Irrigated farmland commands a premium relative to non-irrigated farmland because of capitalized infrastructure, access rights to groundwater and superior yield potential.
In the 10th Federal Reserve district of Colorado, Kansas, Nebraska, Oklahoma, Wyoming, western Missouri and northern New Mexico, that premium has been increasing over time and rising faster during droughts, said Ayesha Cooray, Kansas City Federal Reserve Bank economist, in a website report.
Whether the premium will subsist in the long term, however, depends on existing groundwater reserves, local rates of aquifer replenishment and continued efficiency gains in water use, Cooray said.
IRRIGATION TRANSFORMED REGION
Groundwater irrigation from the High Plains Aquifer — the largest freshwater aquifer in North America — helped transform the overlying portions of Tenth district into one of the most productive agricultural regions in the world, she said. Irrigation is a critical risk management tool during droughts, allowing farm operators to optimize growth, enhance nutrient uptake and protect against heat stress in hot and dry conditions.
The irrigated farmland premium over non-irrigated farmland, increased as drought increased the value of reliable irrigation in agricultural production, the Bank bulletin said. Over the last two decades, multi-year dry periods, record-high temperatures and declining winter snowpack increased the incidence and severity of drought in the western US.
During that period, the premium for irrigated farmland rose across the district, Cooray said. Notably, the premium increased faster during droughts, illustrating the value of secure access to water in times of water scarcity.
THERE IS A PROBLEM
Although droughts drove up irrigated land premiums thus far, severe groundwater depletion could threaten these premiums in the long term, she said. Irrigated premiums evolved since 2010 in Kansas, Nebraska and Oklahoma — three states with varying reserves of available groundwater.
The irrigated land premium is higher for Nebraska (which has ample reserves of groundwater) than for Kansas (which has large but declining reserves) and the irrigated land premium for Kansas is higher than for Oklahoma (which has low remaining reserves), the Bank bulletin said.
The positive relationship between irrigated land value and groundwater reserves is indicative of operators’ confidence in the long-run availability of water for agriculture, Cooray said. Severe groundwater depletion can hurt farm finances by reducing well yields and increasing pumping costs. Elevated risk of reduced yields from insufficient irrigation or the need to convert production to dryland crops ultimately manifests in lower irrigated land premiums, as in Oklahoma.
The resilience of irrigated land premiums to groundwater depletion across the district varies with geographic differences in climate, soil, water use and aquifer recharge, she said. In Nebraska, the average level of groundwater declined by less than a foot from 1950 to 2019, while in Kansas, the average level declined by 27.3 feet.
Nebraska has permeable, coarse-textured soils along with greater precipitation and a shallower water table, enabling higher rates of recharge and less intensive water use, the Bank said. In southwestern Kansas, however, patterns of low precipitation, high evaporation and less porous soil prevent water from percolating to the water table and encourages more intensive water use.
MANAGEMENT PLAYS A PART
While groundwater depletion threatens irrigated land value premiums, effective management and innovation in agricultural production technologies appear to have mitigated some of these risks more recently, Cooray said. In the 1970s, widespread depletion of the aquifer after decades of unrestricted access led to the establishment of decentralized state-level groundwater management regimes.
Permit requirements, well moratoriums and water allocations established rights to pump and coordinated water use across producers, limiting groundwater extraction and incentivizing more efficient water use, she said. Irrigated acreage remained broadly stable over the district over the last 20 years, but the volume of water applied has declined.
Over the same period, corn producers increased yields despite less water use, thanks to innovation in irrigation technology along with yield improvements from drought-resistant seed technology, Cooray said.
CATTLE, BEEF RECAP
The USDA reported formula and contract base prices for live FOB steers and heifers this week ranged from $254.99 per cwt to $258.00, compared with last week’s range of $255.83 to $260.00 per cwt. FOB dressed steers and heifers went for $401.32 per cwt to $407.21, compared with $405.60 to $410.81.
The USDA choice cutout Thursday was down $0.39 per cwt at $380.81 while select was up $0.40 at $363.49. The choice/select spread narrowed to $17.32, from $18.11 with 74 loads of fabricated product and 11 loads of trimmings and grinds sold into the spot market.
The USDA-listed the weighted average wholesale price for fresh 90% lean beef as $464.11 per cwt, and 50% beef was $176.25.
The USDA said basis bids for corn from feeders in the Southern Plains were unchanged at $1.23 to $1.43 a bushel over the Jul corn contract, which settled at $4.27 3/4 a bushel, down $0.07.
The CME Feeder Cattle Index for the seven days ended Wednesday was $374.45 per cwt, up $3.70. This compares with Thursday’s Aug contract settlement of $356.15, down $5.90.