IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

A Dynamic Regional Model of Irrigated Perennial Production

Listed author(s):
  • Franklin, Bradley
  • Knapp, Keith C.
  • Schwabe, Kurt A.
Registered author(s):

    Perennial crop production is inherently dynamic due to several salient physical characteristics including an establishment period of several years with low or no yields, long lives in commercial production (40 years or more), and path-dependence of yields on input use and other exogenous factors, such as weather. While perennial crop production is properly regarded as a dynamic investment, the literature on regional agricultural production is typically static or uses simplified two-stage dynamics, and rarely if ever are the dynamic biophysical elements of perennial crops represented. This paper seeks to address some of the shortcomings of the literature by developing a dynamic regional model of irrigated agriculture with representative perennial and annual crops. The model explicitly accounts for the age composition of perennial stocks including crop establishment period and age-dependent yields and input use. The age composition of perennial stocks provides a parallel to forestry economics and allows us to derive a Faustmann rule for perennial crops. The model is applied to wine grape production in the Riverland region of the Murray-Darling Basin (MDB) in Australia. Over two-thirds of irrigated land in the region is typically planted in perennial crops. During the recent severe drought experienced in the MDB, water allocations to farmers in the Riverland were cut drastically leading to a variety of adaptations by perennial crop producers including changes in irrigation at the intensive and extensive margins. The Australian government has responded to the drought by creating a plan to buy water rights which would then be allocated to an environmental water holder with the express purpose of ensuring the long-term sustainability of river-dependent ecosystems and the economic activity which depends upon them. The fact that the plan calls for the purchase of up to 35% of existing water rights in the Riverland underscores the need for a more robust model of perennial production in order to inform policymakers of the potential effects on the agricultural sector. Given the vast majority of agricultural enterprises in Australia are family-owned, we analyze joint consumption and investment decisions of a utility-maximizing representative agricultural household. Borrowing is allowed but the household faces an interest rate schedule that is increasing in the amount of debt held. We explore the dynamic properties of the model including the existence and uniqueness of a steady state and the conditions required for convergence to the steady state or other periodic solutions. The effects of liquidity constraints and annual crop cultivation on the dynamics of the model are explored as well. Because the state-space required for an age-explicit regional model is too large for conventional dynamic programming methods (i.e., the curse of dimensionality), a running horizon algorithm is used to approximate an infinite horizon dynamic programming solution. We investigate the effects of the age structure of initial perennial plantings. Preliminary findings from the deterministic model suggest that maximizing the net present value of profits from agricultural production with an initial age distribution of grapevine stocks different from those at the steady state levels leads to cycles in area planted by vintage and hence quantity supplied of wine grapes. However, given a CRRA utility function, over very long time horizons the cycles in area planted are shown to be dampened oscillations which eventually converge to a steady state with an equal age distribution analogous to a normal forest in the theoretical forestry literature. Since time to convergence increases with age heterogeneity of the initial land distribution and perennial stocks are path-dependent on irrigation history, stochastic water supplies may imply that convergence will rarely occur in practice. Nevertheless, a steady state perennial age distribution may be useful for the analysis of changes in water policy. The impacts from changes in economic and biophysical characteristics are estimated under both deterministic and stochastic frameworks, the latter of which is based on historical water allocations within the region. Finally, the long-run water demand for perennial crops is identified by systematically running simulations over varying water allocation levels and capturing the farmer’s marginal willingness to pay for more water.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL:
    Download Restriction: no

    Paper provided by Agricultural and Applied Economics Association in its series 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington with number 125212.

    in new window

    Date of creation: 2012
    Handle: RePEc:ags:aaea12:125212
    Contact details of provider: Postal:
    555 East Wells Street, Suite 1100, Milwaukee, Wisconsin 53202

    Phone: (414) 918-3190
    Fax: (414) 276-3349
    Web page:

    More information through EDIRC

    No references listed on IDEAS
    You can help add them by filling out this form.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:ags:aaea12:125212. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (AgEcon Search)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.