On-Farm Water Storage (OFWS) as a Tool to Reduce Risk

Though irrigation can offer producers many advantages such as reducing potential losses due to uncertain rainfall, in some areas of the Southeast irrigation options for agricultural crops are limited. For example, in East Mississippi access to groundwater resources is impractical, with well depths often exceeding 1,000 feet and prohibitively high drilling costs. As a result, producers are gradually resorting to the use of on-farm water storage systems (OFWS) to recapture irrigation runoff and rainfall for later use for irrigation. Previous research has confirmed reduced groundwater withdrawal and downstream flow of nutrients are some advantages that come with OFWS, but few studies have focused on the economic profitability of this system. This article employs a stochastic benefit-cost analysis to analyze the net returns of irrigating from an OFWS using a center pivot irrigation system (CPIS) compared to a rain fed production system for corn and soybean in the Southeast while also incorporating risk in the form of stochastic prices and yields. Preliminary findings indicate that investing in an OFWS for irrigating purposes can increase producers returns significantly compared to depending on rainfall. As expected increase in interest rates reduces the net present value of making such an irrigation investment and this is more evident when interest are above 7%. The use of OFWS becomes more attractive when revenue generated is protected under crop insurance. As coverage levels increases the net present value of investing in an OFWS increases well above that rain-fed production at lower interest rates, however there’s over 60% chance of rain-fed production been more profitable than irrigating at 70%, 75%, 80% and 85% coverage levels when discount rates are over 9%.