Estimating the Incremental Gross Margins due to Irrigation Water in Southern Alberta

Abstract

In this study, the gross margins (above variable costs) are estimated in Canadian dollars of 16 important irrigated crops in Southern Alberta over the years 2004 to 2008. The residual method is then used to estimate the total incremental gross margins (gross margins from irrigated crops minus estimated gross margins from dryland crops had irrigation not been available) of using water to irrigate agricultural crops in four sub-basins in Southern Alberta over those years. The annual incremental gross margins averaged $244 million (in 2008 Canadian dollars) per year and varied from a low of $218 million in 2007 to a high of $271 million in 2005. On a per hectare planted basis, the annual average gross margin from irrigated cropping was $590 and the incremental gross margin was $495. The average annual gross margin and incremental gross margin per 1000 m3 were $225 and $191, respectively.

Dans cette tude, les marges brutes (en dessus des cots variables) sont estimes en dollars canadiens de 16 cultures irrigues importantes dans le sud de l'Alberta au cours des annes 2004 2008. Ensuite, la mthode rsiduelle est employe pour estimer le diffrentiel total des marges brutes (marges brutes des cultures irrigues moins des marges brutes estims des cultures des zones arides o l'irrigation n'avaient pas t disponible) de l'utilisation de l'eau pour irriguer les cultures agricoles dans les quatre sous-bassins dans le sud de l'Alberta au cours de ce temps. Le diffrentiel annuel des marges brutes en moyenne 244 millions de dollars (en dollars canadiens de 2008) par anne. Ils variaient d'un minimum de 218 millions de dollars en 2007 un sommet de 271 millions de dollars en 2005. Sur une base par hectare sem, la marge brute moyenne annuelle des cultures irrigues tait de 590 $ et la marge brute supplmentaire tait de 495 $. La moyenne annuelle de la marge brute et de la marge brute incrmentale taient 225 $ et 191 $, respectivement.

Introduction

Governance of water in Canada has been fragmented with authority for its management shared among four levels of government: federal, provincial, municipal and First Nations (Bakker and Cook, 2011). With demands for water continuing to grow, comprehensive water management strategies have been attempted in several provinces with various degrees of success and urgency (Bjornlund et al., 2008). The province of Alberta has been a leader in developing improved water management strategies that include public participation in water planning decisions, consideration of environmental flow needs, and the use of economic instruments such as markets and pricing. There has been increasing recognition in Alberta of the importance of more effectively managing limited water resources. Revisions to two long-standing pieces of legislation (Water Act in 1999 and Irrigation Districts Act in 2000) introduced the possibility of trading in permanent and annual water entitlements. During the severe drought in 2001, the legal ability to transfer annual allocations of water greatly assisted irrigators in the St. Mary River Irrigation District (Nicol and Klein, 2006). This was followed by release of the Water for Life strategy in November 2003, which established future objectives for water resources and acknowledged that a major shift needs to take place in the way that water is managed (Bjornlund et al., 2007; Alberta Environment (AENV), 2003). The urgency of making these changes was reflected in the Draft South Saskatchewan River Basin (SSRB) Management Plan (AENV, 2006), which noted that water demand from non-irrigation could increase between 35% and 67% by 2021 and between 52% and 136% by 2046.

Irrigation activities account for about 75% of surface water allocations in the South Saskatchewan River Basin in Alberta while commercial, industrial, municipal, and other activities account for just 25% (AENV, 2005). As the demand for clean and safe water grows in urban centers, pressure will increase on agriculture to either reduce some of its use or, at least, to use it to produce higher valued crops.

