0

83.5

40.0

13.7

0.0

0.0

0.0

175.4

30.9

48.0

267.5

174.9

0.0

97.0

0.0

16.0

162.9

40.0

14.7

0.0

0.0

0.0

505.3

70.0

0.0

327.5

174.9

2.0

193.6

150.0

64.7

436.5

40.0

15.5

0.0

0.0

0.0

Total acres planted

Total

6,188.2

6,249.7

5,728.4

2,774.7

2,756.5

218,500.6 220,895.0 203,362.9 203,383.7 212,239.1

400.4

74.2

0.0

205.5

174.9

2.0

101.6

0.0

144.2

565.3

40.0

15.5

1.0

0.0

2.0

9

Source: Arizona Department of Water Resources, Casa Grande,

1983.

10

Table

2.3.

Summary of size of farms in the

Pinal

Active Management

Area.

Size of Farm

Number of

Applicants

Total

Acreage

% of

Total

Less than

10 acres

Between

10 acres and

40 acres

Between

40 acres and

160 acres

Between

160 acres and

640 acres

Between

640 and

1000 acres

Greater than

1000 acres

534

118

191

349

52

70

2258.99

2,957.04

21,231.80

133,087.93

42,451.20

131,033.57

Source: Arizona Department of Water Resources, Casa Grande,

1983.

All farmers in Final use custom services of one form or other.

These custom services include cotton ginning, insecticide and herbicide applications. Many practice some type of water conservation measure, usually laser leveling

(Bookman-Edmonston

Engineers,

1981), which increases water application efficiencies. A good number participate in the federally administered price support programs. Farming is highly mechanized in Final, as it is in the rest of the United States.

Water Resources

The county falls within the Basin and Range province of Central

Arizona, which consists of high northwest trending, uplifted fault block mountain ranges that separate broad alluvial valleys. The mountains consist mainly of impermeable crystalline rocks with minor amounts of sedimentary rocks and effectively form physical boundaries

0.7%

0.9%

6.4%

40.0%

12.7%

39.3%

11 to surface-water drainage and hydrologic boundaries to groundwater flow. Situated in one of the valleys, the county receives a mean annual precipitation of less than eight inches, while lake evaporation ranges between 60-72 inches annually. Drainage in the Central Arizona groundwater basin is provided by the Gila, the Santa Cruz, and the Salt rivers.

Groundwater occurs in the alluvial valley fill. Geologically, this valley fill may be separated into two main units (Kister and

Hardt, 1962): an underlying older alluvium and an upper younger alluvium. The older alluvium is the main aquifer and is distinguishable into a lower, very coarse-grained but cemented conglomerate; a middle unit of clays and silts, and a highly permeable upper unit of sand and gravels. Due to the manner of deposition which resulted in interbedding, delineation of the deposits into separate aquifers is not practical, and the aquifer is usually treated as one unit though in reality, it is a conglomeration of multiple aquifers.

In general, water table conditions prevail, although the aquifer exhibits confined characteristics in places. The younger alluvium consists of unconsolidated gravel, sand and silt which occupy stream courses that have been cut into the older alluvium. Most wells tap water from the upper aquifer unit.

Originally, groundwater movement was from northwest toward the

Salt River, and recharge was from the three main rivers. The flow regime has since changed as a result of falling water levels, and recharge is now from small stream channels during surface flow, seepage from unlined irrigation canals, deep percolation from irrigated fields,

12 agricultural return flow, and possibly underflow from adjacent groundwater basins.

The amount of annual recharge is thought to be very small and has been greatly exceeded by annual groundwater extractions since the early

1940s. Water levels are estimated to be declining by as much as

20 feet per year in the Final area. This decline has not been uniform throughout the aquifer, and increasing costs due to higher pumping lifts vary across the county, with those farms located in the greater depth areas bearing the heavier cost burden. Well yields also vary aerially. Generalized estimates of well pumping lifts and yields are shown in Table

2.4.

Table

2.4.

Well lifts and yields in Final County,

Arizona.

Area

Average Lift

(feet)

Yield

(GPM)

Coolidge

Casa Grande

Eloy

Stanfield

Maricopa

410

575

620

640

1200

1150

1050

800

1000

1800

Source: Adapted from

Hathorn,

Stedman and Gibson

(1982).

Surface water is of negligible importance in Pinal County, except for what is supplied from the San Carlos reservoir. Its use is limited to the San Carlos Project lands and is estimated to constitute

13 about

17 percent of the total water used for irrigation in the county

(Kelso, Martin and Mack, 1973). In addition, the Central Arizona

Project (CAP) aqueduct is expected to supply supplemental water to the entire area beginning in 1986.

However, the exact amount to be supplied and the terms under which it can be used are yet to be defined.

In anticipation of the CAP water, four water user districts have been formed in

Pinal.

These are the

Maricopa-Stanfield,

New

Magma, Central Arizona, and the Hohokam Irrigation and Drainage

Districts. Formed by legislative statute (ARS

45, 1501:1866), these districts are municipal corporations with broad powers. The districts can purchase or acquire water rights, own or sell property, construct facilities, provide the district with water and tax, and charge for services among other things.

However, unlike some other water user organizations in Arizona, for example the Cortaro-Marana

Irrigation District, the districts in the

PAMA have no employees or consolidated facilities

(DeCook and others, 1978). All water is pumped from private wells. The reason this comparison is made at this time is to emphasize the excess.capacity in wells that must exist and which could be eliminated should the districts decide to exercise their powers and supply water as needed to individual members.

Water

Law

An overview of Arizona water law is presented here with the intention of identifying any incentives or disincentives to

14 conservation in

Final County. Since surface water is of such negligible importance in the county, it is accorded only a very brief review.

Surface Water

Arizona water law applies to surface and groundwater differently. Surface water is defined as

"that which occurs in all surface sources and groundwater flowing in underground channels with ascertainable beds and banks" (ARS 45:101). This water belongs to the public, and usufructory rights are acquired by appropriation.

The

"first in time, first in right" principle applies.

This means that an appropriator can claim his right so long as the needs of other appropriators whose rights are senior to his in time have been satisfied. The right is in the form of a permit which limits the appropriation to a certain quantity per unit time and its continuous beneficial use.

Beneficial use as regards to surface water has not been explicitly defined by the law, and the appropriator is not required to employ any conservation measures.

This implies that in the absence of economic incentives, surface water users who feel secure in their rights have no inclination to invest in conservation.

The appropriation right is lost if it is not used for a successive period of five years, and the water reverts back to the public.

This is an additional disincentive to conserve, especially if an appropriator already has difficulty using all the water he is entitled to by his permit.

15

In theory, the law allows transfer of water rights for use in lands for which the appropriation was not originally intended, but as pointed out by Kelso, Martin and Mack (1973), the transfer process is so complex that it effectively discouages attempts at such transfer.

In addition, water salvaged by conservation practices cannot be used to increase irrigated acreage for which the original right does not apply

(Salt River Valley Users Assoc. v.

Kovacovich, 3 Ariz. App. 28, 411 p.2d 201, 1966).

In order to encourage users to be efficient and to prevent waste, the law provides that a person who willfully wastes water to the detriment of another is guilty of a misdemeanor (ARS

45-109).

An apparent conclusion from the foregoing is that the existing law does not encourage or provide incentives for surface water conservation.

Groundwater

Arizona law identifies two types of groundwater: that which occurs and flows in definite and well defined underground channels, and as noted earlier, is regarded as surface water and thus is subject to appropriation; and that which percolates through the soil. Ownership of this kind of groundwater is tied to the land. Traditionally a landowner could pump as much water as was required for reasonable and beneficial use of the land.

However, as groundwater levels declined, "critical groundwater areas" were designated in

1948 by statute (ARS

45:313).

These were defined as areas not having sufficient groundwater to provide a

reasonably safe supply for the irrigation of cultivated lands within the basin at the prevailing rates of withdrawal. New irrigation wells were prohibited within the critical groundwater areas; but more importantly, limits were not imposed on the amount of water that could be pumped from existing wells. This statute had no positive effect on groundwater conservation, as evidenced by the fact that pumpage since

1948 increased statewide.

Perhaps the most important statement on groundwater conservation to have emerged from the Arizona Legislature is the Ground Water

Management Act, which was signed into law on June

12, 1980.

The statement of legislative intent that prefaces the Act effectively summarizes the major problems faced by groundwater users as follows:

A.

The legislature finds that the people of Arizona are dependent in whole or in part upon groundwater basins for their water supply and that in many basins and sub-basins withdrawal of groundwater is greatly in excess of the safe annual yield and that this is threatening to destroy the economy of certain areas of this state and is threatening to do substantial injury to the general economy and the welfare of this state and its citizens.

. . .

B.

It is therefore declared to be in the public policy of this state that in the interest of protecting and stabilizing the general ecdnomy and welfare of this state and its citizens, it is necessary to conserve,

protect and allocate the use of groundwater.

. . .

(ARS

45:401)

[emphasis added].

The major provisions of the Act that are of relevance to this study include:

1.

The creation of a Water Resources Department which succeeds to the authority, powers, duties and responsibilities of the

Arizona Water Commission and the State Water Engineer, and is

16

17 charged with the general control and supervision of surface and groundwater to the extent provided by the Act.

2.

A repeal of the statutory provisions that designated the critical groundwater areas mentioned in the foregoing and their replacement by the Active Management Areas. These initial

Active Management Areas account for

69 percent of the total groundwater overdraft in the state and include over

80 percent of the state's population (Johnson,

1980).

The four of them are the Tucson, Phoenix, Prescott and the Pinel Active

Management Areas.

The groundwater law as it applies to the Active Management

Areas has several features that portend interesting implications for this study. These are the following:

1. Upon designation of an Active Management Area, all existing uses of groundwater are grandfathered and are allowed to continue. The right to continue existing use is called a grandfathered right. There are two types of grandfathered rights: non-irrigation and irrigation grandfathered rights. The

Irrigation

Grandfathered

Right is the right to irrigate the maximum number of acres that was under irrigation at some time during the years between January

1, 1975 and January 1, 1980.

The maximum quantity of water that can be pumped by holders of this right is determined by the product of the Irrigation

Water Duty and the Water Duty Acres. The Irrigation Water Duty is defined as the quantity of water determined by the director

18

(of the Arizona Department of Water Resources) to be

"reasonably required to irrigate the crops historically grown in a farm unit, and shall assume conservation methods being used in the state which would be reasonable for the farm unit including lined ditches, pump- back systems, land levelling and efficient application practices, but not including a change from flood irrigation to drip irrigation or sprinkler irrigation" (ARS

45:564).

A Water Duty Acre is defined as the highest number of acres which were legally irrigated in any one year of the five preceeding the designation of the Active Management Area.

2.

Groundwater management goals for

Pinal County are different from the other Active Management Areas. For the Tucson,

Phoenix and Prescott areas, the goal is to attain "safe yield" by the year

2025.

"Safe yield" is defined as an attempt to achieve and thereafter maintain a long-term balance between the annual amount of groundwater withdrawal from the area and the annual amount of natural and artifical recharge. For the

Pinal

Active Management Area, the goal is to preserve "existing agricultural economies as long as possible, consistent with the need to preserve water supplies for non-irrigation uses" (ARS

45:562).

Management goals are to be achieved by gradual reductions in groundwater withdrawals by establishing a forty-five year conservation program. There will be five management periods, for each of which a management plan will be developed. For

irrigation users, conservation would be achieved by assuming increasingly sophisticated conservation practices in setting the Irrigation

Water Duty.

19

3. All pumpage is to be monitored with the aid of measuring devices. A pump tax which is not to exceed five dollars per acre-foot of water withdrawn by all groundwater users (except domestic wells) is to be imposed.

This pump tax consists of three components: a.

not less than fifty cents nor more than one dollar to be paid as part of the cost of administering the law. The remainder of these costs are to be met by the state; b.

not more than two dollars toward the provision of additional water supplies from outside of the Active

Management Area; and c. not more than two dollars which is to be applied toward the purchase and permanent retirement of irrigated land.

The law also allows the transfer or sale of irrigation grandfathered rights so the water may be used for purposes other than irrigation. Water banking is also encouraged.

This means than an irrigator may withdraw water in excess of the assessed Water Duty in any one year and have the excess amounts reduced from the water duty in subsequent years; or could withdraw less than this allocation, and pump the water

" saved" with the regular allocation in subsequent years.

20

Summary

Final County is one of the areas where irrigation is most concentrated in Arizona. Up to

90 percent of the water used for irrigation is obtained from the underlying aquifers by means of private wells. Recharge to the aquifers is much less than annual withdrawals and water is being mined from storage. As a result, water levels are declining rapidly, thereby increasing pumping costs. Also, subsidence is occurring with the attendant development of cracks and fissures.

Two solutions to the problem of declining water levels have been initiated: the Central Arizona Project that is to provide supplemental water, and the Groundwater Management Act that vests control of groundwater use on the state. The CAP is a very expensive project, and the water it provides will not be cheap. In any case, only a limited amount of the irrigation needs of the county will be met by project water, and groundwater will continue to be pumped. The Groundwater

Management Act, on the other hand, mandates conservation by way of basin-wide management plans that are expected to lead to decreased water use.

The Act already imposes limitations on the quantity of water that may be pumped by any one user, and rate of use is to be monitored with mandatory devices and annual reports to be supplied by users to the state department of water resources. However, the first management plan for the

PAMA does not go into effect till July

1, 1985. Meanwhile, the department is constructing a model of the aquifer that will facilitate the development of these plans. Plan development for the

PAMA will probably be more difficult than for the other active

21 management areas, as the PANA plans have to take the prevailing agricultural economies into consideration. This is why it is necessary to undertake studies that will provide some insight into the costs and returns associated with alternative water conservation opportunities.

CHAPTER 3

ANALYTICAL FRAMEWORK

The choice of an analytical framework for evaluating water conservation policies, programs and measures depends largely on the accepted definition of water conservation. This is because, as Mann

(1982) observes, although the idea of conservation of natural resources is widely accepted, there is no general agreement on a practical definition that is acceptable to the various groups concerned with water policy. In this chapter, the concept of conservation used in this analysis is discussed, an analytical framework is established, and the method of its application is presented.

Definitions of Water Conservation

In a very thorough review of the literature on the definition of conservation, Bauman and others

(1979) argue that most available definitions are vague in practical terms and lack precision. They suggest that in order for a water management practice to constitute a conservation measure, it must meet two tests:

"(1) It conserves a given supply of water through reduction in water use (or water loss) and

(2)

It results in a net increase in social welfare" (Bauman and others,

1979, p. 12).

M. D. Skold suggests that in the presence of a given set of natural resources and technology, conservation should be defined as an

22

23 examination of "the trade-offs between resource use and (a) the value of production from other technically related activities, (b) the discounted values of future production, as well as (c) losses in the resource base from resource use allocation (Skold, 1977, p. 33)." This definition, in addition to meeting the Bauman tests mentioned earlier, emphasizes more succintly the intratemporal as well as intertemporal nature of conservation, and is thus the definition that is preferred in this study.

The underlying concept of Skold's definition is valuation and trade-offs between the benefits and costs of conservation measures.

Benefit-cost analysis is therefore a necessary part of any discussion of conservation, especially if economic efficiency is a primary concern, for as Dean Mann affirms, ". . . water is neither a free good nor a priceless commodity, but rather a resource that may be developed or conserved on the basis of the benefits and costs to society" (Mann,

1982, p. 13).

,

An

Overview of

Benefit-Cost Analysis

John Krutilla's definition of benefit-cost analysis is most relevant to this study and is substantially reproduced here for emphasis. He characterizes it as:

• . . the collection and organization of data relevant by some conceptually meaningful criteria, to determine the relative preferredness of alternatives. As is typical of much economic analysis, the objective is to analyze how a particular desideratum can be maximized--accomplished by comparing differences in the relevant costs and benefits associated with alternatives among which choices are to be made.

24

Essentially, the same activity is carried out by the firm in its investment decisions. However, while the firm employs a private costgain calculus in which externalities and other divergencies between private and social product are neglected, social benefit-cost analysis:

. . . seeks to take account of such divergences as a basis for guiding public action either when market forces do not accurately reflect social value or when by virtue of the indivisible nature of collective goods, no market exists from which to observe directly objective evidence of the community's valuation of the social marginal product (Krutilla, 1961, pp.

22-23).

The analysis described by Krutilla requires a general agreement on a "desideratum," and the existence of the relevant data in such metrics that it can be maximized with currently available methods.

This is not the general case, as there are substantial problems in the measurement of the divergences mentioned. In order to put some of these problems in perspective, an attempt will now be made to encapsulate the theoretical conce

.

pts that underlie the benefit-cost approach.

Review of the Theory

In the tradition established by Pareto, the economic model visualizes society as a collection of rational individuals striving at all times to maximize their individual welfare in a world of relative scarcity. Thus, in a pure market situation with all individuals having perfect information, none being able to affect group behavior and with no costs being attached to bargaining, classical economic theory dictates that individuals will adjust their production patterns and will trade among themselves the goods they have produced, until all

25 have identical marginal rates of substitution. This equilibrium condition is considered to be Pareto-optimal if no adjustment in production or consumption is possible without a subsequent loss in welfare to some individual. At this point, also, the marginal rates of substitution of the traded commodities are equal to their relevant price ratios.

Kaldor (1939),

Hicks

(1939) and Scitovsky (1941) have suggested a variant of the Pareto criterion. Their central thesis is that a change from a social state A to a social state

B is an improvement whenever those who gained from the change could so compensate the losers that, after compensation, the Pareto criterion would be met. It is not necessary that compensation be made; all that is required is that there be a net gain. This reasoning forms the crucial basis for benefit-cost analysis as it is applied today in policy evaluation.

The Kaldor-Hicks-Schitovsky criterion is thought to be concerned mainly with economic efficiency, and ignores income distribution effects. Schitovsky (1941), and Samuelson

(1950), among others have discussed theoretically the effects on benefit-cost analysis of income distributions.

Schitovsky opines that a net increase in real income associated with a project when valued in prevailing prices could differ significantly when valued in terms of prices reflecting the new income distribution resulting from the project. Samuelson, on the other hand, posits that an improvement in efficiency can be considered only after it has been tested on all possible distributions of income. Little

(1950) assumes that the existing distribution of income is non-optimal

26 and would consider an improvement in efficiency desirable only if the attendant income redistribution is acceptable. Little's ideas are of real practical significance to benefit-cost analysis in developing countries, and are incorporated in his work on project evaluation in these areas (Little and Mirlees, 1974).

Determinations of social benefits and costs implies an ability to measure in a quantitative way all benefits and costs accruing from an enterprise in commensurate units. However, there are goods for which precise price equivalents of social value cannot be estimated.

