Calculating the return on a temporary water purchase

For cotton irrigators creating water budgets, it is important to understand the return on a water investment. Current conditions, competition and the continued dry outlook hare resulted in the price for temporary allocation water steadily increasing.

Individual businesses should assess if the most profitable position is to be a buyer or seller in the temporary market, or to simply go about business as usual. The following example evaluates a purchase of temporary allocation to finish a cotton crop by considering the marginal return.

EXAMPLE

You have allocated 8 ML of the 9.4 ML you need for a full irrigation. From 8 ML you anticipate a yield of 10.5 bales. To maximise yield (and profit) we consider: is it cost effective to buy the additional 1.4ML?

Benefits:

Estimated additional yield: 1.5 bales / ha.
1.5 bales / ha @ $697 (includes lint and seed) = $1,045

Costs:

Purchase 1.4 ML @ $463 = $648 (includes the cost of pumping)
Yield related expenses of $93/bale x 1.5 = $140 (includes wrap, cartage, ginning, levies) (see pg2 of the ‘Furrow Irrigated’ gross margin)

Marginal return:

= Benefits less costs
= $1,045 - $648 - $140
= $257

This scenario shows the purchase of additional water is a cost-effective exercise with a positive marginal return. However, if the anticipated yield response is only one additional bale (from 1.4 ML) the costs outweigh the benefits (marginal loss) and the most profitable option is to maximise yield by strategically scheduling the 8ML on hand.

Pricing projections from your merchant and agronomic advice in terms of yield expectations and crop response to water is recommended when crunching these numbers.

BOM streamflow forecasts can aid in water budgeting decisions. Seasonal forecasting information and CottonInfo’s Moisture Manager e-news can help assess probabilities of in-crop rainfall and water budget scenarios.

For more information, see the Australian cotton industry gross margin budgets, or contact CottonInfo’s Jon Welsh or Ag Econ’s Janine Powell.