While water is a key contributor to the productivity and competitiveness of agricultural businesses in Southern Alberta, with primary production from irrigation and the spin-offs in agri-food processing contributing over 18% of the agri-food portion of gross domestic product for Alberta (Alberta Irrigation Projects Association (AIPA), 2002), very little research has been conducted on the value of water used for cropping agriculture in Southern Alberta. Ward and Michelsen (2002) noted that information on the economic value of water enables decision makers to make informed choices on water development, conservation, allocation, and use when demands for water increase at the same time as available supply decreases. Pinfold et al. (2007) estimated the overall value for water in all uses in the SSRB in 2004 to be a little over $1 billion. About 20% of this estimated value was due to the use of water for irrigating crops, a result of greater producer returns from irrigated as opposed to dry land farming. Samarawickrema and Kulshreshtha (2008) calculated the short-run producer surpluses of irrigated crops in Southern Alberta in 2004 to range between $294 ha¹ in the Bow River sub-basin and $376 ha¹ in the Oldman River sub-basin during the drought years of 2001 and 2002. For the same period, the short run value of irrigation water (difference between short-run producer surpluses of irrigated and dryland crop production, divided by water diverted) ranged between $39 1000 m³ in the Bow River sub-basin and $53 1000 m³ in the Oldman River sub-basin. While these overall estimates of the value of water are interesting, Hellegers and Davidson (2010) stated that water managers could improve the allocation of water and, thereby, improve social net welfare, if they knew the value of water by use, region and season.

The purpose of this study is to investigate the financial benefits that accrue to primary agriculture from irrigating crops in Southern Alberta. This is important because any changes that are made to irrigation policy or management schemes that result in changes in the amounts of water that are made available or how water can be used for irrigation will have impacts on the net benefits ($ ha¹) of future irrigation in Southern Alberta. Following the direction taken by Hellegers and Davidson (2010), the specific objectives of this study are: (1) to estimate the gross margins in constant Canadian dollars of the most important irrigated crops in Southern Alberta across time (20042008); and (2) to estimate the total incremental gross margins to irrigation above those of dryland farming, across the five-year timeframe and by river sub-basin: Bow, Oldman, Red Deer and South Saskatchewan.

The time period analyzed includes years where both commodity and input prices varied considerably. As a result of increased use of corn and wheat for ethanol, rapid growth in several developing countries, and other factors, prices of grains and oilseeds spiked in 20072008 (Klein and Le Roy, 2011). From May 2006 to July 2008, when the commodities price bubble burst, corn, soybeans, red hard wheat, oats and feed barley prices increased 193%, 149%, 92%, 125% and 124%, respectively. This was followed by steep rises in the prices of fertilizers and other major inputs.

In this study, data from 13 organized irrigation districts (within the four river sub-basins) in Southern Alberta are examined. Each irrigation district has different soil, climate and water availability characteristics (Bjornlund et al., 2007). The 13 districts account for about 82% of the 650,000 ha under irrigation in Southern Alberta, of which 21% is in the Bow River sub-basin, 47% is in the Oldman River sub-basin, 14% is in the Red Deer River sub-basin, and 18% is in the South Saskatchewan River sub-basin (Alberta Agriculture, Food and Rural Development (AAFRD), 2005). A careful accounting of the returns and costs of irrigation will provide an improved basis for decisions on water management in Southern Alberta.

Methods

Alternative Approaches to Estimating Benefits

Three methods are available for estimating the financial benefits of using water for irrigation: observations of water markets, hedonic methods and residual methods (Young, 2005). Although Alberta legislation currently enables exchanges of annual entitlements and permanent water licenses, Nicol et al. (2008) found that market activity has been limited due to several factors, including complex procedures and relatively high transactions costs. As a result, there are not enough observations of prices for water in Southern Alberta to use that approach to estimate the value of water in irrigation.

Grimes and Aitken (2008) used a hedonic approach to estimate the value of irrigation water in a drought-prone area of New Zealand that contained both irrigated and dryland farms over a 19 year period (19882006). They used econometric methods to estimate property sale prices and assessed valuations as functions of the size of the farm's water right (if it had one) and a set of other farm characteristics, such as specific soil characteristics and distance to the nearest town or city. Torell et al. (1990) used both hedonic and residual methods to estimate the value of water in the Ogallala Aquifer in the United States. They found that the hedonic method produced lower values than the residual method.

The residual method takes a more direct approach to estimating the benefits of using water for irrigation by comparing (through budgets, sector models or other ways) gross margins with and without supplementary water. Doak et al. (2004) used the residual approach to estimate the increase in farm gate gross domestic product (GDP) that resulted from irrigation in a single production year. Their comparative scenario (without irrigation) estimated how land would be used if irrigation had never been developed. Hellegers and Davidson (2010) used the residual method to estimate the disaggregated benefits of irrigation water used in agriculture in the Krishna basin in India, across crops, zones and seasons. Ashfaq et al. (2005) estimated the benefits of irrigation water in Pakistan with the use of an agricultural sector model, in which water was incorporated as a scarce input. The benefits from using irrigation water were estimated using the shadow prices for water for different crops.