On the one hand, there are those common property resources for which there is no existing market. On the other, there are those goods for which a market exists, but due to market imperfections and other distortions caused by government activities, accurate social value is not reflected in observed prices. Pigou (1932) also formalized the concept of externalities to be realized in both the consumption and production of commodities. These externalities result in divergencies between market prices and social value. Valuation in benefit-cost analysis has engaged the attention of students of the approach for a long time

(Margolis, 1970), with the result that considerable research efforts have been expended in developing shadow pricing techniques (Sassone and

Schaefer, 1979).

The implications of the foregoing problems are that in the real world the necessary and sufficient conditions, and hence the marginal equalities specified earlier for Pareto-efficiency, are virtually nonexistent. In this regard, Lipsey and Lancaster (1956) developed their theory of "second best," where they propose that if a constraint that

27 prevents the achievement of Pareto-efficiency is introduced into a general equilibrium system, an optimal solution can only be achieved by departing from all the other conditions for Pareto-efficiency. In general, there is no way of comparing the superiority of this "optimal" solution with the original situation. However, Davis and

Whinston

(1965) have demonstrated that "second best" solutions that result in improvements in efficiency are possible when the mathematical functions defining economic interaction are separable, hence paving the way for the partial equilibrium analysis of policy problems.

Applications in Water Resources

The benefit-cost approach has been used extensively in empirical studies relating to water resource development. Classical works in this area include Eckstein

(1958), Hirsleifer DeHaven and Milliman

(1960),

Maas and others (1962), and Krutilla and Eckstein (1958); however, the emphasis of these earlier tomes is on project planning and evaluation. Lately there have been numerous investigations into water resouce policy, specifically in the area of water quality and pollution abatement programs (for example, Peskin and'Seskin, 1975; Baumol and

Oates, 1975).

It also forms the cornerstone for the United States

Water Resource Council's Principles and Standards

(1973).

A detailed review of studies that utilize the approach directly related to the present study is deferred to the next section.

Water conservation as used in this study is synonymous with economic efficiency in water use, and hence the benefit cost approach, is an appropriate methodology for evaluating alternative water

28 conservation measures. And since irrigation is only one of several uses of groundwater in a basin, efficiency in irrigation water use constitutes only a part of basin-wide conservation efforts. An evaluation of efficiency in agricultural water use should, therefore, be within a framework of total basin water management. This is, thus, the perspective from which centralized groundwater management and alternative irrigation systems in the

PAMA are examined in this study.

Review of Related Studies

Studies related to groundwater basin management and the economics of water conservation in irrigated agriculture that are of relevance to this research may be grouped into four categories: those that pertain to the management of groundwater basins, those that address alternative irrigation systems, plant water-production functions research, and those that relate directly to agriculture and water use in the study area.

Groundwater Basin Management

Kelso's

(1961) study of groundwater management alternatives for the groundwater basin in Central Arizona was one of the first to recognize the significance of the stock value of groundwater, and the problem of its temporal allocation. The general thesis is the following. He makes assumptions that a total of

808,000 acres are irrigated with groundwater in Central Arizona, of which

150,000 acres is accounted for by natural replenishment. The remaining

658,000 acres are therefore being irrigated with water mined from storage. The current

(1960) annual average rate of water use was

5-1/4 acre-feet per

29 acre, and returns to water were

1000 dollars per acre. By assuming that the marginal cost of water was

0.04 dollars per acre-foot per foot of lift, he determined that the breakeven lift was

455 feet. If water applications were reduced to

3-2/3 acre-feet per acre, net returns to water decrease to

75 dollars per acre and the break-even depth increases to 511 feet. At a depth of 342 feet, net returns to water for both rates of water application are equal, at

25 dollars per acre.

The break-even depth is reached in

24 years.

He then considered two management options. First, continue offering water at 5-1/4 acre-feet per acre for

24 years and reduce application to 3-2/3 feet; or secondly, immediately reduce application to

3-2/3 acre-feet per acre. His calculations reveal that the present value of revenue foregone to private pumpers under the second scheme more than doubles the present value of gains at an

8 percent discount rate. Foregone and future benefits are equal at a break-even interest rate of 4-1/2 percent. These results demonstrate the sensitivity of the benefits of groundwater management to the discount rate.

Gisser and Mecardo (1980) use a dynamic optimization model to compare the nt benefits to farmers from water use in the Pecos Basin,

New Mexico, under two conditions: in the presence of competitive pumping, and under regulated control based on an optimal yield policy.

They formulate two objective functions to suit the different conditions, the first being to maximize short-run net returns under pure competition, and the second to maximize the present value of the time stream of benefits. They conclude that when the storage capacity of an aquifer is relatively large, the results of both schemes

30 converge. It is significant that this model only includes irrigation water demand and also ignores other effects of groundwater mining like subsidence. However, their study provides an indication that optimal groundwater management is not always preferable to competitive pumping.

Noel (1979) and Noel, Gardner and Moore (1980) also use a dynamic optimal control model to determine the socially optimal, spatial and temporal allocatons of surface and groundwater among agricultural and urban uses in

Yolo

County, California. Their model explicitly recognizes user costs associated with suboptimal, temporal allocation. Their model results show significant gains to management in the absence of transaction costs and also indicate that a policy of

Pigouvian taxes is superior to that of quotas.

Knapp and Vaux (1981) also use a dynamic optimization model to study groundwater management in the San Joaquin Valley, California.

They reach the same general conclusions about gains to management as did Noel and his colleagues.

Irrigation Systems

Gordon

(1970) has evaluated the effectiveness of alternative irrigation systems in reducing water use and reducing pollutants that reach the Colorado River from the Yuma and Welton-Mohawk Irrigation districts. Though the emphasis of his work is on surface water, it is one of the few studies that includes a comprehensive cash flow and long-run comparative analysis of flood, sprinkler and drip systems. He determined the consumptive use of water for cities under the different systems and estimates the long-run savings in water that may be

31 realized by adopting the sprinkler or drip systems. His results led him to conclude that were sprinklers to be adopted, enough water can be saved to augment Arizona's share of Colorado River water, and agricultural run-off water reaching the river from the irrigation districts will be at a salinity level of

800-900 ppm instead of the current

(1970) levels of

4000 ppm.

However, his analysis was confined to the citrus crop in exclusion of all other crops grown in the area.

Also, detailed crop budgets and changes in net returns to water used were not estimated.

Ozsabuncouglu (1977) used mixed integer programming models to study the economic and water conservation impacts of alternative irrigation systems on irrigated agriculture in Sulphur Springs Valley,

Arizona. As in the PANA,

Surphur

Springs Valley farmers are faced with the problems of a declining water table. His study was based on four representative farm size groups, three energy sources, five field crops, and two major types of irrigation systems, namely flooding and sprinkler. He aggregated the models to predict regional trends. The model results which are of revelance to this study are the following.

Increases in unit pumping costs associated with a change in energy source from natural gas to electricity results in a shift from gravity irrigation system to sprinkler. Increases in natural gas prices, the cheapest energy source, also leads to increase in acreage under sprinkler irrigation, with corn a less water-intensive crop, replacing cotton as the more preferred crop. A decrease in cotton prices also leads to the same result.

32

Conklin and

Schmisseur (1976) use linear programming methodology to evaluate the economic effects from the use of five policy choices for conserving irrigation water in three irrigation districts located in Oregon. Although only surface water is used for irrigation in their study area, their results have some significance to the

PAMA problem. The objective of their models was to maximize the collective profits to all farms within an irrigation district which is viewed as a non-profit service organization that administers water.

The policy choices evaluated include capital investment in district main canal lining, a modification of water charges paid by farmers, and on-farm conversion from flood to sprinkler irrigation systems. Their model results indicated that only an increase in water prices from the base price of approximately

3.86 dollars an acre-foot to

14.50 dollars an acre-foot necessitated a conversion from flood irrigation to sprinklers in all of the irrigated lands located in the North Unit

Irrigation District, one of the three studied. This change was accompanied by a district-wide decline in revenue of

425,000 dollars.

However, up to

28,612 acre-feet of water would be saved from

58,820 irrigable acres.

King and others

(1978) use a cost-minimization model to study and predict the future regional water, energy, labor and capital requirements of irrigated agricultural production in the Pacific Northwest states of Idaho, Oregon and Washington. Total energy requirements were an aggregation of on-farm energy used for pumping irrigation water. Both ground and surface water is used for irrigation in this region. Flood irrigation, pump-back systems, sprinklers and drip

33 systems were the alternative systems considered in the study. Existing cropping patterns and irrigation technologies within the region were used as a base. Their results show that an overall increase in water application efficiencies resulted in a decrease in gross regional water applicatons and increased overall energy used; that pump-back systems are the only feasible systems having the potential of both water and energy conservation. However, due to the nature of their model there is no indication of changes in net returns to water used for irrigation.

Larson and Fangmeier (1978) also evaluated energy requirements for crop production under surface irrigation and sprinkler systems.

Production budgets for cotton, alfalfa, lettuce and barley were analysed. They show that lettuce is the lowest energy user, and that though less water is used under sprinkler, the energy requirements are higher with the system due to the high pressures needed to distribute the water.

Daubert and Ayer (1982) have used break-even analysis to evaluate the conditions that would encourage farmers in southern

Arizona to invest in leveling their fields with the aid of laser equipment. In the presence of federal agricultural conservation programs that include cost-sharing and tax benefits, they show that farmer choice is dependent on farm water variable cost, the capital cost of laser leveling, gross farm income, yield increases obtainable from adopting the system, farm size, the marginal tax rate, the real discount rate and the size of the conservation cost-sharing payment.

These results lead them to conclude that the structure of the

34 cost-share payment, which is limited to a maximum of 3500 dollars in any one year, will slow down the rate at which farms are leveled if farmers plan to obtain the maximum benefits of the program.

Water-Production Function Research

Changes in irrigation practice involve better management and include the timing, scheduling, length of runs, water application rates per unit of time, and the total volume of water actually applied to the farm. The total volume of water that should be applied on typical

Arizona farms has been investigated by Ayer and Hoyt (1981) with the aid of crop-water production functions.

They contend that traditionally, most water policy and irrigation management information has been based on yield-maximizing rather than profit-maximizing applications of water. In order to show that yield-maximizing water applications are suboptimal, they derived water production functions for cotton, wheat, alfalfa and sorghum grown on three soil types in Arizona. The production functions they develop are quadratic in form, which means that beyond certain application rates diminishing returns set in. They also use the production functions to determine the demand elasticity of water at the prevailing crop pries.

The neoclassical economic theory suggests that in order to maximize benefits from water used, the quantity of water should be selected such that the marginal value product (MVP) of water just equals the price that is paid for each unit of water. This quantity would normally be smaller than the yield-maximizing quantity, which corresponds to an MVP of zero. Thus, the yield-maximizing and profit-

35 maximizing quantities will only be equal if water is obtained at zero price.

Empirical results obtained by Ayer and Hoyt closely parallel these neoclassical economic concepts. They conclude that if the price of water is high enough in Arizona, between

200,000 to 250,000 acrefeet of water could be saved annually by irrigated agriculture if on-farm application is done on a profit-maximizing rather than yieldmaximizing basis. Also, they show that the demand for irrigation water obtained at a variable cost of

30 dollars per acre-foot or less is so inelastic that substantial increases in water costs are necessary to induce on-farm conservation measures.

Studies on Pinal

County Agriculture

This group of studies employs farm-level budgeting and predominantly linear programming, to predict farmer response to the falling water table in

Pinal

County. They include the study by Stults (1968),

Burdak (1970), who improved upon Stults' model by coupling it with a hydrologic model of the underlying aquifer which simulated seasonal water level declines, and Boster (1976), who addressed the problem of additional water from the Central Arizona Project water which will be of higher salinity than groundwater that is currently used in the area.

Kelso, Martin and Mack (1973) combine the

Stults, Burdak and other related studies on the Arizona water problem and discuss the economic, social and institutional implications. These studies do not address the possibility of the on-farm adoptions of conservation measures, or

36 the limitations on competitive pumping that may be imposed by the

Groundwater Management Act.

The Methodology of This

Study

The benefit-cost analysis of centralized groundwater management in the

PAMA and the evaluation of alternative on-farm water conservation measures is performed within the following framework in this study:

1.

The existing groundwater conditions and problems in the

PAMA, which have been described in Chapter

2, are conceptualized in the benefit-cost analysis framework.

2.

Some existing theoretical and idealized solutions for centrally managing groundwater in basins with similar problems are described. In order to determine the effectiveness of centralized management in the

PAMA, these theoretical solutions are used as a basis for evaluating the Groundwater Management Act, which is the tool available for basin-wide management in the area.

3.

Finally, since centralized management will result in water use restrictions, an empirical benefit-cost analysis of alternative farm level water conservation opportunities is performed, so as to identify the social and private economic effects associated with each alternative conservation measure.

37

Common Pool Problems

Groundwater exhibits the typical characteristics of a common pool resource, and ownership is governed by the rule of capture. The rule is essentially that "where several parties own land overlying a common mineral pool, each party owns that amount of the mineral that he

'captures' by pumping it to the surface" (Friedman,

1970, p. 857).

The theory of common property resources has been discussed extensively by

Gordon (1954),

Scott (1955), and by Hirschleifer, DeHaven and Milliman

(1960), who apply Scott's conclusions to the specific problems of groundwater.

In an unregulated groundwater basin, well owners operate in a competitive environment, and the quantity of water pumped by a rational profit-maximizing individual well owner X, in any one season, is based on equating the private marginal cost of pumping to the marginal value product of pumped water. Such individual decision making by well owners will usually lead to aggregate extraction that is in excess of the optimal rate of extraction from society's viewpoint, if divergencies exist between society's and private marginal costs and benefits.

Such divergencies do exist and are described concisely by

Friedman (1970), who analyzed the common pool problems to be encountered in the exploitation of a hypothetical mineral called "murk" in the following way:

• . . the meaning of the marginal cost in

X's calculation is not immediately apparent. Because there is only a finite quantity of murk in the pool, the production of a gallon of murk now necessarily means that there will be one less gallon available for production in the future. Therefore, in order to

38 produce a gallon of murk now, X must be willing to forego whatever profit that gallon might have brought at a later time.

The present value of this future profit foregone by the present production of a marginal gallon may be called the marginal opportunity cost of production. . . . This marginal opportunity cost must be added to the marginal factor cost

. . . in computing total marginal cost (p. 857).

The opportunity cost component is only relevant to

X if the alternative of future production exists. The presence of other landowners, however, does not allow X to consider this opportunity cost.

This is because were he to reduce pumping to the societal optimal rate, there is no guarantee that what is not extracted now will be available at a future date. This opportunity cost is usually classified in the welfare economics literature as a user cost (Scott, 1967), and highlights the temporal allocation problem associated with laissez faire extraction of a common pool resource.

Excessive pumping, in adddition, can also lead to other undesirable results; thus, the unregulated pumping of a groundwater resource not only leads to too much water being pumped from the basin, but such pumping proceeds at a rate that leads to the resource being depleted more rapidly than it would have been if all the necessary costs were recognized. The concept of groundwater management strives to modify the common property nature of groundwater, and places "sole ownership" rights on a central decision-making body that recognizes the existence of user costs and other costs of rapid and excessive extraction.

In this way, the rights of overlying owners are quantified and in aggregate, limited to a previously determined optimal quantity. The

Arizona Groundwater Management Act has in effect transformed a situation of competitive groundwater extraction in the designated

39 critical groundwater areas into one in which a central agency is empowered, within limits, to regulate the rate of extraction. That is to say, farmer decision making with respect to the quantities of water pumped will no longer be based on economic factors alone but also on legislated directives.

A question that arises from the foregoing discussion is the extent to which the Groundwater Management Act infringes on farmer's decision making with respect to quantities of water pumped, given the existing economic conditions. To answer this question, it is necessary to review an accepted theoretical model of basin-wide groundwater management, and to establish that the aggregate basin withdrawals for irrigation purposes under unregulated competitive pumping are in excess of withdrawals in the presence of management. This is because the plans to be used for managing groundwater in the PAMA are yet to be developed, and hence it is not possible presently to quantify changes in aggregate withdrawals that will result from their implementation.

However, a theoretical management model would specify the conditions for the extreme case of regulation, conditions which can be compared with laissez faire pumping and those mandated

.

by the Management Act.

Basin-Wide Management Models

Following the pioneering effort of Ciriacy-Wantrup (1942), who recognized that the optimum state of groundwater development is that in which the time distribution of use rates in which the present value of net benefits from water use are maximized, several models of optimal groundwater resource allocation and management have been developed. Of

40 particular relevance is that suggested by Burt

(1964a, 1964b, 1966,

1967a, 1967b), who uses the calculus and dynamic programming methodology to show the relationship between optimal rates of pumping, the stock resource and groundwater recharge. Domenico, Anderson and

Case (1968) and Domenico (1972) have also developed decision rules which, under the appropriate conditions, can be used for optimal groundwater development. Bredehoeft and Young

(1970) use a simulation model to evaluate the optimal development of a stream aquifer system for irrigation.

Buras (1963) also used a dynamic programming approach to determine the optimal operation of a reservoir-aquifer system. Following the work of Bear and Levin

(1970), Gisser and Mercado (1972,

1973), and Noel, Gardner and Moore

(1980) integrate a demand function into a hydrologic model in order to determine optimal ground and surface water allocation. The Burt model is selected for use in the analysis because of its simplicity and ease with which it can be used to demonstrate the economic factors involved in common pool problems.

The Burt Model: Temporal Allocation of Groundwater. As mentioned previously, because of the common property nature of groundwater, private individuals who are inclined to maximize benefits in the current planning period cannot afford to postpone withdrawals from storage to some future period, because what is not extracted now is considered lost forever. The rate at which the groundwater in a basin is mined determines the quantity of water that is left for future generations, and thus introduces the question of temporal allocation.

Burt (1964a, 1964b, 1966, 1967a, 1967b) has addressed the problem in a

41 series of papers, and the development that follows is culled from his

1964b and 1967b publications and Domenico's (1972) review.

In order to simplify the problem, consider a closed groundwater basin, underlain by a homogeneous aquifer that contains a finite amount of stock groundwater in storage,

S, and which is replenished annually with a certain amount of rechage,

R. Water is pumped from the aquifer and is used for a variety of productive purposes, such that

G(Q, S) describes the net benefit function, where

Q is the pumping rate.

Withdrawal of

Q units of groundwater from storage in any time period, t, leaves

S + R - Q units in storage in time period t + 1.

Assume further that f t

(S) is the present value of expected net benefits accruing to water from the last t periods of a planning horizon, then the objective of management is to maximize f t

(S).

