You're Not Ready to Buy More Ground?

A few weeks back, I shared an analysis that our Ag Finance Department did on the idea of improving the land that you have rather than buying more land. That analysis covered the internal rate of return of tiling your ground and showed a payback in 6.25 years on an investment that lasts about 20 years.

For those farmers in the western corn belt and those reeling from drought this year, I'd like to share an analysis on adding center pivot irrigation. While the variables and opportunities on this land improvement are wildly different from one area to the next, take the numbers with a grain of salt and let's work mostly around the concept. I know some Nebraska irrigators who get water from rivers were dealt a blow today, but let's consider this for a more normal year.

We'll build this case on a quarter-section, 160 acres. Of that we would irrigate 130 acres without adding corner technology. As I said, these numbers are going to vary considerably depending on area of the country, etc. But let's say you get 130 bushels/acre from a dry land corn crop. That was the statewide average corn yield in Nebraska in 2011. In that same year, the average statewide irrigated yield was 180 bushels/acre, an increase of 50 bushels/acre. We'll be very conservative and estimate the corn price at $5.00/bushel. Here's the math on revenue:

50 bushels x 130 acres x $5.00 = $32,500 or $250/irrigated acre

Here are the expenses:

--$70,000 for the machine

--$15,000 for the pipe, wire, set-up and ancillary

--$40,000 for the well, pump and engine – this will vary depending on if you're going with gas, electric or diesel and the depth of your well. $40,000 is an average.

Our investment is $960/irrigated acre. Let's add $80/acre to run the pivot and $20/acre for drying, fertilizer and hauling costs. 

Annual net cash/acre $250 - $100 = $150/acre

Internal rate of return: $150/$960 = 15.6%

Pay Back Period:  960/150 = 6.4 years

Here the payback period is fairly similar to the tile analysis done in an earlier article with an investment that costs about double per acre the cost of the tile. It's likely the pivot is going to last 25 to 35 years with good water quality. A spokesman for an irrigation company says there are presently 300,000 pivots operating in North America with an average age of 26 years.

There are countless other ways to pump up your yields with an investment in your land, instead of simply investing in more land.