The residual method for estimating gross margins to primary crop production in Southern Alberta was chosen for this study because of three considerations. First, calculations of gross margins based on observed yield, cost and price data are more precise than those estimated for hedonic models where a large number of factors that affect the price of irrigated land must be estimated econometrically. Second, results obtained from calculations that flow from the residual method will be directly comparable to those used in previous studies in western Canada, principally those by Samarawickrema and Kulshreshtha (2008) and Pinfold et al. (2007). Third, most data necessary to calculate gross margins by the residual approach have been collected in government-sponsored farm surveys in recent years for irrigated crop production in Southern Alberta.

Calculation of Gross Margins for Irrigated Crops Across Time

The gross margin for each irrigated crop (for each year and each sub-basin) was calculated as gross income (price multiplied by yield) minus the variable costs of production. As noted by Doak et al. (2004), estimation of gross margins (above variable costs) is an accepted method of evaluating farm enterprises. This method accounts for costs that vary directly with the type and level of production. While overhead (fixed) costs are important for an individual business operator, they are generally excluded from farm enterprise analysis for two reasons. First, they are difficult to allocate among various crops and enterprises on the farm. Second, and more importantly, the level of costs of some inputs (especially land) is directly affected by the profitability of the enterprise. Also, the cost of family labour usually is omitted because that resource is not hired in a market place. For this analysis, only those costs that varied with the type and level of production (including hired labour, but not family labour) were subtracted from gross returns.

While there were 60 crops grown under irrigation in the 13 irrigation districts of Southern Alberta during the years 20042008, the areas of minor crops were aggregated with those of 16 major crops ( Table 1 ) to make the analysis more manageable. For example, relatively small areas of flax and mustard seed were added to the area of canola; small areas of malt barley, grain corn, rye and triticale were added to the area of barley; small areas of dry peas and fresh peas were added to the area of beans; alfalfa silage was added to alfalfa hay; etc.

Table 1. Irrigated area of crops in sub-basins of southern Alberta 2008 (ha).

Crop	Bow	Oldman	Red Deer	S. Sask	Total
Barley	9767	29503	6859	8697	54825
CPS Wheat^1	989	900	920	146	2955
Durum	4714	15835	725	8847	30122
Hard Wheat	17122	23383	10026	11435	61967
Oats	531	714	487	319	2051
Soft Wheat	3214	8063	243	5119	16639
Alfalfa Hay	19273	38091	16032	10429	83824
Barley Silage	2692	20541	1908	2084	27226
Corn Silage	2379	10799	1638	2840	17655
Grass Hay	1489	4687	1498	1477	9151
Seeded Pasture	16427	15238	14521	5545	51730
Timothy Hay	802	5358	538	1225	7922
Canola	16667	29046	10097	16109	71919
Beans	3968	12307	830	7911	25015
Potatoes	3483	10377	1354	5058	20272
Sugar Beets	1724	6268	158	1977	10127
TOTAL	105240	231108	67833	89219	493400
Sources: Alberta Agriculture Food and Rural Development (AAFRD) (2005, 2006, 2007, 2008, 2009).
^1 The Canada Prairie Spring (CPS) class of wheat was established in 1985 as a lower protein alternative to hard wheat, the major class of wheat grown in Canada. The CPS class is known for its medium protein, medium kernel hardness and medium dough strength properties.

The principal crops grown in the four sub-basins were forages (alfalfa hay and tame pasture), cereals (barley and hard wheat), and oilseeds (canola) ( Table 1 ). In response to market signals and rotational constraints, the areas planted to some crops (durum, hard wheat, canola and corn silage) increased from 2004 to 2008, while the areas planted to others (barley, Canadian Prairie Spring (CPS) wheat, soft wheat, alfalfa hay, barley silage, timothy, beans and sugar beets) decreased (not shown in tables). Other crops remained almost unchanged in cropping area. The total area irrigated was nearly constant over the five-year period, with an average of 493,149 ha, slightly smaller than the 493,400 ha in 2008 (only the areas planted in 2008 are shown in Table 1 ).