Stated formally, where f t

(S) = Max [G(Q,S)

+t-1(S

+ R - Q)h(R,S)dR]

(3.1) h(R,S)dR the probability density function for recharge which is variable

(ltr) -1 discount factor r = discount rate

If an infinite planning horizon is assumed, then as t approaches infinity,

t+1(S) ft(S) = f(S) (Bellman, 1956), such that equation

3.1 may be written as, f(S) = Max[G(Q,S) + qf(StR-Q)h(R,S)dR]

(3.2)

42

It can be shown that a first-order approximation of the solution to this maximization problem is (Burt,

1964a, pp.

82-83),

DG(Q,S) 1

3G(Q,S) aQ r as

(3.3)

Now assuming that the net benefit function can be written as,

G(Q,S)

B(Q) - C(S)Q (3.4) where B(Q) represents the net annual benefits accruing to water less all non-water costs, and C(S) is the cost per unit of water pumped as a function of the amount of water in storage. Substitution of Equation

(3.4) into (3. 3) and differentiating yields,

B' (Q) - C(S) 1 r

,„

\ r

(3.5)

The meaning of the decision rule specified in Equation

(3.5) is that the magnitude of total withdrawals from the basin in any time period should be selected such that marginal net benefits per unit of water pumped equal the negative of the discounted marginal pumping costs with respect to water in storage. The right-hand side of

Equation

(3.5) may be interpreted to be the opportunity cost of groundwater, since the next best alternative use of water not used in a current production period is storage and is equivalent to savings in future pumping costs. The magnitude of Q, the rate of pumping in

Equation (3.5), may be calculated if the parameters of the benefit function B(Q) are known.

To see this, assume that the benefit function,

B(Q), is a quadratic in Q, and therefore reminiscent of the water-production

43 function developed for various field crops in

Pinal

County by Ayer and

Hoyt

(1981), such that:

B(Q) = a l Q - b

1

Q2 (3.6) where

B(Q) is in dollars per season, and Q is in acre-feet per season.

Also, let the unit cost of pumping,

C(S), be defined by:

C(S) = a 2 - b2S

(3.7) where a

2 is the unit maximum-pumping cost, and is defined as: a

2

= mcH

(3.8) where mc is the marginal cost of pumping and H is the full thickness of the aquifer; b

2

= mcdh/dS

(3.9) where dh/dS is water level decline with respect to storage withdrawals.

Due to homogeneity, dh/dS is constant, thus:

C(S) = mcH - mcKS.

If the aquifer is fully saturated, the product KS is equal to H.

(3.10)

44

With appropriate substitution, Equation (3.4) can now be written as:

G(Q,S) = a l Q - b 1 Q 2 - mcHQ + mcKSQ (3.11)

Differentiating Equation (3.11) with respect to Q in accordance with the decision rule in Equation

(3.5) yields:

DG(Q,S)

- a

DS 1

- 2b

1

Q - mcH + mcKS (3.12) and further,

DG(Q,S) _

DS mckQ (3.13) to substitute Equations

(3.13) and

(3.12) into Equation (3.5), such that:

In order to solve for the optimal use rate

Q , it is necessary

_ a l

- mc(H -

KS)

(1-r)mcK + 2b

1

(3.14)

Thus for a given aquifer and a given storage volume, the optimal

* withdrawal rate

Q

is obtained by solving Equation

(3.14) once the other parameters are known. It is immediately apparent from Equation

(3.14) that the marginal pumping cost is critical to evaluation of the optimal pumping rate. Also, an increase in the net price received for goods that are dependent on the water supply increases the use rate

Q .

45

Potential Effects of Management on

Water Conservation in the PAMA

The Burt model is based on the objective of managing the resource such that net benefits from water use to society are maximized. Essentially, this is also the intent of the Arizona

Groundwater Management Act, the tool which is available for centralized management in the PAMA.

In spite of several laudatory and general claims that have attended the passage of this Act, in particular with respect to its effectiveness in achieving water conservation, no specific study on the extent and magnitude of the conservation that will result from its implementation in the PAMA has been performed. While such a specific evaluation is not a primary objective of this research, it is of interest to examine in general terms only, its overall effect on water conservation within the framework of the Burt model of centralized groundwater management.

The Burt model simulates ideal conditions; viz, the physical occurrence of groundwater is simplistic enough for it to be modelled in such a way that the optimization rules can be applied; and the attitudes and circumstances of water users in the basin is such that they are ready and willing to employ water conservation measures. This is not usually the case in the real world, as groundwater production in basins that requires management has proceeded for such a long time that the infrastructure relevant to water use is already in place. Any attempt at centralized control is usually resisted by private interests.

46

The decision rules in the Burt model were developed with the assumption that the aquifer underlying a basin is homogeneous with unvarying hydrologic properties. The aquifers underlying the PANA are quite heterogeneous in nature, and applying the model would necessitate a subdivision of the area into sub-basins, for which separate decision rules should be developed.

Also, although it is not explicitly stated in the development, the marginal costs of pumping referred to in Equation (3.14) should in actuality be marginal social pumping costs. In an aquifer undergoing depletion, and where undesirable externalities like subsidence and the associated development of cracks and fissures has set in, the marginal social costs of pumping should include not only the private marginal cost of pumping but also some valuation from society's viewpoint of these externalities. Because the optimum mining yield is dependent on the marginal pumping cost, as well as other factors, a wrong assessment of these costs will lead to sub-optimal yield determinations.

The method most preferred by economists for dealing with this type of divergence between private and social costs in the utilization of a common property resource is the imposition of Pigouvian taxes on the generators of the externality (Baumol, 1972; Milliman, 1956).

Essentially, the magnitude of a Pigouvian tax should be such that marginal and social costs incurred in resource use are equal.

Equivalently, a quantity restriction the magnitude of which is determined by the size of the divergency between private and social costs could be used. Using these ideas, Noel (1979) and Noel, Gardner and Moore (1980) developed the approriate Pigouvian taxes, and

47 equivalent quantity restrictions that would lead to optimal management of the Yolo

County aquifer in California.

The Arizona Groundwater Management Act makes provisions for the use of taxes and quotas to achieve conservation in the PANA. This tax is to be in the form of a pump tax which is not to exceed five dollars per acre-foot of water pumped, and the quotas are to be based on assumed conservation measures. In order to determine the regulatory ability of these measures toward achieving basin-wide conservation goals, it is necessary to examine their efficacy with respect to a correct Pigouvian tax or quantity restriction.

The relationship between a Pigouvian tax and excessive private pumping is best illustrated by simple diagrams of the type shown in

Figure 3.1.

In the figure, line DD is the aggregate demand for water by all pumpers in the basin.

MPC is the marginal cost of pumping faced by a private well owner. Under the usual assumptions of pure competition and constancy of both input and output prices, a profit-maximizing farmer will limit pumping to the quantity Q.

However, in the presence of externalities, the marginal social cost of pumping (MSC) for the same quantities of water, and which arè equivalent to the marginal pumping costs shown in Burt's

(1964 and

1967b) decision rules will be higher than MPC, and thus may be shown as lying above the MPC line, in Figure 3.1. The corresponding social optimal rate of extraction is Q.

The function of a Pigouvian tax is to equate marginal private and social costs of pumping. For the situation shown in Figure

1, the magnitude of the tax is

P 1 P 2 .

That is, the tax is a function of the

MSC

MPC

P

2

1

Qs

Quantity of

Water Pumped

Figure 3.1. Marginal social costs and Pigouvian taxes.

48

49 difference between MSC and MPC.

In a heterogeneous basin,

MPC's and the corresponding MSC's will vary among individual pumpers as well as between pumping seasons.

This means that a correct Pigouvian tax should also vary between pumpers and be adjusted seasonally. A fl a t rate tax of the type mandated by the Groundwater Management Act is therefore potentially inequitable, as it will result in some pumpers paying more than they should while others will pay too little.

Also, • the amount of the tax in the Groundwater Management Act was determined by political compromise rather than by an attempt to equate marginal private and social costs of pumping. The tax is therefore potentially inefficient with respect to a correct Pigouvian tax. Finally, since the optimum mining rate of extraction,

Q s was not known to begin with, it is not certain that the flat rate tax will have any substantial effect in moving total basin extractions toward the societal optimum. It should be noted that such a societal optimum rate of extraction could be greater than what is being pumped presently, a result which would discourage the imposition of taxes or restrictions on pumping.

An incorrect tax can have one of two effects: if it is too high, pumpers are paying to much for water, and will readjust pumping rates such that the aggregate amount of withdrawals from the basin is less than the societal optimum. Further, the Groundwater Management

Act specifies that part of the tax collected will be used in purchasing land which is to be eventually retired from agriculture. This move will further reduce extraction and increase the deviation of total basin withdrawals from the optimum.

50

If the tax is too low, pumping continues at a rate, Q, greater than the optimum. Retiring lands will thus have a positive effect in reducing aggregate withdrawals and drive it toward the basin optimum. However, only a part of the pump tax revenue is to be applied toward purchasing land for retirement, and it is likely that the large proportion of funds used for land purchases will be provided by the

State.

As has been mentioned above, a quantity restriction should be based on a predetermined optimal mining yield, and the divergence between the private and social costs of pumping. Quotas based on any other consideration suffer from the same defects as the taxes just discussed. The Groundwater Management Act specifies that quotas, in the form of the "water duty," are to be set on the basis of assumed conservation measures which are determined to be reasonable on a farm unit, and not as Pontius

(1980) suggests, on a policy of "planned depletion." Without some prior knowledge of an optimal yield, it is difficult to assess the effectiveness of quotas. To the extent that these quotas will reduce aggregate extractions, the Act may be said to have some effect on reducing water use, which by definition, may not be regarded as conservation. Before

1985, when the first management plan is to go into effect, the Act limits individual pumping to an average amount based on reported quantities pumped in the five years preceeding and including

1979.

There is no reason to believe, for example, that quantities have not been inflated in anticipation of the law. Also, if a farm operation already includes the conservation measures on which the restrictions in subsequent plans are to be based, as may well be

51 the case in many farms in the PÂMA (Bookman-Edmonston Engineers, 1981), then the plans have minimal effect in reducing the quantities of water pumped from the basin.

Farm-Level Water Conservation

Over 80 percent of groundwater pumped in the PÂMA is used for irrigation purposes, and as such, farm-level water use practices have considerable potential in contributing to basin-wide water conservation. Conservation practices at the farm level are identified in this section, and since "it is the net economic benefits at the farm level which provide the primary driving force in determining what water conservation practices if any, are adopted over time by farmers"

(Conklin and Schmisseur, 1976, p. 21), a benefit cost analysis of these conservation measures is required, so as to identify those measures that are most beneficial to both the private farmer and to society.

Opportunities for water conservation at the farm level include changes in (1) cultural practies, (2) irrigation practices, (3) cropping patterns, and (4) investments in alternative irrigation systems.

Cultural practices dealing with water conservation are generally employed to prolong, or increase the productivity of the available water. They may take the form of specific tillage practices, spraying and fertilizing, the objective being to substitute for water or improve its utilization. These practies are not specifically addressed in this study. Irrigation practices involve the timing of water applications, amounts of water applied, length of runs, and other such considerations. The Ayer and Hoyt (1981) study cited and

52 described erlier in this chapter address these problems as they relate to agricultural water conservation in Arizona.

Farmers select certain crop combinations for a variety of technical and economic considerations that include the variation in total annual water supplies. The lower-valued grain crops to be found in a typical crop mix in Final, for example, require less water and at periods when it does not have to be used for irrigating the major crop, which is cotton. However, further savings in water can be realized if the grains are replaced by vegetables that require less water and demand a higher price than cotton. Capital investments in alternative irrigation systems involve a change from the traditional irrigation system of flooding through furrows, to more sophisticated systems like sprinklers, laser leveling the farm or adopting a drip system. These systems have higher potential water application efficiencies, and their installation can result in substantial savings in water. In addition, improvements in crop yields are generally associated with these systems.

The benefit-cost analysis of alternative crop mixes and irrigation

.

systems is carried out in two steps. The first step is a social benefit-cost analysis in which the social costs and benefits associated with each alternative measure are identified and estimated.

The second part is a strictly private analysis as would be perceived by a rational profit-maximizing farmer. The two kinds of analyses and the manner in which they are used in the dissertation are described in the following sections.

53

Social Net Benefit Evaluation.

The results of a social net benefit evaluation differ from those of a private evaluation because of divergencies between market and social prices and externalities. As was discussed in the section on basin-wide conservation, the private variable cost of pumping does not include the user costs associated with subpotimal groundwater mining and the cost of subsidence effects.

Institutional distortions also exist in the form of taxes and subsidies. The social prices used in social benefit-cost analysis that include these divergencies are known as shadow prices, and they more accurately reflect the real value to society of both input and output commodities of a production process. In direct relation to this study, the effects of the institutional distortions and externalities associated with private competitive pumping are such that decisions based on the private benefit-cost analyses alone will be socially suboptimal.

These distortions present significant difficulties in social benefit-cost analysis in an imperfect economy of the type found in developing countries, and devising methods for their appropriate inclusion in economic analysis has been the subject of substantial research efforts. A comprehensive review of the current methodologies in use is provided in

El-Tohami (1983) and Lai

(1974).

These methodologies provide approaches by which the common pool problems associated with groundwater use in the PAMA, and the resulting divergencies between private and social costs can be treated in a social benefit-cost analysis. In particular, based on ideas initially developed by Chennery (1961) and Bruno (1967), research at Stanford

54

University's Food Research Institute has lead to what is now generally known as the Domestic Resource Cost (DRC) method of social benefit-cost evaluation (Pearson,

1976;

Pearson, Stryker and Humphreys,

1981 and

Monke, 1981).

This methodology has also been used by Mears

(1976) to study the comparative advantage of rice production in various regions of the United States.

The

DRC measure is defined as the ratio of the social costs of all inputs in a productive activity less the positive externalities to value added at world prices. It provides an indication of the propensity of the activity to earn or save foreign exchange. However, because it is unit-free, it also provies a useful comparison of resource use allocation between different production practices, and in the case of the present study, between different crops produced under alternative irrigation technologies. For a given crop-system configuration, a DRC ratio that is less than unity is a measure of economically efficient resource allocation in the production of the crop, since the cost of resources used in its production are less than the net income realized from the sale of the crop. Also a comparative examination of

DRCs associated with crop production under a given technology in different areas within a state, region or country provides an indication of those areas that possess comparative advantage with respect to the production of the crop. Those areas with

DRCs that are greater than unity should be discouraged from producing the crop. Otherwise, a technology that indicates a lower DRC ratio should be employed.

55

Two other measures of production efficiency which are related to the

DRC ratio and that can be estimated simultaneously with the same data requirements used for DRC estimation are the Net Social Profitability

(NSP) and the Net Private Profitability

(NPP) of an activity.

The essence of the NSF measure as related to the present study is that an irrigation technology employed in the production of an additional unit of a crop is socially efficient if the social value of the crop is equal to or in excess of the social opportunity costs of the resources employed in its production. Formally,

NSP.

T n

1 [ 1 A..P. t=1 i=1

1)

k=1

1(3

P + E.]/(1+r) k

3 t where

A.

. the quantity of the ith output produced by the jth

(3.15) activity

P i

..the accounting price (shadow price) of the ith commodity f kj

. the quantity of the kth factor of production used by the jth activity p k

= the accounting price (shadow price) of the ith factor of production t. a measure of the net external benefits or costs associ-

J ated with the jth activity t time period of interest r social discount rate

E. externality incurred in the jth activity

The NPP measures the private profitability of an activity as opposed to the

NSP. Prevailing market prices are used in place of

56 social shadow prices. Also, externalities are ignored.

NPP is estimated with equation (3.16) as follows:

NPP. =

T n

[ 1 A..P. - 1 f P ]/(1+r) k=1 k k t=1 t=1 13 1 t

(3.16) whereP.and P

1 k are respectively input and output commodity observed market prices, r is the real rate of discount, and all other variables are as previously defined. A positive

NPP for a technique indicates that farmers shift resources to that technique.

The necessary data for DRC, NSP and NPP estimation consist of the input-output coefficients of the crops and irrigation technologies evaluated, and the set of output prices. In this study, inputoutput coefficients were obtained from the production budgets for

Pinal field crops that will be discused subsequently. Domestic market prices and shadow prices are applied to the input-output coefficients provided in the budgets to calculate the private and social costs of production for each crop and each technology.

Shadow Prices and Externalities. The shadow price or opportunity cost of an input is defined as the marginal value product of the input in its alternative use. The estimation of shadow price for

NSP and

DRC calculations necessitates two assumptions. The first assumption is that agricultural resources are fixed in supply and are not transferrable to non-agricultural sectors of the economy. This assuption is obviously incorrect in the presence of a growing and dynamic economy as exists in Arizona. For example, Kelso, Martin and

Mack (1973) have suggested that groundwater in the state could be more profitably used in sectors of the economy other than agriculture.

57

However, the results of a static and comparative analysis of different production technologies within agriculture would remain quite valid in the presence of the assumption.

The second assumption is that the only divergencies that exist between market and social prices of inputs in the U.S. economy are due to domestic taxes and subsidies. Then if one accepts Samuelson's

(1953) contention that the process of competition has eliminated activities which offer each factor less than its marginal value product which prevails at the maximum income for the entire economy, the market price of inputs must reflect their value to society. Shadow price estimation under these assumptions is thus limited to a separation of domestic taxes and subsidies from the market price of inputs.

In addition to these divergencies between the private and social costs of inputs, externalities as has been pointed out are incurred in groundwater pumping and these include user costs and the social costs of subsidence. Subsidence not only results in the development of cracks and fissures, thereby decreasing the value of land, but also causes the instability of structures that already exist on the land. A specific example in the PANA is Interstate Highway

10, which is frequently damaged around the Picacho

Peak area because of subsidence, and which requires constant repairs at substantial costs to society.

Therefore, the value of an NSP estimate includes the social costs of these externalities. That is to say,

58

(3.17)

NSP = N SP

+ E.

where

NSP

= true excess social profits

E.

= externality costs of groundwater withdrawals

Thus the NSF for each crop and technology may be interpreted as the propensity of the crop grown with the technology to pay for externality costs. Viewed in this way, the NSF measure may be used to rank crops, irrigation technologies, and farm sizes, as is done subsequently in this study.

Private

Net

Benefit Evaluation.

This part of the analysis is based on the assumption that the objective of a rational profitmaximizing farmer with respect to an irrigation technology is to maximize the present value of benefits arising from the use of the technology. In a comparison of present values across different irrigation systems, the system that results in the highest present value is the one that is most preferred ceteris paribus.

