Household, commercial, and environmental demands for fresh water are increasing. As fresh water sources become scarcer, innovative technologies and policies must be developed to address and manage water-related business risks. Practices to capture and recycle water offer potential solutions to this problem by reducing consumption of water and extending its availability (Parsons et al., 2010). In the nursery crops industry, ≈5% of outdoor, uncovered operations nationwide recycle irrigation water (USDA, Economic Research Service, 2015; USDA, National Agricultural Statistics Service, 2014a, 2014b). This proportion is likely to increase as water scarcity becomes more acute in some regions and operations either discontinue agriculture or invest in building water capacity on-farm. Therefore, this project studies the impacts of the recycling investment on capital and operating costs of selected ornamental nurseries, as well as an engineering analysis of “typical” or simulated small and large ornamental nurseries constructed from survey responses.
Management choices regarding water sources are unique to each business and hinge on costs, space considerations, and current and expected needs for the system. Because of the relatively favorable precipitation patterns of the humid eastern United States, high costs associated with well water or municipal water may make capture and recycling of on-farm water an economically feasible option for nurseries. A viable system for capturing and recycling irrigation water reduces a nursery’s demand for other public and private supplies. Capture and use of recycled irrigation may extend an existing water source, such as rainfall, municipal water, or groundwater, as well as provide water “insurance” in case of short-term drought. This system requires investments in both initial and ongoing management and operational costs. These costs may include such major investments as recontouring production areas to divert, capture, and store water; however, such structural changes may reduce scarce nursery production area. Moreover, adoption of recycled irrigation management practices may increase the risk of plant pathogen outbreaks, which increases the maintenance costs of the irrigation system.
The objectives of this study are 1) to estimate the cost of capture and recycling irrigation practices for case study and simulated ornamental nursery operations, 2) to compare such costs against an available alternative water source, and 3) to conduct a breakeven analysis to determine how changes in key factors may affect water sourcing choices. Partial, capital, and breakeven budget analyses were conducted to evaluate capital investments and operating expenses associated with a choice to capture and recycle water vs. sourcing it alternatively (Johnson, 1977; Rutgers Cooperative Extension, 2014; Wilkes, 1977). Three principal groups could benefit from this analysis: 1) nursery managers for whom comparative cost analyses of water supply choices provide information for helping choose among water supply sources or alternatives; 2) policy analysts, decision makers, and other stakeholders interested in comparative water recycling costs to assess benefits of recycling as a conservation practice to reduce freshwater consumption by the agricultural sector; and 3) allied suppliers that provide expertise in design and implementation of irrigation systems to assist clients in reducing both financial and environmental risk associated with growing nursery crops.
As businesses choose among alternative technologies or other investments they must address the question “Will investment A or investment B reduce expenses, generate more profit or both over the short and long term?” Choosing between alternatives is done most straightforwardly with a partial budget of annualized and discounted costs and returns. Partial budgets were used to consider marginal costs or returns specifically associated with the investment alternatives. If one alternative is a water recycling investment, additional costs could include such capital expenditures as construction of a water storage pond or noncash costs such as the forgone net income (opportunity costs) from previous production on the area now dedicated to the storage pond. The budget for a competing alternative may also include marginal returns and costs, such as metered water costs for municipal water. Any or all of the returns/costs items could be annualized capital costs/returns. The net returns of one alternative are then compared with net returns from the other. If the resulting choice is dependent on one or a few highly uncertain cost or return items, then key cost or return items can be varied one at a time to examine the sensitivity of the choice to each factor. This procedure is called breakeven budgeting, because the uncertain factor is increased or decreased such that the decision maker’s resulting choice between alternatives would be indifferent (Castle et al., 1987). Users can then assess the likelihood that such an increase or decrease in cost needed to achieve breakeven will occur.
Partial budgeting of water management capital costs on farms was used to analyze investments required by irrigation with recycled water on a mixed crop farm in Queensland, Australia (Brennan et al., 2008). A similar study was conducted in New South Wales, Australia (Khan et al., 2008). Ørum et al. (2010) assessed incentives that Serbian farmers could receive by implementing new irrigation techniques to conserve water for tuber production.
Several costs in the partial budget are capital costs meaning they involve expenditures for items that provide services for more than 1 year. The decision framework known as capital budgeting offers several key indicators, such as payback period, net present value, and internal rate of return (Law, 2010), each functioning to compare alternative investments with useful lives longer than a single year. Capital costs can be annualized to spread the initial capital investment over its useful life so that annualized budgets of alternative investments can be compared. We compared annualized partial budget costs and returns consisting of both the investment expenditure made at initiation of the project and any associated operating expenses throughout the project life, and discounted to the present (time = 0). Discounting accounts for inflation and the time value of money. We consider cash as well as noncash costs and returns. The latter consist primarily of opportunity costs incurred when returns are forgone by choosing one alternative for another.
Case studies described here present partial budgets developed to analyze costs and returns of alternative irrigation water sources on ornamental nurseries of varying sizes and in different locations. Partial budgets were developed to assess returns/costs for recycling vs. alternative water sources (well or municipal water) on eight case nurseries in Pennsylvania (PA-1 and PA-2), Maryland (MD-1, MD-2, and MD-3), and Virginia (VA-1, VA-2, and VA-3), each of which currently recycle at least some portion of rainfall and irrigation water. The cost/return assessment of these recycling nurseries is intended to represent the net cost of investments necessary to have developed the existing system of irrigation water capture and recycling in the year of nursery inception. That is, each nursery is placed in a pre-irrigation situation of choosing between recycling and a conventional alternative (well or municipal water).
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