To isolate the effects on the incremental returns of changing prices of outputs and inputs, yields for each of the 16 crops were held constant at their five-year (20002004) average levels. The average yields are shown in the first column of Table 2 .

Table 2. Average yields, annual crop prices (in constant Canadian dollars) and percentage increase in prices, 20042008.

	Average Yield (t ha^1)		Crop Prices (Constant Canadian Dollars t^1)
Crops	Irrigated	Dry	2004	2005	2006	2007	2008	% Increase
Barley	4.8	2.1	148	119	115	169	214	44
CPS Wheat^1	4.5		224	203	191	214	369	64
Durum	5	1.8	244	214	189	228	510	109
Hard Wheat	4.3	1.9	224	203	191	214	369	64
Oats	3.9	2.2	149	140	151	198	233	56
Soft Wheat	5.1		224	203	191	214	369	64
Alfalfa Hay	12.4	2	71	64	70	78	90	27
Barley Silage	29.1		47	28	46	34	27	42
Corn Silage	43		47	28	46	34	27	42
Grass Hay	9.9		71	64	70	78	90	27
Seeded Pasture	9.9		71	128	94	114	111	57
Timothy	9.9		137	149	161	172	183	33
Canola	2.4	1	422	330	291	379	553	31
Beans	2.4		539	693	518	532	725	34
Potatoes	31.6		183	229	198	205	191	4
Sugar Beets	47.3		48	48	42	46	42	12
Feed Peas		1.6	158	101	117	181	187	18
Sources: Agriculture and Agri-Food Canada (AAFC) (2006, 2007, 2008, 2009); AAFC (20082009); Statistics Canada (2009); Agriculture Financial Services Corporation (AFSC) (20042008); AAFRD (20042007); AAFRD (2008); Cruickshank (2004).
^1 The Canada Prairie Spring (CPS) class of wheat was established in 1985 as a lower protein alternative to hard wheat, the major class of wheat grown in Canada. The CPS class is known for its medium protein, medium kernel hardness and medium dough strength properties.

Annual farm-level prices (in constant 2008 Canadian dollars) of the 16 irrigated crops are shown in columns 48 of Table 2 . Nominal prices were obtained from data collected and reported by Agriculture and Agri-Food Canada and Statistics Canada, and then deflated by the Canadian Consumer Price Index with the year 2008 =100. Most crop prices decreased slightly from 2004 to 2005, and then increased dramatically from 2006 to 2008. The highest price crop was beans, which increased from $539 t¹ in 2004 to $725 t¹ in 2008. The price of canola declined from $422 t¹ in 2004 to $291 t¹ in 2006, but then increased to $553 t¹ in 2008. From 2004 to 2008, the prices of all major cereal crops increased sharply. During the five year period, barley prices increased by 44%, wheat prices increased by 64%, the durum price increased by 109%, and the oats price increased by 56% in real terms.

The total variable costs per hectare of major crops on irrigated land in Southern Alberta for the years 2004 to 2008 are shown in Table 3 . These data were collected by Alberta Agriculture, Food and Rural Development (AAFRD) from annual surveys of irrigated farmers. The survey procedures used by AAFRD are not described completely in their data releases, and the number of farm units in each crop/year cell was not always sufficient to inspire confidence in their use. However, they were the best data available and considerable efforts were made to check all the cost data to ensure reasonable comparability across similar crops during each of the years.

Table 3. Total variable costs on irrigated land (constant Canadian dollars ha¹) and percentage increase 20042008.