The analysis differs from that described in Equation

(3.16) in the sense that the data used relate to farm average costs and benefits rather than the crop-specific analysis described by Equation

(3.16).

It is the results of these average farm enterprise benefit-cost analyses that are relevant in farmers' decision-making because most farmers in the

PAMA will grow several crops in the same farm rather than concentrating on a single crop.

Thus, based on a chosen crop mix, net present values for a farming enterprise are calculated in two steps.

First, average

59 per-acre net returns to water (NRW) are estimated in the following way.

For a given crop mix, total farm revenue for each crop is the product of per acre revenues and the number of acres allotted to the crop. The relevant crop variable non-water costs are obtained in the same manner.

Farm revenues and non-water variable costs for the different crops are summed in order to obtain total farm gross revenue and total non-water variable costs. The totals are divided by cropped acreage to obtain the average values. Non-water fixed costs are estimated on an average per-acre basis. The non-water fixed costs include the annual costs of farm machinery, irrigation system and land costs. NRWs are obtained by separating average fixed and variable non-water costs from average farm revenues. Formally,

M Q k

P k

A k - TVCk

NRW

T = k=1 (

A k

) - TFC

(3.18) where

NRS = per-acre net returns to water accruing to farm mix with irrigation technology T

P k = market price of crop k

Q k

= average per-acre yield with irrigation technology T

TVC = total average variable costs of all inputs except water

TFC k

= total average fixed costs of all inputs j except wells and pumping equipment

A k

= number of acres allotted to a crop k in the crop mix.

Average per-acre net returns to each unit of water applied for each system is the ratio of NRW in Equation (3.18) to the average per-acre quantity of water used for irrigation. In the second step, average

60 per-acre present value of net benefits is obtained by calculating the difference between

NRW calculated from above and the per-acre average cost of water.

With this procedure, per-acre average net returns, net returns to each unit of water applied and average net benefits are estimated for the traditional system, which is flooding through furrows. These base results are then compared with those obtained from systems with progressively higher potential water application efficiencies.

CHAPTER

4

DATA ANALYSIS

The data used in the analyses described in the preceding chapter are presented and discussed in this chapter. Data sources are identified, and the major assumptions used in data analysis are specified in the first section. The next three sections are devoted to a discussion of farm sizes, irrigation systems, crops, and crop mixes.

Production costs and returns are covered in the later sections.

Assumptions and Data Sources

The parameters from the two analyses described in the preceeding chapter are estimated for two farm size groups with cropped acreages of

400 and

1000 acres. These sizes are assumed to be representative of the farm sizes in the PAMA.

Also, one representative pumping depth,

575 feet, was considered in the estimation of well costs.

Further, the analyses do not include all the crops reportedly grown in the area and which appear in Table 2.2, but were limited to the most predominant crops, namely alfalfa, wheat, barley, sorghum, safflower, upland cotton, and lettuce. As most farmers plant more than a single variety of crops on their farms, a crop mix that was representative of the typical farm sizes considered was developed and used for calculating realistic on-farm estimates of per acre average private net returns to water and average private net benefits.

61

62

The bulk of data on input-output coefficients, production budgets and calendars were obtained from material published by the

University of Arizona Agricultural Extension Service (Hathorn, Stedman and Gibson, 1982), and supplemented with information obtained from materials and interviews provided by County extension specialists, the

Agricultural Conservation Service of the USDA, and the Arizona

Department of Water Resources.

In using the data, several general assumptions were necessary and these are as follows:

1.

The data provided in the budgets are constant throughout the duration of the study, such that variations in input-output combinations and changes in capital investment and monetary returns are eliminated.

2.

There are no significant quality differences among machines, tools, equipment, irrigation systems, labor, and other inputs and outputs.

3.

The PAMA is assumed to be pedologically homogneous, and differences in soil types are not considered.

4.

Per acre yields are equal among the different farm sizes, and the quality of yield also does not vary with irrigation system.

5.

Quantity discounts that may be obtained by the larger farm sizes for which supplies are obtained in volume are ignored.

6.

Individual farmers are price takers; therefore input and output prices are constant.

7. Calendars of operations are independent of farm size, as is irrigation efficiency.

63

8.

All equipment is assumed to be purchased brand new in

1982.

9.

All wells are also assumed to be drilled in

1982, and irrigation systems purchased are installed in the same period.

Farm Sizes

Scale economies in

Pinal county farming have been recognized in earlier studies by Stults (1968),

Kelso, Martin and Mack

(1973), Boster

(1976) and Wade

(1980), and because of this, net returns estimation has been categorized on the basis of farm size in this study. Also, due to the variation in the size of farms in the

PAMA (Table 2.3), and the necessity to reduce the alternative sizes examined to a minimum, two size groups were chosen and assumed to be representative of the area.

However, the choice of farm size was not arbitrary. Table 2.3

shows that the average size class that contains the most acreage is

400 acres, followed by farms larger than 1000 acres.

Stults' (1968) classification which was based on a farm survey (Table

4.1) also shows that the corresponding average cropped acreage of these farm sizes is respectively 370 acres and

960 acres. On this basis, cropped acreages of

400 and

1000 acres were serected for consideration in this study.

On the assumption that the proportions reported in Stults' survey are still valid, and thus allocating an average of

30 percent of farmland to farmsteads, roads, ditches and fallow, the chosen cropped acreages correspond to farm sizes of 520 and

1236 acres respectively. However, cropped acreages are used in the analyses that follow as the relevant measure of farm size, as they more properly reflect resource requirements and output.

Table 4.1.

Farmland

use

in

Final County,

1964.

Size I Size II

Acres

Size

III

Total farmland 322

Farmsteads, ditches, roads, wasteland, and other non-irrigated land

Fallow or idle

70

146

Cropped acres

Cropped acres (range)

106

0-200

657

65

251

341

221-520

1,236

182

379

675

521-960

Size

3,510

380

IV

1,425

1,705

960 and up

Source:

Stults (1968)

64

65

Irrigation Systems

An estimated total of 1.15 million acres was irrigated for commercial crop production in Arizona in the 1982 season (Irrigation

Journal, 1982).

Tables

4.2 and

4.3 are a breakdown by system of the types of irrigation systems used on this acreage. While gravity systems predominate, there have been significant increases in the number of acres under sprinkler irrigation since

1973. The drip

(trickle) system remains largely experimental, its use being limited to permanent tree crops and an extensive acreage of cotton at the

M & W farms located in Coolidge. However, the same survey shows that

305,000 acres were under drip in California in the same year, an increase of

17 percent over the previous year. Conceivably, with time and the presence of the relevant economic incentives, increasing acreages will be converted to drip in Arizona.

Because of this, all three systems--gravity, sprinkler and drip

--are evaluated in this study. In addition, increasing attention is being directed at planeing land to dead level slope with the aid of laser equipment, a procedure that results in better water application efficiencies and uniform distribution of irrigation water over the field. In the following sections, brief descriptions of all four systems evaluated in this study are presented.

Sprinkler Systems

Sprinkling is the method of irrigating crops with water under pressure in the form of a spray. A sprinkler system is a network of tubing or pipes with sprinkler nozzles attached at predetermined

Table 4.2.

Arizona:

1982 irrigation survey data.

Year

Acreage

Irrigated

Percent

Change

1974

1975

1976

1977

1978

1979

1980

1981

1982*

1,150,000

1,150,000

1,150,000

1,150,000

1,100,000

1,147,500

1,150,000

1,150,000

1,150,000

-3

+4

+4

*

Estimate.

Source: Irrigation Journal, Vol.

32(6),

December

1982.

Sprinkler

Irrigated

49,300

51,000

53,350

56,300

66,125

64,000

68,000

71,000

71,000

66

Table

4.3. 1982

Irrigated acreage by system in Arizona.

System Acreage

1.

Sprinkler a.

Center Pivot b.

Hand Move c.

Linear Move d.

Solid Set and Permanent e.

Two Line/Side Roll

2.

3.

Gravity a.

Gated Pipe b.

Open Ditch, Siphon Tube c.

Underground with Valves d.

Flooding from Ditches

Drip

30,000

18,000

1,000

2,000

14,000

9,000

810,000

40,000

220,000

5,000

Source: Irrigation Journal, Vol.

32(6),

December

1982.

67

68 intervals. They were first used in the early 1900s for watering lawns and parks in cities, but since then have been increasingly used not only for irrigating crops but also for frost protection, crop cooling and fertilizer application.

The systems are generally classified as gun (or boom) when the nozzles are operated individually, or lateral where several heads are grouped along a lateral. Lateral systems are further distinguished on the basis of whether they are moved from one part of the field to another, either manually or by mechanical means, until an entire field is irrigated; or the nozzles are set closely together so that the entire farm is irrigated without moving the laterals--solid systems; or travelling laterals that are continuously moved along a closed or open channel water supply to irrigate a large rectangular area; and finally whether the laterals are continuously moved around a pivot to irrigate a circular area, and are described as center pivot systems. Table

4.3

shows that of the 71,000 acres under sprinkler irrigation in Arizona, more than 42 percent are center pivot systems, which is why it is the system chosen for evaluation in this analysis.

In this system, the water is supplied to the laterals from the water source through the pivot, to which they are anchored at one end.

With the aid of powered drive units which support the laterals and are mounted on wheels, tracks or skids, the laterals are able to move continuously around the pivot while applying water to the crops.

Center pivot systems require pressures ranging between

30 lb/in 2

to 85 lb/in2

(Jensen, 1981).

69

Drip (Trickle) Systems

Drip irrigation is the slow and frequent application of water to individual plants at low pressures with the aid of a network of small plastic pipes and emitters. The primary advantage of a drip system is the very high potential water application efficiency. In addition, there is evidence that increased yields and better quality crops are associated with drip system installation. Also, because water with fertilizer dissolved in it is applied directly to the plant, weed growth is reduced, as well as the amount of fertilizer used.

A typical drip system consists of the headworks which include pressure gages, sand separators, screening equipment, valves, fertilizer injectors and controls. To these are attached the main water line, submain or manifolds which in turn supply water to the laterals and emitters. Because of the large number of laterals and emitters required, it is neither practical nor economically feasible to use drip systems on closely planted crops like alfalfa, wheat and barley.

Furrow Irrigation and

Laser Levelling

Furrow irrigation or flooding is the predominant irrigation method in Arizona, accounting for up to

70 percent of total irrigated acreage in 1982

(Table 4.2).

Furrows are usually roughly trapezoidal channels cut mot the soil and into which a large initial non-erosive stream of water is turned; As the water flows down the furrow, it is absorbed into the soil. A level field is necessary for uniform water distribution, and excess water is usually lost by deep percolation and by runoff at the lower end of the field.

In order to reduce losses and improve water distribution, the field is smoothed to slope or dead level during land preparation. Best results are achieved when the blade level on the scraper used for smoothng is automatically set at the desired elevation with the aid of a laser beamed from an outside transmitter. Potential water application efficiency on dead level fields can reach up to

95 percent.

70

Crops and Crop Mixes

Table

2.2 shows total acreage by crop in Pinel over five years, but reveals no indication of the crop mix that may be found on a typical farm. Earlier studies by

Stults (1968), Burdak (1970), and

Boster (1976) of Pinel agriculture have typically restricted a farmer's choice to eight predominant field crops, namely wheat, barley, grain sorghu, safflower, sugarbeets, alfalfa and the Pima and Upland varieties of cotton. The linear programming optimization models then yielded a set of optimal crop mixes under specified water constraints.

However, empirical evidence shows that farmers would not usually select an "optimal" crop mix (Gibson,

1982, pers. comm.; Wade,

1982, pers. comm.;

Hathorn, 1982c, pers. comm.). Wade (1980), for example, shows that in Arizona the crop mix usually varies with farm size, and that more acreage is allocated to cotton in the larger farms relative to other field crops than in the smaller sized farms.

The choice of a crop mix is especially important because it determines the aggregate amount of water needed to satisfy consumptive use and other requirements. Besides, certain crops might also require specialized farm machinery for crop establishment and

71 harvesting, thereby increasing production costs. Grains, for example, would usually require the same type of machinery that can be used interchangeably for either crop, while introducing cotton into the mix requies a harvester, useful only on the cotton acreage but which immediately raises the overall average farm production costs.

Another important fact is the limited amount of vegetable crops grown in Final. Richard Gibson, a University of Arizona County Extension Specialist based in Casa Grande, believes that the soils are quite suitable for raising vegetable crops since those farmers who grow a few acres of vegetables usually obtain satisfactory yields. The reason that more acreage is not devoted to vegetable raising might be due to the lack of established markets, and the unduly high seasonal uncertainty associated with vegetable prices, as Salant and Martin

(1980) also showed for

Cochise

County. However, with higher water costs it is conceivable that a shift to higher valued vegetable crops that use less water than the traditional field crops is possible.

Because of these considerations, and after discussion with

Richard Gibson, two crop mixes were chosen for this study. The first one includes cotton, alfalfa and a grain. This grain could be wheat, barley or sorghum. Cotton was allotted

60 percent of the acreage, and the remainder was divided equally between alfalfa and the chosen grain.

Lettuce is introduced into the second crop mix, with cotton being allotted

50 percent of the acreage, alfalfa 20 percent, and lettuce the remaining

30 percent. These proportions were kept constant for both farm sizes.

72

Production

Costs

An assessment of net returns to water, the domestic resource cost

(DRC), and net social profitability (NSF) measures associated with each irrigation technology requires a correct estimation of all the relevant production costs. These are separated into fixed and variable cost factors.

The fixed costs are those which are incurred regardless of the farm's level of production, and remain constant in the short run. The short run may be defined as a planning period that is so short that the farmer does not have to vary resources such as land, number of wells, buildings, farm machinery and management. Other costs like labor, intermediate inputs and energy costs may be varied within the short run, and are described as variable costs. If the planning period is long enough, fixed costs may also become variable. The following is a description of the fixed and variable production costs associated with each irrigation technology.

Fixed Costs

Fixed costs associated with farm production in a typical

Pinal farm may be broadly classified into three categories: those connected with the supply of water to the farm, those incurred in its distribution on the farm, and those connected with calendar operations.

Fixed cost data on Pinal farms have been estimated by Stults

(1968). Burdak (1970) and

Boster (1976) base their fixed cost estimates on extrapolations of this earlier study.

Hathorn,

Stedman and

Gibson (1982) also publish annual field crop budgets for major Arizona

73 field crops that include fixed cost estimates.

However, the method used for fixed cost estimation in these earlier studies is straight-line depreciation, which is approximate.

Schiltz (1981), in a review of methodological alternatives for estimating farm machinery costs, compares the straight-line depreciation method with the more theoretically superior present value method, and concludes that the straight-line depreciation method would in general always underestimate the cost of fixed factors. Moreover, in the Hathorn budgets, machinery fixed costs are presented on a per hour of use basis. Based on the definition of fixed costs given earlier, it is clear that they are independent of the rate of use of a factor and are present whether the factor is used or left idle. The present value method has thus been preferred in the estimation of fixed costs in this study, whenever the available data allowed.

The Discount Rate. The choice of a discount rate is crucial to present value calculation. In a perfect economy without institutional distortions, the interest an investor is willing to pay for an investment loan should be divested of inflationary factors such that it equals the rel. rate. In July of

1982, when the fixed costs were calculated, the prime rate of interest was 16 percent, which is the rate at which the major banks issue loans to their first class customers. Production Credit Associations (PCA) were issuing loans at

14 percent, excluding a service charge of

2 percent. Many farmers also borrow from small banks and at rates somewhat lower than the PCA or larger bank rates. The inflation rate in this period was about

7 percent. Considering also that real rate estimates from time periods

74 when inflation was very low range between

3-5 percent, the real rate of interest that was used in this analysis is

6 percent. The influence of a variation of discount rate is examined in the sensitivity analysis, when a rate of

3 percent is used.

Fixed Costs: Farm Machinery: The various types of machine equipment required for a farm operation that combines cotton with alfalfa hay and grains or lettuce are listed in Table

4.4.

The list was compiled from the

Hathorn, Stedman and Gibson (1982) budgets.

Lettuce equipment needs were obtained from Stipe and

Aillery

(Unpublished), as published budgets for lettuce in

Pinal are not available. The equipment in the Stipe and

Aillery list required for performing identical operations for the other crops in the mix did not always correspond with that used in the

Hathorn budgets, in which case the closest matches were chosen. The combination of the types of machinery used on any farm and the useful lives of the equipment depends on the crop mix and the acreage allotted to each crop. Hence fixed costs also vary with the crop mix.

In estimating fixed gosts, it is assumed that each piece of equipment is purchased new in

1982.

Trade-in values or salvage values at the end of a machine's useful life on the farm is estimated as a proportion of the original purchase cost using the empirical relationship suggested by the American Society of Agricultural

Engineers (1978), and shown in Equation

(4.1).

RFV = afi L PC

(4.1)

Table 4.4. Machinery and implements required on a typical

PAMA farm.

a

75

Name and Description Codes

Power Code b

04

05

20

29

32

Implement

Code c

03

09

11

15

18

38

41

48

49

30

32

33

37

50

65

75

82

83

88

93

Wheel

Wheel

Stalk tractor, 70

PTO

HP tractor, 80 PTO

HP

1/2-ton truck AT AC PSB SB RAD

Combine PL20 190 BU HS

PSB CC

Cotton picker HS

HDS

V-ripper, 5 shank

Cultipacker, 13 foot

BC

Cultivator, 4-row rolling

Disk border, 6 disk

Disk offset, 13.5 foot

Float, 12 x 36 foot

PC

Landplane, 12 x 45 foot

Lister, 5 botom

Moldboard plow

5-16, 2 way

JD

Mulcher, power, 4 row

Spring-tooth renovator,

16 foot

Grain drill, 14 foot

9910

Planter, drill type, 4 row

Planter, drill type, 6 row

Module builder, with cab

Rood,

2 row, with basket cleaner

Fertilizer injector,

4 row

Fertilizer broadcaster, towed

Blade scraper, 10 foot cutter, 4-row flail a.

Source: Hathorn (1982).

b.

Tractors, trucks and other self-propelled equipment.

c. Tillage, planting, harvesting and other miscellaneous equipment.

where

RFV = the value of the machine at the end of its useful life a, a

= empirical constants estimated for each class of machine

PC = purchase cost

L = useful life of the machine defined in years

The useful life of the machine,

L, depends on the frequency with which it is used on the farm and the subsequent wear, and is estimated by using Equation

(4.2),

L -

Wear

Use or

20 years, whichever is smaller

(4.2) where

Wear

= life expectancy of the machine defined as hours until worn out

Use

= hours of annual use, and

L is previously defined

76

Hathorn (1982b) lists current purchase costs and values of

L for all the required equipment. Tables

4.5 and

4.6 were compiled by using the

. list in conjunction with the estimated hours of use on a farm with the chosen crop mixes, as indicated in the crop budgets.

