Farm Level Economic Analysis of a Wetland‐Reservoir Subirrigation System in Northwestern Ohio

Three wetland‐reservoir‐subirrigation systems (WRSIS) have been designed and constructed in northwestern Ohio. These systems have the potential to improve downstream water quality by reducing discharge to streams, to provide wildlife habitat, to increase wetland acres and vegetation, and to provide a reliable supply of subirrigation water for sustained crop production. This study attempts to quantify all costs and benefits of a WRSIS investment in order to provide farmers with useful information for evaluating application of the technology. Net present value (NPV) analysis was used to compare operation and investment costs with benefits of improved crop production, improved water quality, increased residual land value, decreased tax liability, and wetland mitigation payments. For the studied case, the total NPV is $11 225. Capital and operating costs have a NPV of −$71 293. Sensitivity analyses show that changes in the total amount of invested capital most affect this value. The NPV of yield improvements and increased land value is $39 712. Further analyses show that yield improvement value is most sensitive to variations in the amount of yield response and crop mix (commodity value). Reductions in tax liabilities improve WRSIS NPV by $9333. Analyzing tax parameters shows that increases in variables such as loan terms, proportion of debt financing, and marginal tax rate reduce tax liability due to larger amounts of deductible interest. Likewise, increasing the proportion of equity financing increases tax liability due to less deductible interest and higher equity opportunity costs. Finally, wetland mitigation payments add $30 000 and water quality improvements add $3473 to the WRSIS NPV. Research Question In 1994, a 5‐yr study began in northwest Ohio that links subirrigation systems with upground reservoirs and constructed wetlands. The project, called a wetland/reservoir subirrigation system (WRSIS) is being examined for its ability to recycle runoff and drainage waters, reduce sediment and agricultural chemical flow to watersheds, improve water quality, increase wildlife habitat, increase wetland acres, and improve crop yields. In a WRSIS, a wetland is constructed to receive subsurface drainage and runoff from adjacent cropland. The cropland is subirrigated by a water supply reservoir that is also linked to the constructed wetland. The wetland, reservoir, and subirrigated cropland are integrated to recycle runoff and drainage waters. Yield data from the first 2 yr of this project and from subirrigation research plots from other locations in Ohio are being used to analyze the net benefits of these systems for improved and sustained crop production. Literature Summary In 1971, subirrigation was touted as a new farming practice that could result in advantages such as greater savings of water, eliminating runoff, and increasing the yield of crops. Since that time, data concerning yield improvements, comparisons with conventional irrigation technology, and the economic feasibility of subirrigation has been examined. Previous empirical studies have been performed regarding budgetary analysis of implementing a subirrigation system. These studies have provided good estimates of the costs involved in constructing a subirrigation system. Other papers have included break‐even analyses and per acre investment cost/income comparisons. However these studies did not provide a complete analysis of the profitability of a project similar to the WRSIS study. In particular, little attention has been paid to federal and state income tax consequences of the investment, method of financing capital costs, or potential payments from private or government sources for WRSIS investment. Study Description The data for this study were collected from three demonstration sites in northwest Ohio. The test sites were chosen for this research by considering factors such as soil physical properties, land conformation, and water table depth. The sites chosen were in the Ohio counties of Defiance, Van Wert, and Fulton. The data collected from each site include capital costs, variable input costs, management costs, maintenance costs, yield benefits, and land allocation. The WRSIS investment is characterized by a sizable initial investment followed by a lengthy stream of annual returns over the life of the investment. A net present value (NPV) analysis is the method used to evaluate the investment. This method is appropriate because it accounts for the opportunity cost (time value of money) over the lengthy investment horizon of this project. Sensitivity analyses are completed to evaluate alternative methods of financing, the impact of differential rates of income taxation, and the impact of transfer payments from off‐farm sources. Applied Questions What is the overall economic benefit of the WRSIS project? This study has attempted to quantify all the economic benefits associated with the WRSIS project. Increased yield and land values, decreased tax liabilities, and environmental benefits were contrasted with the capital and operating costs of the WRSIS project. If all of these benefits were realized (and internalized), the base case model has a positive NPV of $ 11 225. Are increased yield and land values combined with decreased tax liabilities enough to offset WRSIS construction and operation costs? The yield and land value benefits achieved by the subirrigation system are not enough to offset the high costs involved in building and operating the WRSIS project. The base case model described in the paper compares the economic benefits of increased crop yields and land value to costs incurred by construction and management. For the studied case, the present value of yield improvements and land appreciation over a 30‐yr project, totals $39 712. However, the present value of capital and operating costs totals $71 293 over the project life. The project NPV, ignoring federal and state income tax effects, is −$31 581. When the NPV analysis is converted to an after‐tax basis, system profitability is improved but still negative (−$11 241). It is assumed in the model that all tax deductions such as interest and depreciation may be fully realized by the farming operation. Increases in variables such as loan length, proportion of debt financing, and marginal tax rate positively affect system profitability due to the larger amounts of tax deductible interest expense. Increases in the proportion of equity financing negatively affect profitability due to lower tax deductible interest costs and higher equity opportunity costs. What are the values assigned to the environmental impacts of the WRSIS system? Environmental benefits were quantifiable to some degree. In Ohio, market payments for wetland mitigation are estimated at $30 000 for a wetland similar to that constructed for the WRSIS project. Possible annual subsidies resulting from decreased sedimentation and positive water quality impacts were also analyzed. The amount of reduced operating costs to public organizations was estimated to be $203/yr. Combined environmental benefits add $22 466 to the NPV of the WRSIS project, resulting in an after‐tax NPV of $11 225. It is important to note that other environmental benefits exist that were not quantified in this study.