Crops	2004	2005	2006	2007	2008	%
Barley	515	470	668	623	756	47
CPS Wheat^1	619	671	630	594	794	28
Durum	619	671	630	594	837	35
Hard Wheat	574	627	622	707	792	38
Oats	515	470	668	623	756	47
Soft Wheat	606	485	632	624	809	34
Alfalfa Hay	357	487	431	474	492	38
Barley Silage	359	288	387	539	674	88
Corn Silage	359	288	387	539	674	88
Grass Hay	357	487	431	474	492	38
Seeded Pasture	307	301	295	289	282	8
Timothy Hay	832	766	751	834	1087	31
Canola	718	703	689	648	894	24
Beans	964	931	655	802	1320	37
Potatoes	2970	2906	3334	4266	4438	49
Sugar Beets	1439	1496	1524	1583	1635	14
Sources: AAFRD (2004-2007); AAFRD (2008).
^1 The Canada Prairie Spring (CPS) class of wheat was established in 1985 as a lower protein alternative to hard wheat, the major class of wheat grown in Canada. The CPS class is known for its medium protein, medium kernel hardness and medium dough strength properties.

The variable costs include the costs of seed, fertilizer, chemicals, crop insurance, trucking and marketing, fuel, oil and lube, machinery repairs, building repairs, irrigation fuel and electricity, custom work, hired labour, operating interest, utilities and miscellaneous. On irrigated land, the total variable costs for silage more than doubled over the five-year period. For cereals, including barley, CPS wheat (a class of wheat with medium protein, medium kernel hardness and medium dough strength properties), durum, hard wheat, oats, and soft wheat, total variable costs increased by 2847% over the period of 20042008 ( Table 3 ). Total variable costs for cereal crops were considerably higher in 2008 than they were during the 20042007 period. Sugar beets and potatoes are high-cost crops. The total variable costs of sugar beets increased from $1439 ha¹ to $1635 ha¹ from 2004 to 2008, and total variable costs of potato production increased sharply from $2970 ha¹ to $4438 ha¹ over the five-year period. On average, the total variable costs of crop production on irrigated land increased by more than 35% from 2004 to 2008. As data describing the variable costs of irrigated crop production were not available by irrigation district, they were assumed to be the same across the four sub-basins.

Calculation of Residual Gross Margins of Irrigation Over Dryland

Following Samarawickrema and Kulshreshtha (2008), the residual method was used to estimate the incremental gross margins from use of irrigation water on crop production in Southern Alberta. Specifically, the incremental gross margins are defined as the difference between the gross margins of crop production on irrigated land and the estimated gross margins of crop production without irrigation, as described in Equations 1 3.

where:

IR _t is incremental gross margin from irrigation in year t;

RI _t is total gross margin on irrigated land in year t;

RD _t is total gross margin on dryland in year t;

AI _ist is area irrigated for crop i in sub-basin s in year t;

YI _it is average crop yield on irrigated land for crop i in year t;

P _it is price of irrigated crop i in year t;

VCI _it is variable cost of production on irrigated land for crop i in year t;

AD _dst is area of dryland for crop d in sub-basin s in year t;

YD _d is crop yields on dryland for crop d;

P _dt is price of dryland crop d in year t; and

VCD _dst is variable costs of production on dryland for crop d in sub-basin s in year t.

To obtain an estimate of the incremental gross margins from applying irrigation water to crops in Southern Alberta, it was assumed the total area under irrigation would be planted to dryland crops if irrigation were unavailable. To estimate the gross margins under dryland conditions, it was assumed the dryland cropping patterns that existed on adjacent land would be used on the irrigated area in the absence of irrigation. The resulting estimates of area of each crop in each sub-basin for each year were then multiplied by the yield and price of each crop to obtain an estimate of gross returns for each sub-basin under assumed dryland conditions. The total variable costs of dryland production of each crop for each year (20042008) were then subtracted from the gross returns to arrive at estimates of what gross margins for dryland crop production in each sub-basin would have been with no irrigation. The estimated incremental gross margins were then calculated by subtracting the estimated gross margins under assumed dryland conditions from gross margins under irrigation for each sub-basin. Gross margins and incremental gross margins per hectare and per net 1000 m³ of water diverted were calculated, the latter by using net diversions of water (gross diversions of water minus return flows) for the four sub-basins, as calculated by Bewer et al. (2010) and shown in Table 4 .

Table 4. Net diversions¹ of water (1000 m³) for the sub-basins, 20042008.