The present value in any year of a depreciable piece of equipment is defined by:

PV = PC

-

RFV

(l+r) n

(4.3) where

PV = present value of the equipment r = discount rate

n = year of interest, and other variables are as previously defined.

The equivalent annual series of payments is obtained by applying the capital recovery factor (CRF) to the present value, as shown in

Equation

(4.4),

77

AP pv

[ r(1+r)

71

] ci+r) n i

(4.4) where

AP

= equivalent annual payments and other variables are as previously defind.

Equation

(4.3) and (4.4) were used to calculate annual payments for different hours of use for a typical farm's equipment inventory.

Two sets of per acre costs were calculated. First, the farm average per acre cost was calculated by dividing the annual cost of the equipment by the relevant cropped acreage, even when the equipment is specialized and used for only one crop in the mix. Second, when individual crop machine fixed costs are determined, only the relevant acres on which the crop is grown is used as the denominator. Thus if a machine is used for only two crops in the mix, their acreage is combined and used as the denominator to obtain fixed costs for each of the two crops. These are the fixed costs used in

NSP and

NPP estimation.

Insurance is usually obtained annually and is based on an allrisk policy which includes fire, theft and liability. Insurance costs

Table

4.5.

Machine use and trade-in schedule: traditional crop mix.

a

78

MCODE b

400

Acres

Hours Used on All Acres

Cotton Grain d

Alfalfa Total

L c (yrs)

1000

Acres

Lc

Totale

Power Code

04

05

06

20

340

44

318

480

29

32 288

Implement Code

03

09

11 133

15

18

30

32

132

75

82

83

88

93

33

37

38

41

49

50

65

72

72

54

116

144

44

9

21

57

80

21

42

3

15

21

18

150

184

288

48

18

36

21

42

4

3

4

382

62

526

744

21

48

18

133

210

21

42

72

72

4

54

116

144

15

4

59

7

12

20

9

2

20

14

14

20

9

20

6

20

20

7

4

20

20

20

20

14

952

153

1312

1860

52

3

180

180

9

135

288

360

36

9

144

120

45

332

523

52

103

20

20

20

12

20

20

20

20

20

20

20

13

20

20

20

20

20

20

4

20

20 a.

Traditional crop mix is: cotton, 60%; grain, 20%; alfalfa,

20%.

b.

Machine codes and names are presented in Table 4.4.

c.

L is useful life of machine in years.

d.

Grain could be any one of: wheat, barley, sorghum.

e.

Total hours used on a

1000 acre farm.

Table

4.6.

Machine use and trade-in schedule: alternative crop mix,a

79

400 Acres

1000

Acres

Lc Hours Used on All Acres

Lc (yrs)

MCODEb

Cotton

Alfalfa Lettuce Total Totald

Power Code

04

283

05

06

36

266

20

29

32

400

240

Implement Code

03

09

11

15

18

110

110

38

41

48

49

30

32

33

37 60

60

45

50

65

75

82

83

88

96

120

8

93

36

2k

18

150

184

48

17

36

21

42

4

4

4

3

23

189

240

36

36

36

14

48

20

36

108

10

327

54

605

824

240

84

54

146

14

194

21

42

20

60

60

4

4

45

36

96

120

108

11

14

36

20

20

20

20

29

17

20

13

20

20

20

20

20

20

20

20

20

20

17

11

20

20

20

4

8

818

135

1510

2060

600

14

29

8

1

3

4

20

20

20

17

17

20

20

12

18

7

20

10

13

20

7

4

20

20

20

210

135

34

484

52

103

49

150

150

9

9

113

90

240

300

270

26

33

90 a.

Alternative Crop Mix: cotton,

50%; alfalfa,

20%; lettuce,

30%.

b.

Machine codes and names presented in Table

4.4.

c. L is useful life of machine in years.

d.

Total hours used on a

1000 acre farm.

are calculated at the beginning of each year, are limited to the useful life of the equipment, and are equal to the product of the depreciated value and the insurance rate. The annual rates are summed and multiplied by the capital recovery factor to obtain equivalent annual payments, using Equation

(4.5).

80

I =

N RFV n

Z x

IR x r(l+r) i=1 (

1 +r)

11

(l+r)_1

N

(4.5) where

I insurance costs reduced to equivalent annual payments

IR insurance rate 0.01 in Final.

Annual property taxes are computed over the first six years of the useful life of farm machinery, after which no further taxes are paid. The method of calculation is the same as for insurance, except that the insurance rate is replaced by the tax rate. Tax is assessed at 18 percent of equipment's market value. Housing has been omitted from cost estimates, as few farmers in Final house machinery equipment

(Schlitz, 1981; Hathorn, 1982c, pers. comm.).

Machine fixed costs are summarized in Tables

4.7 and

4.8.

The results all reveal extensive economies of scale as the fixed costs for

1000 acre farms average about 50 percent of 400 acre machine fixed costs. This is valid only under the assumption that one piece of each type of equipment is owned on a farm whatever its size. It is conceivable that because of the size of a farm and the frequency of an operation, an owner might choose to obtain more than one of a particular kind of equipment, thereby increasing the per acre fixed costs.

Table 4.7.

Summary of farm per acre acreage machine costs.

Annual Cost

Sales Tax

Property Tax

Insurance

Totals

Traditional Mix

400 Acres 1000 Acres

100.07

4.44

10.45

4.29

119.25

50.58

2.96

4.18

1.99

59.71

Alternative Mix

400 Acres

1000

Acres

83.97

3.63

8.55

3.27

99.42

55.09

2.78

3.42

1.85

63.14

81

Table

4.8.

Summary of per acre machine costs: individual crops.

Cotton

Alfalfa

Grains

Lettuce

Traditional Mix

400

Acres

1000

Acres

Alternative Mix

400

Acres

1000

Acres

123.19

89.25

139.62

-

67.25

37.95

52.79

-

137.90

75.51

-

46.77

92.52

42.42

-

35.19

82

However, the observed scale economies with respect to machine fixed costs are in agreement with Schultz's

(1968) findings; and since his results were based on actual farm surveys, the assumption is not unrealistic.

Fixed Costs: Wells.

Water for irrigation in Final is either from wells or surface sources. However, surface water constitutes less than 10 percent of total water used (Table

2.1), and most of this is in the Ak-Chin

Indian Reservation project lands. Surface water has thus been ignored in this study, and only well water fixed costs have been considered.

83

Well fixed costs for different depths to water have been estimated in

Hathorn, Stedman and Gibson (1982) and

Hathorn (1982a).

In order to reduce the number of alternatives to be considered, a pump lift of 575 feet was chosen for analysis. The results are therefore representative only for areas where water is pumped from this depth in

Final.

Two types of well are costed: the first type is that required to supply water when the furrow system or flooding on laser levelled fields is used as the irrigation method; and the second supplies water when the pressure systems, sprinkler and drip are used. The difference is due to the additional pressure required to distribute water with the pressure systems.

This additional pressure would normally be supplied by added equipment that may include a reservoir and a pump; but for convenience it is assumed here that pressure is supplied by increasing the existing pressure head at the well by the amount of the operating pressure of

84 the irrigation system. System operating pressure in pounds per square inch (psi) is converted to well pressure head in feet by applying a conversion factor as is shown in Equation

(4.6).

Pressures of

35 psi and

30 psi were used for the center pivot and drip systems respectively.

H

= P x 2.309 (4.6) where

H

= head in feet

P = system operating pressure in psi

2.309 = conversion factor

An increased well head means a larger pump motor and additional pump bowls which in turn result in a more expensive well than that used for non-pressure irrigation systems.

The present value method was used to estimate equivalent annual payments using Equations

(4.3) and

(4.4).

Salvage values of well components replace the remaining farm value

(RFV) when those equations are used. Details of the cost calculations are presented in Table

4.9.

Property taxes are not calculated for the well because they are assessed on the land as land improvement. The power assembly, installation and site costs are insured against fire and lightning. The resale value of these components at the beginning of each year is not known; therefore insurance costs were calculated on the basis of the annual average investment and the prevailing rate using Equation

(4.7).

Table

4.9.

Fixed costs: wells.

Specifications and Assumptions*

1.

Well is drilled and cased with

16 inch casing to

1500 feet

2.

Well pumps

1050

GPM or

836 acre—feet annually

3.

4.

Depreciate well

Depreciate power unit

25 years with

0 percent salvage

15 years with

3 percent salvage

15 years with

3 percent salvage

5.

Depreciate power unit

6.

Depreciate bowls

03 years with

0 percent salvage

7. Compute insurance on average investment in power assembly

Price Quotations (Excluding

4%

Sales Tax)*

1.

Drilling Cost and Casing Installation

2.

Casing, Foundation and Test Pump

3.

Pump Assembly

4.

12

Inch Bowls

5.

Power Unit

6.

Starter with Compensator and Secondary

Power Station with Safety Switches

7.

Installation Labor and Site Costs

Regular

System

45,000

35,440

16,035

6,216

8,500

11,216

Annual Fixed Costs:

8.

Purchase Costs

9.

Sales Taxes

10.

Insurance

11,949

504

1,070

Pressure

System

45,000

35,440

16,035

7,102

9,800

12,405

12,474

• 504

1,190

*

Price quotations and depreciation schedules obtained from

Hathorn

(1982b).

85

Annual Insurance

-

PC

+

SV

2 x .0952

where

PC

= purchase cost (less sales tax)

SV

= salvage value

.0952 = insurance rate.

86

(4.7)

Crop Water Requirements and

Well Fixed Costs. The number of wells required on a farm to meet irrigation requirements needs to be known before per acre fixed costs for wells can be calculated.

Irrigation requirements are in turn a function of the crop mix, the consumptive use requirements of the crops, and the irrigation system used.

Estimates of crop consumptive use requirements for the Casa

Grande area were obtained from Erie and others

(1982).

These were used as the basis for calculating the quantity of irrigation water that needs to be delivered to the farm. This quantity varies by irrigation system, as it depends on the system's potential water application efficiency. Water application efficiency is defined as the ratio of the quantity of water stored in the soil root zone during irrigation to the quantity of water actually used for irrigation, formally,

WAP =

W f x 100

(4.8) where

Ws

= water stored in the soil root zone during irrigation

Wf = water delivered to farm

WAP water application efficiency as percent.

87

Given the water application efficiency for any system, and assuming the crop consumptive use to be equal to Ws, the water stored in the soil root zone during irrigaton, the equation is used to calculate the needed amount of water to be delivered to the farm.

Water application efficiencies were obtained from published estimates in the literature and are as follows: drip 90 percent; dead level basins, 85 percent; sprinkler 75 percent, and furrow, 60 percent

(Hansen, Israelson and Stringham, 1979; Pair and others, 1975; Larson and Fangmeir, 1978; Jensen, 1981).

Values of Ws calculated in the manner described above are shown in Table 4.10, in which estimates for furrow irrigation system by

Hathorn, Stedman and Gibson (1982) are also presented for purposes of comparison. It seems that the Hathorn values were obtained by varying the water application efficiency between 63 percent for sugarbeets to

99 percent for alfalfa hay. There is no apparent rationale for this procedure, and hence furrow water requirements were recalculated using a 60 percent efficiency and these results are used in the rest of the analysis.

The total farm water use for each crop by irrigation system is a product of the appropriate values in Table 4.10 and the number of acres allotted to it on the farm. Aggregate farm water use is a summation of water required by all the crops in the mix. Finally, the number of wells required to service a farm is obtained by dividing the total farm water use by the well capacity. Table 4.11 shows the number of wells by system and crop mix that are required to service different farm sizes, and the associated fixed costs.

88

Table 4.10. Water needed to satisfy consumptive requirements with different irrigation systems, in inches of water.

Crop C.U.

H.Eff.

a

H.E.

b

Furrow C.P.

Laser

Drip

Cotton 41.2

Wheat

25.8

Safflower

45.4

Barley

25.3

Sorghum

25.4

Alfalfa

74.3

Lettuce c

15.7

69.0

73.0

86.7

79.0

57.7

99.07

-

60.0

35.5

53.0

32.0

44.0

75.0

-

67.0

38.5

75.7

42.2

42.3

123.8

26.17

59.9

34.4

60.5

33.7

33.9

99.07

20.93

48.5

30.4

53.4

29.8

30.0

45.8

28.7

50.4

28.1

28.2

87.4

82.6

18.47

17.44

a.

Water application efficiency used in the

Hathorn, Stedman and

Gibson

(1982) budgets.

b.

Water delivered to farm using

Hathorn's water application efficiencies.

c. The consumptive use requirement for lettuce is

8.5 inches; however, a further

7.2 inches is needed for germination and cooling.

89

Fixed Costs: Irrigation Systems. Irrigation system fixed costs were calculated on an annual basis using the present value method as described previously. Purchase cost data and salvage value specifications for the pressurized systems were obtained from Lierman (Unpublished), and for ditch lining from Stipe and

Aillery (Unpublished).

Laser levelling costs were obtained from Daubert and Ayer (1982).

Details of annual costs for the systems are presented in Tables

4.12

through 4.15.

Property taxes were not calculated since discussions with

Ken Lucas, a deputy county tax assessor in Casa Grande, revealed that the systems are also assessed on the land as improvements.

Farmers who invest in laser levelling or ditch lining are entitled to federal cost-sharing assistance under the Agricultural

Conservation Act. Under this program, they may receive payments to cover half of their investment up to a maximum of $3500. In addition, the accelerated tax depreciation allowed by the federal tax code for these conservation methods provide an additional incentive.

The accelerated tax depreciation incentive affects taxes paid on gross farm income, and therefore affects investment only in an indirect way. Besides, it is also assumed in this analysis that the whole farm is laser levelled, or all the necessary ditches lined at once, such that the farmer receives the maximum cost-share subsidy only once.

However,

Daubert and Ayer

(1982) have shown that the effect of these programs on farmer's decision to laser level is to slow down the rate of leveling so as to obtain maximum program benefits. This suggests that private investment costs of levelling may have been overestimated in this analysis.

\ 0

Ut

00

H

0

Q

Q

CN

• r-1

CN

CO tr)

• e-1 r-I

-4-

CO

\O

Cc) a,

1-1

• r

H

N

CO \ 0 ri H

.0 .0 In in cn

‘.0

• in r•• n

.

Ln

1-1

C) cn

CV

CO

1"...

,-1

CV

CV

CN

• c0

N..

in

.0

CN CN CN cn 0 0 r--

N In in

• • tn

• cn r-- ri

.0 .0 is n

H H H

N Ifl

\O

'.0 in

\ cn

Q

CO

.0 rl in cn

• ri

CN

CO

CYN

Ln cf)

Cr) r-

\ 0

4

r-I

CO co'N

111

90

91

Table

4.12. Fixed costs: drip system.a

A.

1982

Price Quotations (including

4

7 sales tax)

Item

No.

Description

1.

2.

Filter Station:

Computer, cement slab, pipe, valves

Mainline

8"

PVC (with valves)

3.

Submain: 6", 5", 4", 3" graduated PVC

4.

Bi-wall tape:

2,155,680 feet for

160 acres at

$400/acre

5.

6.

7.

Fertilizer injection pump

Installation (excluding bi-wall tape)b

Installation: bi-wall tape at

$30/acreb

B.

Specifications and Assumptions

1.

2.

3.

4.

5.

Depreciation Filter Station

Depreciation Mainline pipe

Depreciate sub-main pipe

Depreciate bi-wall tape

Fertilizer injection pump

C.

Annual Fixed Costs

Purchase

Price

(%)

17,504.00

25,898.00

19,714.00

64,670.00

1,495.00

29,100.00

4,800.00

15 yrs.,

0 salvage

25 yrs.,

0 salvage

25 yrs.,

0 salvage

3 yrs.,

0 salvage

15 yrs.,

0 salvage

Per Acre

Annual Fixed

Costs Item

Total

Sales taxes

No.

Annual

Cost

1

2

3

4

5

1,732.87

1,948.00

9,482.87

23,022.00

147.96

6 2,359.00

7

1.413.95

32,106.77

2,152.19

200.67

13.45

a.

Drip equipment is priced in 160 acre blocks.

b.

These are labor costs and total domestic taxes and are charged at

27 percent, which includes taxes, FICA, etc.

92

Table 4.13. Fixed costs: laser levelling.

A. 1981 Price Quotations (including 4% sales tax)

Item

No.

Description

1.

Remove existing ditches and add new ones

2.

Scrapping: 400-100 cubic yards at $.35-.45 per cubic yard (Av. 700/yd.

3 at $0.4/yd.

3 )

3.

Chiselling

4.

Steer manure: 20 tons at $5/ton

5.

Check gates

6.

Erosion control structures, plume

B. Specifications and Assumptions

1.

Depreciate ditchesa

2.

Depreciate scrapping costs

3.

Depreciate chiselling, manure

4.

Depreciate check gates, erosion controlsa structures, etc.

Purchase

Price/

Acre

($)

100.00

280.00

16.00

100.00

16.00

90.00

25 yrs., 0 salvage value

25 yrs., 0 salvage value

3 yrs., 0 salvage value

25 yrs., 0 salvage value

C. Annual Costs

Item

No.

1

4

5

2

3

6

Total

Sales Tax

Subsidy

Private Cost

Social Cost

Annual Costs/

Acre

7.83

21.90

5.98

37.41

1.25

7.04

81.41

3.26

0.63

80.78

78.78

a. There are costs attached to the disposal of these items at the end of their useful lifes which have been ignored in this assessment.

Table 4.14.

Fixed costs: ditch lining.a

Item

No.

1

2

3

4.

Price/Acre

Description

($)

Ditch layout

279.50

32.00

Turnouts

Ditch ends

3.90

5.20

Ditch start

Total

Annual costa

Sales tax

Subsidy

320.00

25.00

1.00

0.63

24.37

Private cost

Social cost

24.63

a. All items depreciated

25 yrs. with no salvage value at the end of useful life.

93

94

Table

4.15. Fixed costs: center pivot system.a

A.

1982

Price Quotations (including

4% sales tax)

Item Description

1.

2.

3.

Trench and backfill, 1320 feet at

$0.60/ft

10 inch PVC mainline,

13200 feet at

$3.50/ft a.

4

Strand

#2 440 volt wire b.

2

Strand

12-2 wire c.

1-1/2 inch PVC pipe

1,320 feet at

$1.50/ft

4.

8 towers, aluminum and steel

5.

8 440 volt,

3 phase motors and gear boxes

6.

10 psi spray heads,

1288 feet at

$.70/ft

7.

