UNL CropWatch March 16, 2011 Q & A: Calculating a Rate When Neighbors Share Irrigation Costs
March 16, 2011
Our neighbors would like us to irrigate the 80 acres that lies next to ours with our center pivot and well. How do we establish a rate?”
Irrigation Cost Estimator
To calculate irrigation costs, download an Excel spreadsheet I developed at http://lancaster.unl.edu/ag/Crops/irrigate.shtml. (Look for the “Irrigcost.xls Excel® Notebook.) To use this calculator, you'll need to know the following information:
To estimate the cost of pumping the water, note:
When estimating ownership cost, the component initial cost should reflect the current (depreciated) value at the time the agreement goes into force.
When computing the price to irrigate the adjoining property, do two runs, reflecting the acres irrigated with and without irrigating the neighbor's property.
Run 1 should show the acres covered if only the irrigation owner were covered.
Run 2 should report the total acres irrigated if the system were extended to also irrigate the neighbor's land.
Note: The ownership cost on a per acre basis will be lower when irrigating more acres, but the magnitude of the reduction in cost depends on what ownership costs the neighbor agrees to pay. One could argue that if this is to be a long-standing agreement, the neighbor should contribute a proportionate share of the ownership costs.
Determining a rate for custom irrigation depends on several variables such as water lift, system efficiencies, etc. specific to each situation, thus there are no generally accepted rates. Each scenario is unique and calculations must be done on a case by case basis.
In all cases, it’s essential that the pivot owner receive enough to cover all costs.
Energy is the easiest cost to calculate. You’ll need to know your irrigation energy costs and amount of use (either water applied or hours used) for last year as well as prices for fuel and/or electricity for the two years. Divide last year's energy cost by last year's use to get last year's rate. Last year's rate must be modified to reflect price differences between the two years. To adjust for price differences, divide last year's rate by last year's price and multiply that by this year's price.
Repair costs are more difficult to calculate due to year to year variations and the fact that repair rates increase as machines age. Any estimates based on history will probably be too low. Also factor in the ever increasing costs for all repairs.
Non-cash ownership costs can be divided into two components: opportunity and depreciation. Because they are not cash costs, they may be overlooked and cause irrigation costs to be underestimated. They are especially difficult to estimate for a pivot system because it is composed of multiple components, including the pivot, pump, power source, and well. The ownership cost of each component must be estimated separately because each has different characteristics such as life expectancy and salvage value.
Estimating the Less Tangible Value of Irrigation
Calculating irrigation costs is only the first step in determining an equitable rate to charge. Charging an amount that only covers costs and allows the neighbor to retain all profits generated from increases in production is being a very good neighbor and a very poor businessman.
Determining how much to charge above the amount required to cover costs may be the most challenging part of the formula. It’s also the one where outside advice is least appropriate.
Given the difficulties in accurately estimating irrigation costs and the concept of sharing the increased profitability due to irrigation, charges for irrigating extra acres should be somewhat more than estimated costs.
Budget Analyst, Farm Management