	Sub-Basins
Year	Bow	Oldman	Red Deer	S. Sask.
2004	333,518	573,941	244,453	298,822
2005	214,730	393,337	167,264	222,548
2006	268,163	542,554	184,011	277,974
2007	340,128	504,285	230,992	347,887
2008	318,142	591,643	220,768	310,956
Source: Bewer et al. (2010).
^1Net diversions of water are defined as gross diversions of water minus return flows.

Seven major crops were grown on dryland in Southern Alberta in those years: durum, hard wheat, barley, oats, canola, feed peas and alfalfa hay. Hard wheat and barley account for almost two-thirds of the area in the assumed dryland situation. When allocated to the irrigated area, they would be planted on an average of 157, 600 ha and 157,859 ha, respectively; (estimated areas in 2008 are shown in Table 5 ). Alfalfa hay and durum account for 12% (59,480 ha) and 11% (54,780 ha) of the cropped area, respectively.

Table 5. Assumed areas of dryland crops in 2008 (ha)¹.

Crops	Bow	Oldman	Red Deer	S. Sask	Total
Durum	3215	22999	2334	26232	54780
Hard Wheat	22804	74578	17728	42631	157740
Barley	43498	84511	21608	7791	157407
Oats	6306	8649	5722	4579	25256
Canola	9709	6774	7087	0	23570
Feed Peas	3468	6374	1880	3445	15167
Alfalfa Hay	16240	27223	11475	4542	59480
TOTAL	105240	231108	67833	89219	493400
^1 It was assumed that the cropping pattern that existed on adjacent dryland would be used on the irrigated area in the absence of irrigation. The total areas under irrigation in each of the sub-basins were apportioned to the seven major dryland crops on the basis of that cropping pattern.

Average yields of the seven dryland crops are shown in the third column of Table 2 . Obviously, crop yields on dryland are much lower than on irrigated land. In the case of barley, the yield with irrigation was 4.8 t ha¹, whereas on dryland, it was only 2.1 t ha¹. The yield improvement from supplemental water was even higher for alfalfa hay where the yield under irrigation was 12.4 t ha¹ as compared to only 2.0 t ha¹ under dryland conditions. Furthermore, some high-yielding crops on irrigated land, such as barley silage (29.1 t ha¹), corn silage (43.0 t ha¹), potatoes (31.6 t ha¹), and sugar beets (47.3 t ha¹) are not grown on dryland in Southern Alberta.

Data describing the variable costs of dryland crop production were available by soil zones: Brown Chernozem, Dark Brown Chernozem and Black Chernozem (in the United States, the soil classes are referred to as Aridic Haploboroll (for Brown Chernozem), Topic Haploboroll (for Dark Brown Chernozem) and Udic Haploboroll (for Black Chernozem)). The Bow River sub-basin consists of 45% Brown Chernozem soil and 55% Black Chernozem soil; the Oldman River sub-basin consists of 61.3% Dark Brown Chernozem soil and 38.7% Brown Chernozem soil; the Red Deer River sub-basin consists of 66.7% Brown Chernozem soil, 22.2% Dark Brown Chernozem and 11.1% Black Chernozem soil; and soil in the South Saskatchewan River sub-basin is completely Brown Chernozem (Yan et al., 2010). Since the variable costs of producing each crop differ by soil zone and the proportions of each soil zone in the four sub-basins are different, total variable costs of producing each of the seven crops in each sub-basin were computed on the basis of the relative proportion that they were planted in each soil zone.

The estimated variable costs on dryland are shown for the Brown Chernozem soil zone only in Table 6 . Total variable costs for the other two soil zones generally were somewhat higher than for the Brown Chernozem soil zone (Yan et al., 2010). Total variable costs of dryland cropping increased slightly over the 2004 to 2007 period, but increased significantly in 2008. For example, the average variable costs of durum in the Brown Chernozem soil zone increased slowly from $193 ha¹ in 2004 to $270 ha¹ in 2007, before increasing sharply to $387 ha¹ in 2008 (Yan et al., 2010).

Table 6. Total variable costs of crops on dryland Brown Chernozem Soil from 2004 to 2008 (constant Canadian dollars ha¹).

Crops	2004	2005	2006	2007	2008
Barley	252	203	278	239	422
Durum	193	243	242	270	387
Hard Wheat	306	300	293	302	346
Oats	283	277	293	263	292
Alfalfa	376	368	352	442	452
Canola	232	227	258	316	332
Feed Peas	113	111	66	109	171
Sources: AAFRD (20042007); AAFRD (2008).