Gallon drops,

1288 feet at

$1.55/ft

8.

16 rubber tires, lights, lightning arrestor

9.

Freight and installation

B.

Specifications and Assumptions

1.

2.

3.

4.

5.

Depreciate items

1-4

Depreciate towers

Depreciate motors, ger boxes

Depreciate spray heads and gallon drops

Depreciate item

8

25

15

5

5

10

Purchase

Price ($)

824.00

4,805.00

2,059.00

37,668.00

1,664.00

937.00

2,076.00

4,295.00

7,800.00

yrs.,

0 salvage value yrs.,

0 salvage value yrs.,

0 salvage value yrs.,

0 salvage value yrs.,

0 salvage value

C.

Annual Fixed Costs

Item No.

Annual

Cost

Per Acre

Annual Fixed

Costs

1-4

5

6

7

8

9

10

Total

Total Sales Taxes (annual)

Insurance

Total per acre costs

593.70

3,729.20

379.83

213.70

473.84

561.10

1

,

019.00

6,970.37

256.40

2,852.90

58.09

2.14

23.77

84.00

a. Center pivot equipment is supplied and priced in 120-acre blocks.

95

To see that this is the case, consider a 400 acre farm that is laser levelled over 10 years according to

Ayer-Daubert schedule. Total subsidies in the ten year period amount to 35,000 dollars The equivalent annual series of this amount is 3,526 dollars or

$8.82 per acre for 400 acres, and $3.53 an acre for 1,000 acres. If the whole farm is laser levelled at once, only

3,500 dollars is received which over ten years amounts to $1.18 an acre for the 400 acre farm size. However, laser levelling cost increases during the ten year period may well erode the eight dollars per acre cost saving gained from waiting to take full advantage of the program.

General Farm

Maintenance. These include costs of ditch repair, road grading, weed control in areas not cropped, and other miscellaneous activities. These are treated as fixed costs in the Hathorn budgets and are charged at $14 per acre. The same approach is used in this study.

Variable Costs

The source of the bulk of the data on variable production costs used in this study is Hathorn,

Stedman and Gibson

(1982).

The field crop budgets are presented in Appendix Tables

1 through 7.

Published lettuce crop budgets are not available for the county, and the budget used is a combination of data obtained from Yuma (Wright and Grounds,

1972),

Imperial Valley (Bell and others,

1981),

Stipe and Aillery

(Unpublished), which wase supplemented with information obtained from a discussion with George Scott and Paul Fleming, both farmers in

Marana, during a lettuce harvesting operation. The budget is assumed to be

96 representative of the lettuce budgets for the semi-arid areas of

Arizona.

In addition, the budgets are only representative of the calendar of operations performed for farms with flood or furrow irrigation systems. Adjustments to the budget are necessary when pressurized systems are evaluated as some of the listed operations become redundant with the installation of these systems, and less material and labor are required in some cases. These adjustments vary by crop and by system. There does seem to be general agreement on calendar operations to be eliminated, though there is no clear-cut concensus on the amount by which fertilizers and insecticides, for example, should be reduced. The approach used here therefore has been to eliminate the necessary operations but keep the quantity of materials used intact.

Table 4.16 obtained from Lierman (Unpublished) lists these operations by crop and by system.

The variable costs in these budgets may be classified into five categories: labor, materials, custom services, electrical energy costs for pumping water and maintenance costs of farm equipment, wells and irrigation systems. A description of thse cost categories is presented in the following sections.

Labor.

Schiltz (1981) classifies labor in farm production into four categoris: scheduled labor, labor for supervision and management, and unscheduled labor. Unscheduled labor may be described as skilled indirect labor that is required for repairs of broken-down equipment or wells and will be discussed later in the section on domestic resource costs.

Table 4.16. Calendar operations eliminated when different irrigation systems are used.

Crops

0

O r-r m a)

11 rt

O

=

I--,

m

'-.4 m

W ri-

CI)

0

Il

M

C

3

System

Operation

Center

Plus

Level

Drip

Pivot

Dead

Basins

Landplane

Listorbed

Buckrows

Disk ends

X

XXXXX

XXXXX

X

Remove

1 cap

Cultivation

X

X X

Prepare endsharvest XXXXX

Landplane

Plow

Listorbed

Buckrows

Disk ends

Remove

1 cap

Cultivation

Prepare ends-harvest X

1 Insecticide app.

X

Fert. app.-Sidedress X

X

X

X

X

X

X

X

Source: Liederman

(Unpublished).

97

98

Scheduled labor is that required to perform individual calendar operations, which consist of field operations, fueling and minor lubrication of farm machinery. It is usually performed by day and monthly wage labor. It is assumed in this analysis that labor used for field operations is unskilled and is paid at the minimum wage rate of

$3.65

an hour. Fringe benefits,

F.I.C.A. matching funds, Workman's Compensation and unemployment insurance add up to a total of

27 percent of the wage rate and is added to the per hour earnings, since this is what the farm operator must pay out. Labor costs for harvesting lettuce are much higher than the regular rate at

$10.75 an hour, as the work is strenuous and labor is highly unionized.

Irrigation labor costs vary according to irrigation system.

This is because precise information on the number of hours of labor required to irrigate an acre using sprinkler and drip systems in

Arizona is lacking. Estimates were therefore obtained from the work of

King and others

(1981), who compared labor costs for different irrigation systems in the northwestern states and the Texas great plains. They suggest values of

0.04 hours of labor per acre inch of irrigation water for center pivot and

0.3 hours per acre inch for the drip system.

Skilled or semi-skilled staff are required to supervise unskilled labor, while management staff is also necessary for management decision-making, keeping accounts and paying wages. This specialized kind of labor may be performed by the owner-operator, or depending on the farm size, be delegated to staff hired for that purpose. Supervision and management costs are accounted for in the

99

Hathorn budgets as

5 percent of total farm income. This is the procedure followed in this analysis, except for lettuce harvesting, where semi-skilled supervisors are hired and paid at an estimated rate of

$14.60 an hour.

Machinery Repair, Maintenance and Fuel Costs. The cost of machine repairs varies with the hours of use of the equipment and the

American Society of Agricultural Engineers has derived empirical relationships to determine annual costs of maintenance for varous groups of farm equipment. These are referred to as the TAR equations and are used to estimate repairs as follows:

Repairs

-

PC x

TAR

(4.9) where

Repairs average annual repair cost

PC current replacement price of machine

TAR

= total accumulated repairs expected over the useful life of the machine as calculated by using the appropriate TAR equation

L = useful life of the machine.

The TAR equations for different categories of machines are reported in the

ASAE yearbook of

1978, and are of the following form:

TAR

(PCTUSE)f3

(4.10) where and are empirical constants that vary by machine category.

PCTUSE _ USE x L

WEAR

x 100

100

(4.11) where all variables are as previously defined for Equations (4.1) and

(4.2).

Repair estimates in the Hathorn budgets were computed using

Equations (4.9) through

(4.11).

However,

Schiltz (1981) has compared these estimates with those obtained by using the present value method, which also utilizes the TAR equation but takes into account the time value of money. The equation is of the following form:

PV

Average Annual Repairs =

L.

K

TAR

K

-

TAR (K-1)PC/(1-r)

R x CRF n=1 1-(1-r)

-N

/r where

TAR

K

= total accumulated repairs equation for year

K

TAR

K-1

= total accumulated repairs equation for year

K-1

CRF = capital recovery factor and all other variables are as previously defined.

(4.12)

Schiltz shows that estimates of annual repairs using Equation

(4.9) will usually be higher than those obtained by the present value method, Equation (4.12), by between

2-9 percent depending on the discount rate and the TAR equation used. He further compares these estimates with actual data collected from case farms and found that budgeted estimates using either of the above equations differ from real repair costs by a range of

+42.4 percent to -62.5 percent.

101

The reasons for this are the following. Actual repair costs in any one year on a particular piece of equipment are highly variable and could be over or below the budgeted estimates computed with the equations. Second, repair estimates are based on

L, years to wear-out, which may differ from a farm operator's trade-in schedule. An operator who constantly trades in his equipment at rates shorter than that assumed for

L would always have lower repair costs than those estimated. It seems, therefore, that repair estimates by either

Equation

(4.11) or

(4.12) would always be in error to some degree, and for practical purposes the simpler equation should be preferred. This is why the

Hathorn budget estimates are used in this study.

The quantity of fuel used was also obtained directly from the

Hathorn budgets, and current gasoline pries and diesel prices were applied to obtain actual costs.

Variable Costs of Pumped Water. The variable energy cost of pumping water is directly proportional to the rate of discharge and the drawdown incurred at the well (Nelson and Busch,

1967), formally:

VC

= CQ(L + s)

(4.13) where

VC

= total variable energy cost of pumping water

Q = discharge

L = initial lift s = drawdown at the pumping well, and

C = cost of lifting one unit of water, one unit distance at the prevailing pumping efficiency.

102

Discharge and the initial lift are known quantities, and the reliability of variable cost estimates clearly depends upon the accuracy with which drawdown, s, is measured. Drawdown in a puffing well is dynamic and constantly changing, with the rate of drawdown depending upon discharge and the physical properties of the aquifer. These physical properties are the transmissivity and storativity. Transmissivity is a measure of the amount of water that can be transmitted horizontally by the full saturated thickness of the aquifer under a unit hydraulic gradient, while storativity may be defined as the volume of water that a permeable unit will absorb or release from storage per unit surface area per unit change in head.

In a homogeneous two-dimensional aquifer of infinite aereal extent, with several fully penetrating pumping wells, Maddock (1972) has shown that if groundwater flow is modelled by the appropriate equation, drawdown at any of the wells is determined by the product of the pumping rate and the aquifer response functions. For an aquifer from which M wells are pumping, drawdown at well k in any time period, n, is measured by,

M n s(k, n) = E

E a(k, j, n-1+1)Q(S, i) j=1 i=1 where

s

= drawdown at well k f3(k,j) = response function describing the effect of pumping well j on well k

Q(j) = discharge rate at well j.

(4.14)

103

The magnitude of the response function is dependent on the storativity and the transmissive properties of the aquifer defined earlier. Response functions are usually determined by subjecting a model of the aquifer to various degrees of simulated pumping stress.

With this information, Equation (4.13) may be written in terms of

Equation (4.14), thus,

M n

VC(k)

C(k)0(k) [L(k) +

E $(k, j, n

j=1 i=1 i

4-1

)Q(5,

(4.15) where VC(k) is the variable energy cost of pumping water from well k.

Equation

(4.15) can be used for accurate predictions of energy costs at the beginning of every pumping season.

Response functions for the aquifer underlying

Pinal have not been determined; but for practical purposes, good approximations of energy costs can be obtained if during the pumping, continuous measurements of change in drawdown are performed and used in Equation

(4.15) in place of the response function. The energy costs used in this analysis are obtained from

Hathorn (1982), who publishes annual estimates for Final and the rest of Southern Arizona. However, it seems that a static water level is assumed to exist throughout the duration of pumping such that only

L(k) in Equation

(4.15) features in the estimates and the drawdown due to pumping is ignored. This means that the energy costs used here have been underestimated, and apply only to the brief initial period at the beginning of the season when pumping lift is 575 feet.

104

The costs of pumping plant repair, maintenance, lubrication and labor depend upon the age of the plant, and these costs should be depreciated as described for farm machinery. However, no adequate relationship between age and the repair cost components could be found in the literature, and annual repairs estimates were again obtained from Hathorn's work.

Land. Land costs may be estimated in two ways. First, it may be assumed that land is rented and for accounting purposes, only the rental value and tax paid on it are charged to the farm's operating costs.

Second, it may be assumed that the farm operator owns the land, and two kinds of annual costs are relevant: the annual property tax paid on the land, and interest that would have been earned if the cash value of the land were invested in an alternative endeavor. Since most farming in Pinal is done on land owned by the farmer, this second method is preferred in this analysis.

Property tax assessment on land is commonly based on its market value, whether it is improved, and on its location. Assessment on this basis can lead to inequitable tax valuation, especially if the land has good locational value which would influence its market price, but have no effect on its agricultural productivity. Because of this, the

Arizona Department of Revenue uses a legislated scale of values that depends on the water supply source for property tax assessment on farm land. Land with a surface water supply source is assessed higher than that which obtains its water from underground sources. Also, irrigation systems, wells and ditches are considered as improvements to the

105 land rather than improvements on the land which would increase its market value. For example, homesteads are assessed separately as improvements on the land while wells are not.

Ken Lucas (1983, pers. comm.) would not offer any absolute assessment values for the type of hypothetical farms considered in this study since so many variables enter into the assessment. He suggests that the current minimum guideline value of $350 per acre be used for evaluation. He also would not offer an estimate of the current full cash market value necessary for interest calculations. Roger Selley

(1983, pers. comm.) suggests that $1500 per acre would be a realistic estimate. Hathorn, Stedman and Gibson (1982) use the legislated guideline value of $350 per acre for interest calculations. In this analysis, the guideline values are used for both interest and property tax calculations.

Additional Data Requirements for

Social Profitability Estimation

The budgets presented earlier together with yields and output prices provide the necessary data required for the estimation of social profitability measures. However, as was explained in Chapter 3, private and social costs of production need to be differentiated. This involves shadow price estimation which, in the methodology used in the study, is limited to a separation of domestic taxes and subsidies from the market prices of inputs. The rationale for this procedure was discussed in Chapter 3.

In addition to the separation of domestic taxes and subsidies from input costs, further disaggregation of some of the budget data

106 into different cost categories was necessary before it could be used for DRC and NSF calculations. This includes data for custom services, machinery, irrigation system and well repairs. The cost categories include labor, capital equipment, fuel and spares, but are lumped together as single values in the

Hathorn budgets.

The criteria for separating custom services and well repair costs into their components (Table 4.17) were compiled from information obtained from Richard Gibson

(1982, pers. comm.), and Abe

Khalaf (1983, pers. comm.), a local well drilling contractor in Tucson. Criteria for decomposing machine repair costs were suggested by Hinz

(1983, pers.

comm.).

In the budgets, all scheduled labor for farm operations except for lettuce harvesting is assumed to be unskilled and paid at the same wage rate, and that there is one employee for each operation.

Obviously this may not be the case in reality, but it is the amount of labor-hours that is relevant in the calculations. Unscheduled labor for repairs and custom operations is assumed to be skilled. While this may not be true for some custom operations, it was not possible to further distinguish between skilled and unskilled labor from the information that was available.

The only inputs considered to be tradable in the budgets are intermediate inputs like insecticides and herbicides. Tariff schedules of the U.S.

(U.S.I.T.C., 1982) show that these are tariff-free goods; that is, no import or export taxes are charged on these items, as are tractors and most other farm equipment. All output prices are assumed to be equivalent to world prices.

Table 4.17.

Custom and repair cost allocation schedule for social profitability estimation.

Labor

Percent of Total Cost

Spares and Fuel Capital

Repairs (wells)

Repairs

(machines)

Repairs (Irrig. system)

"30

45

40

Custom Services 40

50

15

55

20

5

40

20

40

107

108

Output

Prices

In recognition of the fact that agricultural prices are subject to fluctuations caused by such factors as weather, insect infestations and sudden changes in demand, the U.S. Water Resouces Council (1973) mandated the U.S. Department of Agriculture to develop annual normalized prices that are directed toward correcting short-term fluctuations in prices. These are the prices used in the evaluation of the agricultural impacts of alternative plans for the development of water and related land resources.

The normalized price of a commodity is the weighted average of the actual season average prices over the preceeding five-year period.

The weights used place more emphasis on recent prices than on earlier ones. Each individual year's weight is greater than zero but less than

1, and all weights must sum up to unity. Weights are divided by using a polynomial distribution lag regression technique. In order to account for variations in prices to be found between states, a state normalized price is obtained by multiplying the national normalized price by the average ratio of the state price to the national commodity price for the preceeding five-year period.

The normalized prices for 1982 published by the USDA-ERS are used in this analysis, and are presented in Table 4.18.

Table

4.18. 1982 Normalized prices.

Commodity

Arizona Normalized

Price/Unit

Wheat

Barley

Grain Sorghum

Alfalfa Hay

Cotton (Upland)

Cotton Seed

4.44/bushel

3.22/bushel

6.71/cwt

90.11/ton

0.747/1b.

122.33/ton

109

CHAPTER

5

ANALYSIS OF RESULTS

Implementation problems of an idealized theoretical management model and the related potential shortcomings of groundwater management in the

PAMA were discussed in Chapter

3.

It was shown that centralized management alone, and in particular as mandated by the Groundwater

Management Act, by itself may not provide sufficient incentives that would lead to the adoption of adequate water conservation measures from the social viewpoint.

In order to make recommendations regarding ways in which management may be restructured so as to make it more responsive to conservation, as well as satisfy the profit-maximizing goals of individual farmers, a detailed evaluation of the profitability and water conservation potential of four alternative irrigation technologies has been performed. The results of this evaluation are presented in this chapter.

In the first section, the profitability of the major typical crops when produced under different irrigation systems are discussed.

Following this is a presentation of average private profitability when the crops are combined in a typical farming enterprise. A summary of water and energy use associated with each irrigation technology concludes the chapter.

110

111

The Profitability of Crops and Systems

Three measures of profitability appear in Tables 5.1 through

5.4, namely the Net Private Profitability

(NPP), the Net Social Profitability

(NSP), and the Domestic Resouce Cost (DRC) ratio. The NPP measure provies an indication of the private profitability associated with each unit of a crop produced. By definition, the crops that exhibit the higher NPPs should be preferred by the farmer in the long run. From the social viewpoint, also by definition, crops with a

DRC ratio that is less than unity are to be preferred over those with a higher ratio. Equivalently, the crops with the higher NSF

measures per unit are preferred over those that show low

NSPs.

The results presented in the tables show that in general, net private profitability is smaller than the corresponding net social profits. This is an expected result, since the private costs of production include a charge for sales taxes, property taxes and fringe benefits for labor. These charges are eliminated in the shadow pricing procedure that preceedes NSP estimation; hence

NSP is consistently higher with respect to NPP

.

in all cases.

The

NSF

measure as discussed in Chapter 3 may be interpreted as the propensity of the crop to pay for the externality costs incurred in providing the irrigation water used in its production. The measure therefore embodies a charge for the externality, E, as shown in

Equation (3.17).

That is to say, all NSPs presented in the tables are overestimated by the amount of the externality cost.

Net social profitability from crops produced with furrow irrigation technique are shown in Table

5.1.

Cotton shows an NSF per unit

Table

5.1. Indicators of private and social profitability: furrow irrigation.

Crop

Unit

NP?

