Costing an irrigation system (net margin calculator)
Use this calculator to do a quick check on the annual $ returns from operating an irrigation system.
If you use both columns, you can compare the costs and returns from any two irrigation systems. For example, if you are thinking of changing your irrigation system, you can enter values for your current system in the 'system 1' column, and estimated costs for a proposed system in the 'system 2' column, and find out whether your proposed system warrants further investigation.
Irrigation system cost calculator
Results
| Costs per year ($/y) | System 1 | System 2 | Calculations used | |
|---|---|---|---|---|
| Pumping costs: | Pumping costs = [a] × [b] × [c] that is, irrigated area [a] × pumping cost/ML [b] × water used [c] | |||
| Labour costs: | Labour costs = [h] × [i] that is, yearly labour in hours [h] × labour cost in $/h [i]) | |||
| Depreciation: | Depreciation = ( [d] – [g] ) ÷ [f] that is, ( capital cost [d] – resale value [g] ) ÷ years of working life [f] | |||
| Interest: | Average capital value = ( capital cost [d] + resale value [g] ) ÷ 2 Interest = average capital value × interest rate [e] ÷ 100 | |||
| Repairs: | Repairs = yearly repair cost [j] | |||
| Cost: | Costs per year = pumping cost + labour cost + depreciation + interest + repairs | |||
| Net margin: | Net margin per year = gross margin income/ha [k] × irrigated area [a] – costs per year + pumping costs | |||
| Return on investment (%): [Return on capital cost] |
Return on investment (%) = Net margin per year ÷ capital cost × 100 |
Limitations of this calculator
The main shortcoming of this calculator is that it works on yearly averages. Usually, in practice, there is a large initial outlay, and it is some time before the benefits from this outlay produce additional income or reduced operating costs.
The calculator does not use discounting. Discounting might alter the appeal of different projects. If you are considering a large outlay, do a more detailed investment analysis that accounts for the projected flow of costs and income over the life of the new system. As a minimum extra step, you should prepare a cash flow budget to ensure you have the cash flows to handle the investment. The results from this calculator should indicate if the difference in the annual net margin can provide loan repayments or an adequate return on the capital invested.
Instructions
Enter the area to be irrigated in hectares. If water is limited and you expect to apply different rates per hectare with the existing and proposed system, then the total area to be irrigated may be determined by the available water. Say you have a system capable of watering 40 ha, and usually apply 6 ML per hectare with it. If the new system applies 6.5 ML per hectare, and you still have only 240 ML of water available, then you will need to reduce the area to 36.9 ha (= 240 ML ÷ 6.5). If you are considering a centre pivot system, remember the corners may not be irrigated. Only count the area irrigated.
How many hours labour is needed to set up, operate and maintain the irrigation system? Take care not to double-count these values. If labour costs are allowed in the gross margin calculations in [k], they should not be included here, and vice-versa.
- If paid labour is used, ensure that labour costs cover all costs including wages, workers compensation and superannuation.
- If the labour used is family labour, a labour cost should still be included because there is usually something else that could be done to earn income or reduce costs. If there is nothing else that needs doing, then there is still value in leisure time. A rate of at least $15 per hour is suggested, and this should be more if irrigation labour requirements are competing with other priority jobs on the farm.
[k] Gross margin income ($/ha)
Variable costs are those costs that vary directly with the area grown, including seed, fertiliser, fuel, sprays for crop protection, water pumping costs, repairs and contracting.
Different irrigation systems can result in different crop gross margins. This can happen when:
- One system results in higher yields than another. Water may be applied more efficiently and crop yields may be improved.
- Different systems allow different crops to be grown.
- Quality premiums or discounts apply.
- Irrigation costs differ.
A different system may reduce water wastage and enable more hectares to be irrigated. It may increase water usage but may also increase the tonnes produced per ML of water. Per hectare yields may increase proportionally more than the increase in water use.
- Note that the gross margin already includes an amount for pumping costs, so the calculator will adjust the net margin figure by adding the calculated pumping costs back in.
- Note also that the other gross margins we provide do not include labour costs, except where it is part of a contractor charge. Do not include irrigation labour costs in the gross margin estimations, because irrigation labour costs are estimated and included separately.
More information available below.
Reading the results
The net margin per year can be compared with the initial capital outlay to consider the return on investment. The result from this calculator indicates which systems are worth more detailed analysis:
- a return on investment of less than 10% suggests this system does not produce a sufficient return on investment
- a return on investment of between 10% and 15% is a marginal return. You should research this system further, and examine alternative investments.
- a return on investment of more than 15%: this return on investment indicates the system is definitely worth further research.