Results

Gross Margins of Irrigated Crops

Gross margins (gross returns above variable costs) were calculated for each of the 16 major irrigated crops for each of the five years ( Table 7 ). The calculated gross margins vary greatly by crop and by year. Annual gross margins for potatoes were much higher than for the other crops. However, the area of potato production in the irrigated region of Southern Alberta was just 20,272 ha in 2008 ( Table 1 ) and similar amounts in previous years - due to limited availability of marketing contracts with the three large potato processing plants in the region. Similarly, the ability to produce sugar beets (another crop with generally high gross margins) was limited to the availability of marketing contracts with the single sugar processing firm in the region. During the period of analysis, the total area of sugar beets planted averaged 15,965 ha (Yan et al., 2010) but the total area in 2008 was just 10,127 ha ( Table 1 ).

Table 7. Gross margins, Bow River sub-basin (million constant Canadian dollars ha¹).

Crops	2004	2005	2006	2007	2008	Average
Barley	137	55	27	120	186	94
CPS Wheat^1	369	221	213	348	830	396
Durum	553	358	279	502	1,611	661
Hard Wheat	346	204	162	170	721	321
Oats	53	37	67	11	34	40
Soft Wheat	382	406	210	317	815	426
Alfalfa Hay	521	306	438	491	624	476
Barley Silage	1,005	519	951	443	112	606
Corn Silage	1,656	904	1,591	913	487	1,110
Grass Hay	344	146	263	296	399	290
Seeded Pasture	394	966	637	836	817	730
Timothy	528	712	844	868	725	735
Canola	336	121	36	299	489	256
Beans	276	663	537	422	348	449
Potatoes	2,321	3,720	2,379	1,649	1,082	2,230
Sugar Beets	714	658	353	485	251	492
Source: authors' calculations.
^1The Canada Prairie Spring (CPS) class of wheat was established in 1985 as a lower protein alternative to hard wheat, the major class of wheat grown in Canada. The CPS class is known for its medium protein, medium kernel hardness and medium dough strength properties.

The large beef industry in Southern Alberta creates a great demand for feed; this helps to explain the relatively large areas planted ( Table 1 ) and the relatively large gross margins of corn silage, seeded pasture, barley silage, and alfalfa ( Table 7 ). Most of the Timothy hay (another crop with relatively high gross margins) is cubed and exported to high price markets in Asia (principally Japan). Most of the cereal, oilseed, and pulse crops have solid gross margins (on average) with the exception of oats ( Table 7 ), which were planted on just 2,051 ha in 2008 ( Table 1 ) and are used primarily as a specialty feed for horses.

Incremental Gross Margins of Irrigation Over Dryland

The estimated total gross margins from cropping on irrigated land in each of the sub-basins for each of the five years are presented in the third column of Table 8 . These calculations are based on the area of each crop in hectares times yield times price minus total variable costs of production. The gross margins of the 16 crops in each sub-basin were then summed to obtain the total gross margins of the crops under irrigation in the irrigation districts of Southern Alberta in each of the years. The total gross margins (in real terms) on irrigated land increased from $296 million in 2004 to $336 million in 2008. From 2004 to 2007, the total gross margins on irrigated land were fairly stable, but increased greatly in 2008 due, in part, to much higher commodity prices that year. However, the total gross margins for individual crops (not shown in tables) varied throughout the five-year period. For example, the total gross margins from potatoes declined from $86 million in 2005 to just $35 million in 2008. The situation with durum and hard wheat was just the opposite, increasing from $16 and $14 million, respectively, in 2004 to $53 and $48 million in 2008.

Table 8. Incremental gross margins from irrigation by year and river sub-basin in southern Alberta (million constant Canadian dollars).

