Irrigated Agriculture is an Engine for Economic Activity in Rural Communities
by James Pritchett, Assistant Professor, Agricultural and Resource Economics

Water is an important natural resource that contributes to the Colorado’s economic, cultural and social well-being. But as recent events have shown, our limited water supply has many competing uses and is undergoing many rapid changes. Water rights are being voluntarily transferred from irrigated agriculture to municipal use, groundwater supplies are being sufficiently depleted so that pumping is too costly relative to the value of the crops and wells without sufficient augmentation are being retired. Ultimately, this means fewer irrigated acres, and the economic impacts of this reduced activity are a key concern for rural communities.
How important is irrigated agriculture to rural communities? Quantifying cash receipts is one way to measure the impact of irrigated agriculture to Colorado’s economy. When tallied as sales at the farm gate, agricultural receipts generated roughly $5.4 billion in 2005 or about 2 percent of Colorado’s general economic output. About 40 percent is derived from crop sales with the remainder from livestock sales. Irrigated cropping generates approximately $1.62 billion in a year, or about ¾ of all crop receipts.
Of course, the economic contribution of agriculture doesn’t stop at the farm gate. For example, irrigated crop production supports commercial livestock, meat-packing, and dairy industries. These primary industries encourage economic development directly, through the purchase of inputs, and indirectly, through the wages and salaries of employees. Without other viable local base industries, a reduction in the revenue generated in the agricultural sector will have adverse economic impacts throughout the regional economy. This begs the question, “How important is irrigated agriculture’s activity to the regional economy?”
Recent research from Colorado State University and the Colorado Water Resources Research Institute provides insights1. First, irrigated agriculture’s contribution to economic activity varies by region (Table 1). The second column of Table 1 indicates the proportion that all agricultural receipts (crops and livestock) make of the region’s total economy. Measured at the farm gate, production agriculture makes a significant portion of sales for the Rio Grande basin at 48 percent of the total output. In the South Platte, production agriculture is significant industry but relative to all economic activity, it makes a smaller proportion. Simply put, the South Platte basin economy has more sources of economic activity when compared to the Rio Grande region.
The third column of Table 1 includes farm gate sales, but also measures the inputs purchased to support irrigated cropping. More specifically, economic activity includes the following.

· Direct activity: Revenue flows from the sale of crops.

· Indirect activities: The revenue generated by the demand for inputs from other industries. For instance, a farmer indirectly supports businesses supplying inputs such as fertilizer, seed, etc.

· Induced activity: The revenue generated as labor spends its wages in the regional economy in areas such as supermarkets, pharmacies, banks, etc.

In the third column of Table 1, the direct, indirect and induced activity has been summed and then averaged for each acre of the regions’ cropland. The lowest value is found in the Arkansas at $428 per acre and the highest is in the Rio Grande at $1,127 per acre. The crop mix describes, in part, the difference. The primary crop in the Rio Grand (in terms of its value) is potatoes, a high value crop that requires significant inputs to be grown, and is exported almost exclusively out of the region. Forage crops are typical in the Arkansas, and these perennial require relatively fewer inputs. In addition, much of the forages used in the Arkansas Valley are used locally.

So when is economic activity high? When high value crops are sold outside the region, when revenues from the crop sales are spent on locally produced inputs and when local support industries use local labor and inputs.
What about limited irrigation versus ‘buy and dry’ of irrigated land?

Limited irrigation is better for the regional economy when compared to fallowing or converting large swaths of land to dryland cropping. Simply put, limited irrigation provides greater direct, indirect and induced economic activity. While not as large as the economic activity shown under full irrigation in Table 1, the economic activity generated by limited irrigation is greater than that for dryland cropping.

The economic activity in Table 1 is a snapshot of irrigated agriculture’s contribution today, but it cannot be interpreted as “lost” economic activity as water leaves agriculture. As an example, we would expect farms to adapt and improvise when confronted with a limited water situation – that is, they might convert to dryland cropping or rangeland. Likewise, agribusiness may innovate – it’s common for wholesalers (such as cooperatives) to provide more small acreage services as large agriculture shifts out of the region. Of course, this is viable near larger urban areas than those that are more distant.
This table does not address distributional effects, two in particular. First, if the irrigated acres that are fallowed happen to be clustered (which is likely given legal transactions costs), the economic consequences will be localized and severe, even though they appear to be smaller when viewed at a regional scale. In addition, the effects will be more intense for particular businesses that are solely designed to support irrigated agriculture and individuals whose work skills are cannot be shifted from agriculture to other industries.

Finally, the economy’s tipping points aren’t represented Table 1 – that is, a critical mass is needed to support businesses in rural economies If revenues slide below the tipping point, then businesses may closed down in spite of efforts to shift to other revenue streams. Lost property taxes are also not included in the analysis, which may be severe given the large difference between assessed values of irrigated vs. dryland.

James Pritchett: pritchet@lamar.colostate.edu Department of Agriculture and Resource Economics, CSU