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Economics of Groundwater Use in the Beryl-Enterprise Area

Economics of Groundwater Use in the Beryl-Enterprise Area. Land Value. Compound interest: $1,000 deposited at 5% for 20 years: $1,000 + $1,000(1.05) + $1,000(1.05)(1.05)…. = $1,000 (1.05) 20 “Future value” = $2,653 at the end of 20 years.

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Economics of Groundwater Use in the Beryl-Enterprise Area

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  1. Economics of Groundwater Usein the Beryl-Enterprise Area

  2. Land Value • Compound interest: • $1,000 deposited at 5% for 20 years: • $1,000 + $1,000(1.05) + $1,000(1.05)(1.05)…. • = $1,000 (1.05)20 • “Future value” = $2,653 at the end of 20 years. • What would I have to deposit to have $2,653 at the end of 20 years? • “Present Value” = $2,653 / (1.05)(1.05)(1.05)….. • Present Value = $2,653 / (1.05)20 • Present Value = $1,000

  3. Land Value • Suppose I deposit $1,000 every year for 20 years at 5%. What is the “future value?” • = $1,000(1.05)20 + $1,000(1.05)19 + $1,000(1.05)18 + ….. + $1,000 (1.05) • = $24,831 (future value of $1,000 per period)

  4. Land Value • Suppose I want to know what the $1,000 per year at 5% for 20 years is worth today (Present Value of $1,000 per period) • = sum of each year’s future value divided by (1.05)20 or ($1,000(1.05)20 / (1.05)20 + ($1,000(1.05)19 / (1.05)20 + … • = $12,821 • If I deposit $12,821 today at 5%, it will give me $1,000 per year for 20 years. • What would you be willing to pay for an income stream that guaranteed you $1,000 per year for 20 years? Not more than $12,821 if your interest rate is 5%.

  5. Land Value • Suppose I or my offspring were to deposit $1,000 per year from now to eternity. • The Present Value of that stream ($1,000 in “perpetuity”) at 5% is $1,000 / (0.05) • = $20,000 • What would you be willing to pay to get an income stream of $1,000 per year forever? Not more than $20,000.

  6. Land Value • So what does this have to do with land value? • An acre of irrigated land produces a certain net return (gross receipts less costs) every year (AVERAGE?) • The present value of that net return for “t” years is the asset value of the land (assuming no other effects on land value).

  7. Land Value • We can look at the present value of that “stream” of net returns over some period of time – maybe 50 years (the working life of a farmer) or maybe forever (in perpetuity) • That present value should be reflected in the price someone is willing to pay for the land.

  8. Land Value • For example, suppose that an acre of irrigated alfalfa produces a net return of $170 per year. • The Present Value of the stream of net returns of $170 at 5% for 50 years is $3,103. • The Present Value of the stream of net returns of $170 at 5% per year in perpetuity is $3,400

  9. Land Value • SO? • Data from the Utah State University Extension Service indicates that an acre of alfalfa will produce a net return (after current pumping costs) of about $170 in the Beryl-Enterprise area after pumping costs. • The same data base indicates that the “average” irrigated acre yields about $134 per acre in net return.

  10. Net Returns per Acre • Here is a table of consumptive water use, current percentage of the irrigated crops in the region, gross sales, net returns without pumping costs and net returns including current pumping costs (http://extension.usu.edu/agribusiness/htm/finance)

  11. Returns to Irrigated Crops

  12. Pumping costs • Pumping costs are estimated at $70 per acre at present. However, as pumping continues, lifts are estimated to increase an average of about 1.12 feet per year. The increased pumping cost is approximately $0.32 per acre per foot of lift for alfalfa, and about $0.22 per acre per acre foot of lift for corn. • Water duty = Consumptive use requirement divided by irrigation efficiency (assumed to be 73%)

  13. Land Value Again • The net return for alfalfa is $170 per acre minus the increased pumping cost. • The Present Value of that stream of net income for 50 years is $3,022, and for 100 years is about $3,250. • Local lending agencies indicate that their appraisals of irrigated acreage in the Beryl-Enterprise region are $3,000 to $3,500 per acre.

  14. Land Value • The difference (if any) between the present value of the irrigation returns and land price is probably due to: • Speculation about future profitability of corn and alfalfa, and • Speculation about the future development of non-agricultural uses (ranchettes, for example)

  15. Land Value Change • Lenders also say that an acre of dry land in the Beryl-Enterprise region ranges from $250 to $500 per acre • That means that the loss of water would result in a loss of value of around $3,000 per acre, (sale price of $3,500 less the $500 value of dry land) which is consistent with our calculations.

  16. Land Value Change • What is the Present Value of the loss of $3,000 over time at 5%? • The answer represents the Present Value of removing water from the land at “t” years in the future, or • The price a producer would pay now for land that will have water removed “t” years in the future.

  17. Present Value of Loss of Land Value

  18. Land Value Again • What does this mean for the farmer? It means that the value of his land depends on how many years elapses before he can no longer pump groundwater.

  19. Land Value Today if Water is Removed “t” Years from Now

  20. Conclusion • Beyond 70 years, the cost to the farmer in terms of reduced land value, or price, today is very small.

  21. Impact of Losses • Washington-Iron County Region • Data limit the detail of the analysis to county-level • Most local input purchases occur in the two counties • Most purchases by households are in the two counties • Annual losses assume that production will be reduced by the same amount each year over a 20-year period

  22. Impact of Losses • Assume that 90% of hay, 70% of corn and grain, and 50% of pasture is exported • Assume a 20-year period over which production is reduced by the same amount (5%) each year. • The total value of reduced exports from the Beryl-Enterprise area would be about $3.9 million • The annual value of reduced exports from the area would be about $195,000.

  23. Direct Changes in Region Job s Household income RGO Annual 0.5 $ 46,133 $ 194,812 Total 10 $ 922,656 $3,896,247 • Most of these changes will occur in the Beryl-Enterprise area.

  24. Projected Total Impact of LossesWashington-Iron County Region Using the IMPLAN Model Job s Household income RGO State and local taxes Annual 1.5 $ 67,410 $ 266,342 $ 11,926 Total 29.6 $1,348,198 $5,326,837 $238,512

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