The Water Use and Climate Effects on Farm Profitability in Colorado River Basin

Abstract

The Colorado River is the lifeblood of the southwestern United States. The imbalance between water supply and demand in this basin has been increasing and conditions are projected to worsen with climate change and population growth. Because agriculture is a major user of groundwater and surface water in this region, federal and state agencies suggest that substantial cuts in agricultural water use will be required to re-balance water supply and demand. Such cutbacks, though, impose opportunity costs in the form of lost agricultural production and farm income. This study considers the regional distribution of net returns to irrigated agriculture in Colorado Basin states to address where such opportunity costs will be low and high. In some counties, net farm returns per acre of irrigated land or per acre-feet of water applied are quite high, while in others areas are low. The study also examines which factors determine why farm profitability is low or high across counties. The relationship between net farm income and a set of climate, water resource availability and farm characteristic variables for the seven Colorado Basin states is examined using county-level data from 2005 and 2010. Regression results indicate that county level farm income per irrigated acre and per acre foot of water applied are significantly influenced by temperature, precipitation and reliance on groundwater relative to surface water. A simple rationing model is applied to examine potential costs of large reductions in water use that might occur under land fallowing programs. If fallowing were concentrated in areas with the lowest gross revenues per acre foot of water, even substantial reductions in water use would have only a minimal effect on the value of regional production.