$/Unit

400 Acres

NSP

$/Unit DRC

NPP

$/Unit

1000 Acres

NSP

$/Unit

DRC

Upland Cotton

Alfalfa

Wheat

Barley

Sorghum

Safflower

Lettuce lb.

ton lb.

lb.

cwt.

lb.

-0.05

0.08

-35.53

-24.26

-0.04

-0.03

-0.05

-0.04

-8.1

-6.71

-0.08

-0.06

Cartons 2.39

3.18

0.95

0.00

0.08

1.28

-30.38

-19.73

1.47

-0.02

-0.02

1.70

-0.03

-0.03

2.29

-5.98

-5.06

1.46

-0.05

-0.04

0.55

2.39

3.17

0.89

1.23

1.28

1.48

1.97

1.27

0.55

112

Table

5.2.

Indicators of private and social profitability: center pivot systems.

Crop Unit

NPP

$/Unit

400 Acres

NSP

$/Unit

DRC

NPP

$/Unit

1000 Acres

NSP

$/Unit

DRC

Upland Cotton

Alfalfa

Wheat

Barley

Sorghum

Safflower

Lettuce lb.

ton lb.

lb.

-0.07

0.010

-31.23

-20.40

0.95

1.23

0.02

-25.90

0.06

-15.87

-0.05

-0.06

-0.04

-0.05

cwt.

lb.

-9.65

-8.36

Cartons

-0.09

-0.07

2.72

3.51

1.56

-0.03

-0.02

1.89

-0.04

-0.04

2.61

-7.96

-7.11

1.53

0.51

-0.06

2.72

-0.04

3.50

0.93

1.18

1.38

1.66

2.37

1.33

0.51

113

Table

5.3.

Indicators of private and social profitability: laser leveling.

Crop

Unit

400

Acres

NPP

$/Unit

NSP

$/Unit DRC

1000

Acres

NPP

$/Unit

NSP

$/Unit

DRC

Upland Cotton lb.

Alfalfa ton

Wheat lb.

lb.

Barley

Sorghum

Safflower cwt.

lb.

Lettuce

0.13

-0.03

-0.02

-5.73

-4.65

-0.04

-0.02

Cartons

3.32

0.20

-14.95

-4.31

-0.01

-0.01

3.99

0.74

0.17

0.24

0.69

1.04

-10.65

-0.54

1.00

1.09

-0.01

-0.00a

1.05

1.33

-0.01

-0.00a

1.14

1.83

-4.18

-3.46

1.64

1.17

-0.01

-0.00a

1.01

0.44

3.65

4.26

0.41

a. Value approximate to

2 decimal places.

114

Table

5.4.

Indicators of private and social profitability: cotton under drip irrigation system.

400

Acres

NPP$/lb. NSP$/lb.

0.01

0.09

DRC

0.88

1000

Acres

NPP$/lb. NSP$/lb.

0.05

0.13

DRC

0.83

115

116 that is over

112 percent higher than that obtained from alfalfa, while alfalfa's is about

200 percent higher than that of wheat or barley.

Sorghum and safflower show

NSPs that are in turn less than that of barley. The same pattern is repeated when the crops that are irrigated with sprinklers or when the field is planed to dead level. All these observations are also valid for net private profitability. Of the traditional crops, only cotton shows a

DRC ratio that is less than unity for each irrigation technique. The next best

DRC ratio is shown by alfalfa for each system, followed by safflower, then wheat, barley and sorghum in that order.

In most cases, the indicators for private and social profitability are better for the

1000 acre farm size than for the 400 acre farm size, thus confirming the existence of scale economies. The advantage could be conceivably increased if quantity discounts were included.

Lettuce, which was introduced as an alternative crop, shows consistently higher measures of NSF and NPP than all other traditional crops that are allotted more acreage in the area. The

DRC ratio is also not only less than unity, but much lower than that of cotton in all irrigation systems.

A comparison of net social profits for cotton under different irrigation systems reveals that while less water is used for irrigation with center pivot systems than in furrow, social profits from cotton are reduced by up to 87 percent with a change from furrow irrigation to center pivot. A change from furrow to the drip system or laser leveling the field results in an increase in NSF of about 13 percent and 60

117 percent, respectively. With alfalfa, social profits from furrow irrigation are

15 percent and

82 percent less than those obtained from center pivot and laser levelling, respectively. For the feed grains and safflower, replacing a furrow system with center pivot decreases

NSF by an average of

25 percent. Laser leveling, on the other hand, increases the

NSP of these crops by up to an average of

40 percent.

The following conclusions may be reached on the basis of these results. Of the traditional field crops, cotton is the most profitable both from the private and social points of view, and this profitability is higher in the

1000 acre farm sizes than in the 400 acre farms.

Except for alfalfa, the adoption of a sprinkler system at current system costs and output prices in order to replace a furrow system represents a misallocation of resources. However, laser leveling greatly improves resource allocation from furrow, as does adopting a drip system in cotton production. In the case of alfalfa, conversion from furrow to center pivot improves resource allocation. However, the magnitude of this improvement is less than that realized when fields are laser planed to dead level. This improvement is also consistently of greater magnitude in the larger farm size group. Overall, dead leveling, which combines a high potential water application efficiency with improved yields, is the most superior of all the conservation measures considered. While the center pivot sprinkler system has a higher potential water application efficiency than furrow, it appears that the savings in water are not sufficient to offset the additional resources required for installing the system. Thus it may not be concluded under current conditions that the irrigation technology with

118 the higher water application efficiency necessarily yields the higher profits either to the private farmer or to society in general.

All the traditional field crops except cotton, show negative private and social profitability measures. This means that these crops are currently being produced at a loss in the long run.

DRC ratios associated with these crops are all greater than unity, and as such their continued production at current input and output prices represents a misallocation of resources. This result is well known from previous analyses done for Final County agriculture, and which were reviewed in Chapter

3. Typically, linear proramming models were used in these studies to predict farmer adjustments to increasing water costs, and to determine optimal crop mixes. In the models, which considered only the furrow system of irrigation, all-cotton solutions were prevented from occurring by introducing constraints that restrict the number of acres allocated to cotton. Although these field crops show losses, they continue to be included in the crop mixes to be found in Pinal presently, most likely as a protection against risk and to provide crop rotation benefits. Besides, these crops require labor and water at different times of the year than does cotton, and this allows the farmer to spread his resources over time.

A major result of this study is that the results of the previous model studies by Kelso, Martin and Mack

(1973), Boster (1976), and

Stults (1968) need to be reevaluated with respect to laser leveling and drip systems.

119

Effect of Change in Output Prices and Discount Rate on Profitability

The results of the present analysis are dependent on the magnitude of the discount rate and the input, output prices used. As was discussed in Chapter

4, the input prices used are those that prevailed in

1982. For output, normalized prices based on a modified weighted average of market prices of the preceeding five years were used. However, it is generally well known that agricultural output prices have been experiencing a general downturn during the past five years due to the depressed state of the world economy. An upswing in output prices would result in improved NPP and

NSP measures. However, such a change would have no effect on the relative rankings of the irrigation systems and individual crops in terms of profitability if input prices remain constant. In addition, it is also conceivable that improved technology of the drip systems might result in lower prices for the system, thus improving the associated profitability such that it becomes more competitive with respect to laser leveling.

In order to examine the effect of change in the discount rate on net social profits and the relative ranking of the different systems in terms of economic efficiency, a decrease in the discount rate to

3 percent from 6 percent was assumed and new capital costs associated with the production of each crop were estimated. In the calculations, an average trade-in period of ten years was assumed for all machinery, and remaining farm values (salvage values) were calculated using

Equation (4.1). Irrigation systems and wells were depreciated according to the original schedule with only the discount rate altered.

120

Estimates were made only for the three major traditional field crops, namely cotton, alfalfa and wheat, and at the 400 acre farm size level.

The results appear in Table 5.5.

They indicate a positive increase in NSPs from those observed at the 6 percent discount rate.

The relative increase in crop NSPs associated with the furrow system is consistently higher than for the other systems. This is due to the relatively smaller amount of capital involed with the furrow system.

The furrow system retains its relative superiority over the center pivot system in cotton and wheat production. Also, though the center pivot system shows a better

NSP in alfalfa production, this profitability is now only about 2 percent higher than that obtained from production with the furrow system, a decrease from the 15 percent advantage that was observed at the 6 percent discount rate. This is an indication that lower discount rates do not favor conversion to the sprinkler system from furrow.

Farm Enterprise Private Net Benefits

The discussion in the previous section emphasized social profitability associated with individual crops and systems. However, farmers in the PANA have traditionally produced more than one crop on their farms; therefore, a private benefit-cost analysis of different water conservation measures should be based on farm enterprise crop combinations. In this section, the results of such an analysis are presented.

Table

5.5. NSPs associated with a

3% discount rate.

Crop

Unit Furrow

CP Laser Drip

Cotton lb.

Alfalfa ton

Wheat lb.

0.10

-16.01

0.011

-15.71

0.24

-3.19

-0.02 -0.03

-0.01

0.11

121

122

Average Per Acre Net Benefits:

Traditional Crop Mix

The allocation of farm acreage to different crops in the traditional crop mix is as follows: upland cotton, 60 percent; alfalfa,

20 percent; and grain or safflower,

20 percent. Table 5.6 contains costs and return summaries from this crop mix in three different irrigation systems. Table 5.7 contains the results from a farm enterprise that combines two different irrigation systems. The cotton crop is under drip while an alternative irrigation system is used on the remaining acreage.

Inspection of the tables shows that the furrow system, the system predominantly used in Arizona, in combination with other gravity systems, and against which all the other systems are compared, exhibits the highest average per acre variable non-water costs. This is because some calendar operations become redundant when the alternative systems are used (Table 4.16) and are eliminated. The difference between per acre average variable non-water costs for furrow and each alternative system thus depend on the operations that were eliminated and the quantity of materials and labor inputs used in the redundant operations. Also, per acre average variable non-water costs are assumed not to change with farm size.

Average per acre net returns to water

(ANR) are positive for all systems. But the variable costs of water needs to be subtracted from these returns in order to determine if the farm enterprises are making a profit in the short run. Variable costs of water decrease with a rise in irrigation efficiency, as these depend on the quantity

Table 5.6.

Average per acre annual costs and net returns summary: traditional crop mix.

Item

Furrow

400

Acres

CP

Laser Furrow

1000

Acres

CP

Laser

Fixed

Land costsa costsb

Annual fixed costs/wellsc

Total water costs

144.25

203.25

200.66

84.71

143.71

141.12

26.67

26.67

26.67

26.67

26.67

26.67

412.42

379.00

390.96

412.42

379.00

390.96

Variable nonwater costs

Total non-water costs

Variable water costs

583.34

608.95

618.29

523.80

549.38

558.75

176.42

166.43

128.30

176.42

166.43

128.30

101.82

106.12

68.20

101.82

114.58

69.60

278.24

272.55

196.50

278.24

258.01

197.90

Total farm costs

861.57

881.50

814.79

802.04

807.49

756.66

Gross revenued

733.50

733.50

881.66

733.50

733.50

881.66

Net returns over variable nonwater costs

321.08

354.50

490.70

321.08

354.50

490.70

Net returns over all variable costs

144.66

188.07

422.50

144.66

188.07

362.40

-128.07

-148.00

66.87

-68.54

-73.99

125.00

Net returns over total costs

123 a.

Includes costs of machinery and irrigation system.

b.

Property tax and interest on

$350/acre at

67o.

c.

Calculated on a per acre-foot basis.

d.

Yield increase of

20% for laser leveling.

124

Table

5.7.

Average per acre annual costs and net returns summary for a combination of drip and alternative systems: traditional crop mix.

Drip and

Furrow

400

Acres

Drip and

CF

Drip and

Laser

Drip and

Furrow

1000 Acres

Drip and

CF

Drip and

Laser

Item

Fixed costs a

257.74

Land costs b

26.67

Variable non- water costs

414.34

698.75

Total nonwater costs

Variable water costs

156.45

69.50

Annual fixed costs/wells c

Total water costs

225.95

Total farm costs

Gross revenue d

924.70

841.54

Net returns over

427.20

variable costs

Net returns over

270.75

variable costs

Net returns over total costs

-83.16

281.32

26.67

408.77

716.76

152.72

70.74

280.22

26.67

417.75

69.65

198.20

26.67

414.34

85.35

221.78

26.67

408.77

77.91

220.68

26.67

417.25

69.65

223.46

202.94

239.80

220.90

202.94

940.22

724.14

133.29

927.08

63.921

156.45

879.01

662.79

142.99

883.69

664.60

133.29

867.54

841.54

881.66

841.54

841.54

881.66

432.77

464.41

427.20

432.77

464.41

280.05

331.12

270.75

280.05

-98.69

-45.43

-37.47

-51.90

331.12

14.11

a.

Includes costs of machinery and irrigation system.

b.

Property tax and interest on

$350/acre at 6%.

c.

Calculated on a per acre-foot basis.

d.

20% yield increase for drip and laser combination.

125 of water pumped. Returns over total variable costs, including the variable costs of water, are positive for all systems. This means that under current conditions, the traditional mix yields positive results to all systems in the short run. Farms under furrow enjoy the lowest short-run receipts, while the leveled farms enjoy the highest.

In the long run, the fixed costs of irrigation systems, machinery and land are included in the calculations. It can be seen that average per acre net returns to water have become substantially reduced. Also, economies of scale become important as the larger farm size group enjoys the higher

ANRs.

However, both in the short run and long run,

ANRs can be substantially improved with a change from furrow to any one of the alternative systems. To put this in better perspective,

ANRs per unit of water applied were calculated. These are presented in Table

5.8.

The percent change in

ANRs with a change from furrow to each of the alternative systems appears in Table 5.9.

Increases in

ANRs associated with a change from furrow to the center pivot system, which were up to

34 percent in the short run, have decreased to

1 percent and

7 percent in the small farm size and large farm size groups, respectively. This is an interesting result because although the use of the center pivot system involves the use of less variable resources, when compared to furrow, these savings are not enough to ofset the additional cost of installing the system so as to make the system more profitable than furrows in the long run. This indicates that at the current prices of inputs and outputs and for the small farm size groups, there is no incentive in the long run for a

126

Table

5.8.

Average net returns to water per acre-foot of water applied to farm.

Irrigation System

Furrow

Center pivot

Laser levelling

Drip and furrow

Drip and center pivot

Drip and laser levelling

Traditional Mix Alternative Mix

400

Acres

1000

Acres

400

Acres

1000

Acres

($) ($) ($) ($)

24.81

25.01

59.85

28.55

27.30

36.98

34.66

36.97

73.39

40.47

39.11

50.95

96.89

108.77

209.59

113.73

117.15

118.76

103.67

116.63

218.04

121.57

116.14

198.31

127

Table

5.9. Percent per acre increases in short-run and long-run average net returns to water due to change from furrow to alternative systems: traditional crop mix.

System

Short-run

Long-run

400 Acres 1000 Acres

400

Acres

1000

Acres

Center pivot

Laser levelling

Drip and furrow

Drip and center pivot

Drip/laser

34

110

61

78

105

34

110

61

78

105

1

141

15

10

49

6.7

112

17

13

47

128 farmer to convert from furrow to a sprinkler system. The results also show that when the drip system is combined with furrow in the manner described previously, it yields better results than having a center pivot system on the entire farm. Combining sprinkler with drip is not as good as the drip-furrow combination. Overall, laser leveling shows by far the superior results. A notable result with laser leveling is that in the long run, increases in

ANRs are higher for the smaller size farm group than for the large farm size group.

Average per acre long-run net benefits (returns over total costs) are positive for dead leveled farms, with the larger farm size group showing average net benefits that are almost twice the size of those realized in the smaller sized farms. All other systems show negative net benefits. This is a significant result because it means that farm operators with farms similar to the ones considered in this study, and using furrow irrigation systems, are not covering their fixed costs. One might wonder why they continue to produce these crops. In the calculations, charges were included for interest on land and management. Many farmers are owner-operators, and as

Stults (1968) suggests, do not really have to make a cash payment on the land.

However, when the charges for both management and land are removed, the per acre losses are still substantial. The neoclassical economic theory indicates that production in an enterprise can continue in the short run without covering fixed costs, for a short time. Ultimately, these costs need to be covered or the production enterprise should cease. Adopting sprinklers or drip systems in

Pinal, as the results show, will only decrease long-run losses under current conditions.

129

Again, laser leveling practices are the most superior form of conserving water and at the same time improve on average net farm benefits.

Finally, in order to obtain an idea of the long-run value of each acre-foot applied to the farm, under each irrigation system, the long-run costs of each acre-foot are subtracted from the long-run returns to water. This is because the average net benefits discussed earlier include returns from all the inputs used in the production process. Net returns to each acre-foot of water applied furnishes an indication of how much a producer can afford to pay for each acre-foot of water used on the farm. The results in Table 5.10 show that in the long run, and under the assumptions specified for this study, and for the traditional crop mix, farmers are already paying too much for water under furrow irrigation systems, and the negative values indicate the degree by which this per-unit long-run average per acre foot cost of water is in excess of average per unit net returns. These losses are increased if the center-pivot system is adopted in place of furrow.

Adding a drip system to a portion of the farm and leaving the rest in furrow only decreases the loses (Table 5.7). It is only when farms are leveled that these values become positive. The significance of this result is with regard to the pump tax that was discussed in the preceeding section. Such a tax on water under these conditions is perhaps justified in the short run; but in the long run it only serves to increase losses with all the systems except for laser levelling.

Table 5.11 shows average net returns to each acre-foot of water applied when alternative grains are introduced into the traditional

Table

5.10.

Average net returns to water per acre-foot less average per acre-foot water costs.

Irrigation System

Traditional Mix

400 Acres 1000

Acres

400

Alternative Mix

Acres

1000

Acres

Furrow

Center pivot

Laser leveling

Drip and furrow

Drip and center pivot

Drip and laser leveling

-21.17

-29.72

15.19

-16.63

-21.60

-10.66

-10.23

-13.49

28.73

-7.49

-11.36

3.30

50.90

60.00

164.68

66.94

67.17

139.25

57.25

64.80

173.06

72.32

66.15

148.89

130

131 crop mix to replace wheat. Sorghum shows the worst returns, and it is again only in laser levelled farms that average net returns are positive.

Average Per Acre Net Returns:

Alternative Crop Mix

One of the major ways of reducing on-farm water use and at the same time increase net returns to water, is a change in the cropping pattern. In order to evaluate the consequences of such a decision, a theoretical crop mix in which the grain or safflower in the traditional mix is replaced by lettuce was developed. Lettuce attracts higher prices than any of the crops in the traditional mix, and also requires less water for production. Though it is a higher risk crop with a limited market, it was selected to be representative of several vegetable or tree crops that could be introduced in an alternative mix.