The sample figures in the 'system 1' column of the irrigation system cost calculator give these results:
| Costs per year ($/y) | System 1 | |
|---|---|---|
|
Pumping cost |
= 40 ha × $25/ML × 5.5 ML/ha | = $5,500 |
|
Labour cost |
= 1000 hours × $15 | = $15,000 |
|
Depreciation |
= ($20,000 – $2,000) ÷ 5 years | = $3,600 |
|
Interest |
= ($20,000 + $2,000) ÷ 2 × 8% | = $880 |
|
Repairs |
= $2,500 | |
|
Total costs |
= $27,480 | |
|
Net margin |
= ($850 × 40 ha) – $27,480 + $5,500 | = $12,020 |
The same measures for the 'system 2' values give these results:
| Costs per year ($/y) | System 2 | |
|---|---|---|
| Pumping cost | = 40 ha × $18/ML × 6.2 ML/ha | = $4,464 |
| Labour cost | = 100 hours × $15 | = $1,500 |
| Depreciation | = ($110,000 – $35,000) ÷ 25 years | = $3,000 |
| Interest | = ($110,000 + $35,000) ÷ 2 × 8% | = $5,800 |
| Repairs | = $500 | |
| Total costs | = $15,264 | |
| Net margin | = ($925 × 40 ha) – $15,264 + $4,464 | = $26,200 |
Which system is the better investment?
One way of working out if a system is cost-effective is to compare the annual net margin of the system ($12,020 for system 1) to its initial capital cost ($20,000). Remember that interest and depreciation have already been taken into account in the calculations, but principal repayments have not been allowed for.
To compare the two systems, estimate a return on capital invested, after interest. You can do this by dividing the net margin by the initial capital cost.
As a rule of thumb, you should look for an improvement in the net margin of at least 10% — preferably at least 15%. You can then decide to go ahead with a change in system depending on the returns from this project compared with other projects, the levels of risk involved, and the cash flow projections.
Here is this comparison for the two sample systems:
Return on capital, after interest
(Net annual margin, system 2 – net annual margin, system 1) ÷ system 2 outlay = ($26,200 – $12,020) ÷ $110,000 = $14,180
$14,180 ÷ $110,000 = 12.9%
At 12.9%, this investment would be regarded as marginal. There may be better investment alternatives.
Working out gross margin income/ha
Different crops and yields result from different irrigation schemes, and price for the product will vary. For the irrigation cost calculator, we need to calculate an average $ return per hectare over the cropping cycle for each system.
Finding a yearly average
- Estimate the gross margin and water use for each crop in the rotation.
A gross margin is the gross income (yield × price) less variable costs of producing the crop. Variable costs include fertiliser, fuel, sprays for crop protection, water pumping costs, repairs and contracting.
See sample gross margins for a range of enterprises - Then, convert these estimates to a yearly average. For example, take a situation where lucerne is followed by an irrigated wheat crop before going back into lucerne:
Lucerne and wheat in 6-year rotation: average gross margin and water use
| Year | Crop | Gross margin | Water use (ML) |
|---|---|---|---|
| 1 | lucerne | $250.00 | 5.5 |
| 2 | lucerne | $850.00 | 7 |
| 3 | lucerne | $850.00 | 7 |
| 4 | lucerne | $815.00 | 7 |
| 5 | lucerne | $750.00 | 7 |
| 6 | wheat | $550.00 | 3.4 |
| Yearly average | $677.50 | 6.15 | |
Double cropping
For double cropping, find the yearly average for the rotation. Divide the gross margin total of a full rotation or cycle by the number of years in the rotation (note, not by the number of crops). For example, if there are 6 crops in 4 years, the average yearly gross margin is found by dividing the gross margin total for the 6 crops by 4.
Water use per hectare
The water used by each crop is included in the irrigation system cost calculator as megalitres per hectare per year (section [c]). Again, this average should be worked out as shown above.
Different water usage will be recorded as a seasonal change over the life of the irrigation system.
Pumping costs: Note that the gross margin already includes an amount for pumping costs, so the calculator will adjust the net margin figure by adding the calculated pumping costs back in.
Expanding the irrigation area
If you want to examine the returns under an expanded irrigation area, you would increase the hectares in section [a] of system 2.
You will also need to get an average gross margin for your current system (system 1). This will be a weighted average of the returns from the present irrigated area plus the returns from the part of the dryland enterprise that you would put under irrigation.
Calculate this average like this:
- Find the total annual gross margin income from the present irrigated area. Note that:
total annual gross margin = average annual gross margin/ha × number of hectares
- Add to this the total annual gross margin from the dryland area that will become irrigated under the proposed system.
- Then, divide this sum by the total area the proposed system would irrigate to get a per-hectare figure.
Expanding the system by 10 hectares
| System 1 (Current system) | System 2 (Proposed system) |
|---|---|
| System 1 is irrigating 30 hectares. | Proposed system is to cover 40 hectares, including the area covered by the current system (that is, there are an additional 10 hectares to be irrigated). |
|
Average gross margin, irrigated crop: $1000/ha
Average gross margin, dryland crop: $200/ha |
|
| The average gross margin per hectare for the present system would be: {($1000 × 30) + ($200 × 10)} ÷ 40 = $800/ha |