February 2018
The Business of Farming


Is it all about the return on investment?

A few days ago, my teenage son informed me that he didn’t plan to have any kids because, in his words, "It doesn’t make financial sense."

Now, although I completely agree with him, I wonder how he came to this conclusion. Was it based on all the times he’s heard me tell him I don’t have any money because he’s already taken it all? Or did he sit down and put pen to paper and realize he would get absolutely zero monetary return from a kid? Not likely, but at least he’s thinking about what a financially sound investment should look like.

Unlike with kids, where I know there’s not a payoff in the end (financially, anyway), trying to make financial sense of agricultural investments can be a tricky proposition, particularly with irrigation.

We hear return on investment thrown around a lot when discussing equipment purchases, and irrigation systems are no different. Irrigation is a costly investment – so, yes, you should sit down and do the math to figure out increased net returns each year and the break-even point before making the decision to start installing pivots in your fields.

There are even websites that can do the math for you. Just enter some acreage numbers, up-front costs, crops you’ll plant, expected yield, etc. – and it will tell you everything you want to know. But again, in ag, it’s tricky because there are several assumptions being made to calculate that ROI. What is the expected yield? What crop is being planted? What is the expected price? (The one calculator I looked at defaulted to $1/lb. cotton for expected price!) No, you don’t ignore the ROI, but are there other things you need to take into consideration if you’re looking at irrigation for your farm?

In most cases, if you figure the return of irrigation over dryland acres, it doesn’t take long to see a financial benefit even with substantial purchase and operating costs of an irrigation system. But that increased yield, which makes it feasible, doesn’t just magically happen!

ROI is important for making a decision, but how you manage that irrigation to actually produce the expected yield is just as important.

How are you going to decide when to turn on the irrigation? A lot of growers wait for visible plant stress to turn on the system. That means, if the plant is wilted, it’s time for some water … probably not the best way to decide when to cut on irrigation.

There are several ways to schedule irrigation: checkbook method, online systems, soil sensors, etc. All of these are good tools for irrigation scheduling, but you have to commit to managing the system if you’re going to commit to the purchase.

And then there’s the weather. We can do all the calculations we want, but we can’t predict the rain five years from now. When your fields are irrigated, you can push for higher yields because you know you’ve got the water. But what if you get the timely rains? What if you don’t? That irrigation system is an insurance policy for when you don’t have the rainfall at the right time. Just like any insurance policy, its value is way more apparent when you need it, not when you don’t.

So as a numbers person, I definitely urge you to look at the return potential for irrigation, any large purchase or new practice. It has to make financial sense for your operation. But, just like kids, sometimes there’s some hidden value you just can’t calculate.

If you are considering installing irrigation and have some financial questions or have irrigation already and would like information on how to manage it for higher profit, contact your local Alabama Cooperative Extension System Farm and Agribusiness Management Agent, or check out the team at www.aces.edu/agriculture/business-management; on our Facebook site, www.facebook.com/AUAgBiz; or Twitter, https://twitter.com/auagbiz.



Jessica Kelton is a regional farm and agribusiness management agent for ACES.