The acreage allocation in this mix is as follows: cotton,

50 percent; alfalfa,

20 percent; and lettuce,

30 percent, respectively, of total cropped acreage.

Average per acre farm costs and returns which appear in Table

5.12 show dramatic increases when compared to those of the traditional mix. The high variable costs are due to the lettuce harvesting operation, which is labor-intensive. However, the price of lettuce is high enough such that the variable costs are offset and this farm enterprise is profitable both in the short run and long run. Again, as in the traditional crop mix, economies of scale are apparent, as all the categories of net returns are higher for the larger farm size group.

132

Table 5.11. Net returns per acre-foot of water applied with alternative grains or safflower in place of wheat, in traditional mix.

Crops

Furrow

($)

400

Acres

CP

($)

Laser

($)

Furrow

($)

1000

Acres

CF

($)

Laser

($)

Barley

Sorghum

Safflower

-22.81

-31.52

-24.77

-33.69

-21.93

-30.97

9.25

-11.90

-15.22

6.02

-13.95

-17.76

10.40

-11.90

-15.66

22.94

19.70

22.96

Table

5.12. Average per acre annual costs and net returns summary: alternative crop mix.

Item Furrow

4000

Acres

CP

Laser Furrow

1000 Acres

CP

Laser

Fixed

Land costsa costsb

124.42

183.42

180.42

26.67

26.67

26.67

87.14

147.14

144.14

26.67

26.67

26.67

1010.26

982.61

1035.76

1010.26

982.61

1035.76

Variable nonwater costs

Total non-water

1161.35

costs

Variable water costs

160.67

1192.70

1242.85

1124.00

1156.42

1206.57

154.40

125.09

160.67

154.40

125.09

Fixed costs wells AFC

92.73

106.31

67.56

95.10

85.05

67.86

Total water costs

Total farm costs

253.40

1414.75

260.71

1453.41

192.65

1228.41

255.77

1266.03

239.45.

1395.87

192.96

1399.53

Gross revenued 1695.23

1695.23

2142.00

1695.23

1695.23

2142.00

Net returns over variable non-water costs

684.14

712.63

1105.96

684.94

712.63.

1105.96

Net returns over all variable costs

Net returns over total costs

524.30

280.48

558.22

241.82

981.15

913.59

524.30

492.20

558.22

299.36

981.15

742.47

133 a.

Includes costs of machinery and irrigation system.

b.

Property tax and interest on $350/acre at 6%.

c.

Calculated on a per acre-foot basis.

d.

Yield increase of 20% for laser leveling.

134

Dead levelled fields also bring in higher net returns to water and net benefits per acre.

In Table

5.13 the percent per acre increases of average net returns to each acre-foot of water used for irrigation associated with a change from the traditional mix to the alternative mix are presented.

A comparison of Tables 5.9 and

5.13 reveals some interesting points.

In the short run, the highest per acre increase, 110 percent, obtained by changing from furrow to laser levelling, is less than the percentage increase in net returns to water,

134 percent, obtained by keeping the field in furrow and changing the crop pattern. In the long run, the pattern is the same. Also, as in the traditional crop mix, the smaller farm size groups experience larger percentage increases in net returns to water than the larger size group.

On-Farm Water

Use

Average on-farm water use is obtained by summing individual crop water use on the farm and dividing by the farm size. Individual crop water use on the farm is the product of the crop consumptive use requirement under a given irrigation system and the number of acres allocated to the crop on the farm. Average farm water use calculated in this way by irrigation system in the traditional and alternative crop mixes appear in Table

5.14.

As is expected, the furrow system with the lowest water application efficiency requires more water in both crop mixes. The least amount of water is required when the drip system is combined with the furrow system as described previously.

135

Table 5.13. Percent per acre increase in average net returns to water/ acre-foot associated with a change in crop mix.

System

400

Short Run

Acres 1000

Acres

Long Run

Short Run

Long Run

Furrow

Center pivot

Laser

134

117

131

290

335

250

134

117

131

199

215

197

136

Table

5.14.

Average per acre farm water use (acre—inches) with alternative systems.

System

Furrow

Center pivot

Laser leveling

Drip and furrow b

Drip and center pivot b

Drip and laser leveling b

Traditional

Mix

Alternative

Mix Net

Savings a

72.60

59.76

52.80

60.00

54.84

51.12

66.12

55.44

51.48

55.56

51.36

45.60

6.48

4.32

1.32

4.44

3.48

5.52

a.

Acre—feet of water saved by adopting alternative crop mix.

b.

Cotton acreage is in drip while the rest of the farm is under the alternative system.

137

Changing the crop mix and keeping the farm in furrow results in average savings in water of approximately 6.5 acre inches per acre.

This amounts of

114,300 acre feet of water on the reported five-year average cropped acreage of 211,676 acres in the PANA and is

11 percent of annual groundwater use. These savings in water pumped also represent savings in variable costs of water. There are no savings in fixed costs, as is indicated by Table 4.10, which shows that the same number of wells is required on a farm regardless of the crop mix.

Well Fixed Costs

The question of well fixed costs was mentioned briefly earlier when water savings associated with a change in the crop mix was discussed. The number of wells required on a farm is reduced by one

(Table 4.10) if a farm is levelled, because of the decreased amount of water required. This therefore results in lower fixed costs. Fixed costs remain the same with sprinkler, and in fact increase slightly because of the needed additional bowls.

At this point, the excess capacity that must exist with regard to wells in the PANA should be mentioned. It is conceivable that crop mixes and cultural practices will vary between farms, and as such not all farmers will be irrigating exactly at the same time, and several wells will exist that are underutilized. Because fixed costs are present whether a well is pumped or not, and are reduced by the number of acres over which they are spread, considerable savings in fixed costs could be incurred by consolidating the wells in the PANA. The various irrigation districts which are listed in Chapter

2 could use

138 their authority to acquire all the wells within their jurisdiction and assume the responsibility of distributing water to the farmers within the district. This will reduce excess capacity in wells, as well as eliminate or reduce the need to drill replacement or new wells. The

Central Arizona and Maricopa-Stanfield Irrigation Districts are already considering this proposal (Bookman-Edmonston Engineers, 1981).

Irrigation Energy

It was shown in the preceding chapter that the per unit energy requirement for pumping and distributing irrigation water is higher for pressure systems than for the non-pressure systems. Specifically, it is 1090.37 kwH versus

1293.30 kwH per acre-foot per foot of lift for the non-pressure and pressure systems respectively, with a

60 percent well efficiency, 'and for the low pressure (30 psi) systems considered in this study.

Irrigation energy use per acre by crop and system is presented in Table 5.15.

In all cases, the amount of water saved by the increased irrigation application efficiency of the sprinkler system is enough to offset this increased energy use, such that both energy and water are saved by changing from furrow to the center pivot system.

This could also be due to the assumption regarding the additional pressure requirement being obtained by adding extra bowls to the well.

The situation may well change if pressure were supplied by an outside source like a pressure pump. Energy costs will also increase with higher pressure as King and others (1978), who use 70-90 psi for

139

Table

5.15.

Energy use

(KwH) under alternative systems: traditional crop mix.

Crop

Furrow CF

Laser

Drip

Cotton

Barley

Sorghum

Wheat

Safflower

Alfalfa

Lettuce a

6,084.3

3,838

3,849

3,499

6,869

11,248

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140 pressure systems in the Pacific Northwestern states, demonstrate in their study.

CHAPTER

6

SUMMARY, CONCLUSIONS AND IMPLICATIONS

Summary

The main objective of the research, as was stated in Chapter

1, is to determine the possible effects of groundwater management and alternative irrigation systems on water conservation in Final County agriculture and to evaluate the economic impacts arising from the adoption of conservation measures.

Related to this main objective are several policy questions.

The goal of groundwater management in the Pinel Active Management Area, as specified by the Arizona Groundwater Management Act, is water conservation such that agricultural economies in the area are maintained for as long as possible, consistent with the need to preserve water supplies for non-irrigation uses. As such the more specific objectives of this study may be grouped into three categories:

1.

Basin-wide objectives: a.

Examine theoretical models of groundwater basin management and compare suggested decision rules with the range of policy tools that may be used for groundwater management in the Final Active Management Area within the limitations of the Arizona Groundwater Management Act.

b.

Evaluate the effects of these management tools on farmers'

141

142 decision making with respect to the adoption of water conservation measures.

2.

Farm-level objectives: a.

Estimate measures of net social profitability and domestic resource cost ratios for different crops under different irrigation systems so as to determine the degree to which society will benefit from alternative water conservation measures.

b.

Estimate the short-run and long-run private benefits associated with alternative irrigation systems when used on traditional crop mixes and compare these with private benefits obtained from an alternative crop mix.

c. Estimate and compare savings in water and energy associated with different irrigation systems and the alternative crop mix.

3.

On the basis of research findings, make policy recommendations for the promotion of the most socially profitable water conservation policy.

The problem of the rising costs of pumping irrigation water in the PÂMA was introduced in the first chapter, which was followed by a description of the structure of agriculture, water resources, and an overview of the Arizona Groundwater Management Act in Chapter

2. In order to meet the study objectives, the problem was conceptualized in the third chapter and the analytical framework, benefit-cost analysis, was described. Following this, the Burt

(1967a) model of groundwater

143 management was reviewed, as a basis for the critical examination of the centralized groundwater management options in the

PAMA. Then, basin-wide and on-farm opportunities for water conservation were identified. Several measures of farm-level water conservation were chosen for economic evaluation. These were, a conversion from the predominant flooding irrigation through furrows to either one of sprinkler or drip systems, or laser leveling the farm and retaining flooding as the irrigation system. The final water conservation measure considered was a change from the traditional crop mix to an alternative one in which some grains are replaced by lettuce, a higher valued, and less water intensive crop. Chapter

4 contains a description of data used and its treatment in the evaluation of alternative irrigation technologies and crop mixes.

The results of the analysis are presented in Chapter

5.

The results include a comparative presentation of the per acre average long-run and short-run and private and social net benefits associated with traditional and alternative irrigation systems, and crop mixes.

In general, these results indicate that the most profitable water conservation measure is the adoption of an alternative crop mix that emphasizes more vegetables.

This is true for all irrigation systems. Laser leveling, on the other hand, is the most superior water conserving irrigation system in terms of private and social profitability. The reason is that in spite of the fact that sprinkler and drip systems are less water-intensive, the associated current fixed costs of these systems are such that their adoption will lead to economic loses.

144

As far as it is known, this is perhaps the first comprehensive study on Final County agriculture that summarizes this net reduction in water applied and energy consumed with respect to different irrigation technologies and estimates the degree to which the agricultural producer and the general public benefit from alternative water conservation measures.

Conclusions

There seems to be general agreement that the policy systems for achieving higher levels of water conservation may be separated into two broad categories (Mann, 1982): regulatory, and the provision of incentives. A regulatory model for groundwater management and the implementation problems involved are described in Chapter 3. These problems involve the certainty and accuracy with which externality costs associated with pumping groundwater are estimated. Taxes and pumping restrictions have the inherent danger of being incorrect and inequitable in the absence of sufficient information, and are as such, not Pigouvian.

Because of the nature of the externalities involved in groundwater mining, it is difficult to assess the degree of divergency between marginal private and marginal social costs of pumping; and since the optimum mining yield of the aquifer underlying the PAMA is indeterminate, it may not be assumed that the current rate of mining is suboptimal, and the correct

Pigouvian tax that should be assessed on groundwater pumpers cannot be determined with certainty. Were the optimal mining yield known, and the social costs quantified, it would

145 still be necessary to obtain information on marginal private costs of pumping experienced by individual pumpers so that the appropriate tax on each individual will be assessed. A tax which is not based on these considerations is not only inefficient; it is also inequitable.

Thus on the basis of economic efficiency considerations, the maximum five dollar per acre-foot surcharge such as is mandated by the

Arizona Groundwater Management Act is potentially inefficient, may not necessarily lead to optimal yield rates, and is also potentially inequitable. By the same token, a pumping quota based on asssumed irrigation conservation measures is also potentially inefficient and inequitable. The consequences of an incorrect tax or quota are the following: a tax that is too high will result in aggretate withdrawals of groundwater from the basin that is less than the optimal yield, and a premature withdrawal of acreage from agriculture. A tax that is too low has little effect on basin withdrawals, and will have negligible effects on conservation.

On the assumption that farmers are profit maximizers, one can proceed to evaluate the economic conditions that would warrant their adopting on-farm water conservation measures. The results of such an evaluation presented in the preceding chapter indicate that farmers and society as a whole stand to gain both economically and in terms of water conservation by investing in water conservation measures in the long-run. But these long-run gains are not the same for all the conservation measures. The results presented in Table

5.1 through 5.16

show that while converting to sprinkler systems from furrow increases short-run net returns to water, in the long-run these benefits are

146 eroded, and the result is a net loss in resources, both to the private farmer and to society.

Replacement of a furrow system with a drip system on a cotton farm as Tables 5.1 and

5.4 shows increases net benefits to both the farmer and society, and also leads to water and energy conservation.

However, in the presence of other field crops which are usually grown with cotton in the mix, the farmer loses money and cannot meet fixed costs in the long run. Laser leveling is the practice that is shown conclusively to be the most profitable water conservation measure on farms with several crops.

Other major field crops, including alfalfa, wheat, barley, safflower, and sorghum represent losses in the long run, both in terms of private net benefits and the social benefit indicators. Converting from furrow to other systems only serves to reduce the losses associated with these crops. The losses are reduced the most with laser leveling.

As an alternative to including these crops in the mix, lettuce was introduced to replace them. The results now show conclusively that average net farm returns to water are dramatically improved and all the efficiency measures,

NPP, NSP and

DRC ratios indicate that this is a better mix, and a better allocation of resources. Again, laser leveling farms yields the best results when irrigation systems are compared with the alternative crop mix.

It may thus be concluded that existing economic conditions, vis-a-vis, production costs and output prices, will provide a stronger

147 incentive to groundwater conservation by the private farmer in the

PAMA than centralized management.

Implications for Policy

The conclusions from the research presented above demonstrate that the tools available for centralized groundwater management could be inadequate in achieving basin-wide water conservation. However, the results of the benefit-cost analysis performed for the various irrigation systems show that it is not only profitable for farmers to laser level their farms, but it is also profitable from society's viewpoint. Also, increased net benefits and net returns to water are obtainable from changing the crop mix, or irrigating with profit-maximizing rather than yield-maximizing quantities of water.

All these measures entail net-gains to basin-wide conservation.

However, acceptance of some of these measures by an individual entrepreneur depends on his attitude_ toward risk as well as the economic circumstances of the farming operation. It seems that in general farmers are risk-averse and tend to be very cautious in applying novel ideas. Commenting on the use of research information by farming communities, Hagan and Stewart

(1972, p.

20) state that such use "is seriously lagging relative to the rate of utilizing new information in other areas of human endeavor

. . . this gap between knowledge and use seems to be continuing to widen in the field of irrigation."

If one assumes that these comments apply equally to farmers in the

PAMA, one may conclude that they will be slow to adopt new measures

148 that either require a substantial initial capital investment like land leveling, or to overcome their perception of risk and introduce more risky crops into their traditional crop mix. Under these circumstances, and in the face of potentially ineffective basin-wide management by conventional methods, two remedial measures are possible in order to encourage on-farm water conservation in the PANA: (1) amend the Arizona

Groundwater Management Act so as to provide the adequate regulatory tools, or (2) promote incentives to water users in the basin that will encourage them to adopt water conservation measures.

The first option has political as well as information problems.

It is common knowledge that the Ground Water Management Act is a delicate political compromise, and since farmers constitute a powerful interest group in Arizona it will be virtually impossible to include any new regulatory measures into th% Act. Besides, such regulatory measures may be necessarily prescriptive, and might entail restrictions on the type of crops grown in an area. The results of this analysis closely identify such crops, but such an amendment to the Act may be deemed unconstitutional and portend the demise of the whole Act.

Raising the pump tax or prescribing expensive investments in laser leveling could be perceived as making agriculture in the PANA less competitive in the short run with other producers in the state, or in the nation.

The second and perhaps more viable option is the provision of incentives. Incentives are justified because when they lead to the adoption of water conservation measures, the net social benefits from their adoption is usually greater than the private gains to the

149 farmers. In addition, less water is pumped from the basin. The results in Tables

5.1 through 5.15 suggest definitely that laser leveling is the method of water conservation that should be encouraged since it has the highest measure of net private profitability and net social profitability and also the lowest domestic resource cost ratio, when compared to other systems. In this regard, it is fortuitous that land leveling is one of the practices that by mandate of the Act can be included in management plans, while sprinklers and drip systems are specifically excluded.

However, it may be difficult to include laser levelling in management plans because, as Table 4.13 shows, the initial costs of levelling can be quite high. It should be noted in this connection that farmers are represented in the Management Area's Groundwater Users

Advisory Council, which reviews and provides advice on management plans

(ARS 45: 420A), that are subject to public hearing and can be appealed

(ARS45: 563, 569C, 570, 571).

The kinds of incentives that have been suggested to encourage the adoption of capital-intensive water conservation techniques include cost-sharing and accelerated depreciation of capital equipment for tax purposes (Arizona Ground Water Commission, 1978). These already exist at the federal level, in the form of the Agricultural Conservation

Program. Daubert and Ayer

(1982) have shown with respect to the cost-share program of the ACP that the structure of such programs can be critical to their effectiveness, as the current structure of the ACP cost-share program is such that it actually slows down the rate at which farmers who want to take advantage of the program adopt

150 conservation practices. One way of avoiding this is to increase the proportion of costs borne by the government, and instead of making the money available on an annual basis, provide enough for a one-time investment, such that program profits are realized early on. Such a program may, however, be resisted by farmers who already have leveled their farms. These farmers could be compensated on their original investment.

It was shown in Chapter 3 that irrigated land purchase and retirement by the state, one of the tools available as the management periods progress, is inefficient. However, since it is allowed by the

Groundwater Management Act, and the results of the study confirm the existence of scale economies, the smaller-sized farms should be phased out first, in order to take advantage off scale economies.

Finally, a caveat is in order. The results discussed in this dissertatiion are based on the several assumptions which were noted in detail in the foregoing text. Also, the basis of the analysis is economic efficiency. This does not imply that it is the only consideration that is relevant to water policy. Usually, in policy choice, there are other non-efficiency considerations, for example income redistribution, that need to be considered. However, as Eric

Monke notes, "While consideration of non-efficiency objectives is an essential complement to efficiency analysis, from an analytical perspective such objectives may be considered independently of efficiency analysis. Such concerns do not alter the verity of positivistic results" (Monke, 1981, p. 3).

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