	River Sub-Basin	Gross Margins from Irrigated Production	Gross margins from Dry Land Production	Incremental Gross Margins
2004	Bow	53	6	47
	Oldman	152	36	116
	Red Deer	35	7	28
	S. Sask.	56	7	49
	TOTAL	296	56	240
2005	Bow	56	0	56
	Oldman	144	17	127
	Red Deer	35	3	32
	S. Sask.	59	3	56
	TOTAL	294	23	271
2006	Bow	46	1	45
	Oldman	138	14	124
	Red Deer	31	2	29
	S. Sask.	49	0	49
	TOTAL	264	17	247
2007	Bow	49	9	40
	Oldman	132	27	105
	Red Deer	33	6	27
	S. Sask.	50	4	46
	TOTAL	264	46	218
2008	Bow	67	14	53
	Oldman	157	52	105
	Red Deer	42	11	31
	S. Sask.	70	15	55
	TOTAL	336	92	244

If irrigation was unavailable and the presently irrigated land instead devoted to dryland crop production in a pattern that is the norm in adjacent areas, the total gross margins from cropping activities would be much lower than on irrigated land (fourth column in Table 8 ). The highest total gross margin would have occurred in 2008, due primarily to the very high crop prices that year. However, the gross margin would have been only $92 million, as compared to the $336 million on equivalent irrigated area. In 2006, the dryland crops would have produced only $17 million in gross margins, as compared to $264 million on irrigated land. Several dryland crops, including canola, feed peas and alfalfa hay would not have covered the total variable costs of production during many of those five years (not shown in tables). Gross margins from canola would have varied from a negative $1 million in 2006 to a positive $2 million in 2008. Gross margins from feed peas did not cover total variable costs of production during four of the five years and just about equaled total variable costs of production in one year (2004). However, production of cereal crops on dryland would have covered their variable costs of production during most years.

The incremental gross margins from irrigation water were defined as the difference between total gross margins on irrigated land and total gross margins if that land had not been irrigated. The incremental gross margins from irrigation cropping activities for each sub-basin for each of the five years are shown in the fifth column of Table 8 . The incremental gross margins (in real terms) were relatively stable over the five-year period, ranging from a low of $218 million in 2007 to a high of about $271 million in 2005. The Oldman River sub-basin contributed more than 45% of the incremental gross margins from irrigation in the irrigation districts of Southern Alberta.

Gross Margins and Incremental Gross Margins ha¹ and 1000 m³

The gross margins from irrigated production and incremental gross margins across the four sub-basins and the five years averaged $590 ha¹ and $495 ha¹, respectively ( Table 9 ). The gross margins ha¹ and incremental gross margins ha¹ were highest in the South Saskatchewan and Oldman River sub-basins. Gross margins ha¹ were highest in 2008 and generally lowest in 2006 and 2007. Incremental gross margins ha¹ were highest in 2005 and lowest in 2007.

Table 9. Gross margins and incremental gross margins from irrigation: $ Ha¹ hectare and $ 1000 m³ of net water diverted by year and river sub-basin.

		Gross Margins from Irrigation		Incremental Gross Margins
		$ Ha^1	$ 1000 m^3	$ Ha^1	$ 1000 m^3
2004	Bow	513	161	447	142
	Oldman	657	266	502	204
	Red Deer	493	144	395	115
	S. Sask.	636	189	546	164
	TOTAL	597	206	485	167
2005	Bow	532	262	532	263
	Oldman	623	365	550	322
	Red Deer	516	212	486	197
	S. Sask.	661	266	628	251
	TOTAL	598	295	551	273
2006	Bow	440	173	440	170
	Oldman	594	253	534	228
	Red Deer	464	166	419	153
	S. Sask.	578	176	578	176
	TOTAL	538	207	504	194
2007	Bow	475	143	388	118
	Oldman	565	261	446	207
	Red Deer	491	145	401	118
	S. Sask.	570	143	525	132
	TOTAL	534	185	441	153
2008	Bow	637	211	504	166
	Oldman	679	266	454	177
	Red Deer	619	192	457	140
	S. Sask.	785	226	616	178
	TOTAL	683	233	495	169
	AVERAGE	590	225	495	191

Also shown in Table 9 are calculations of gross margins 1000 m³ and incremental gross margins 1000 m³ of net water diverted, which averaged $225 and $190, respectively. Gross margins 1000 m³ of net water diverted were highest in 2005 and lowest in 2007. This was due mainly to the relatively low net diversions in 2005 and the relatively high net diversions in 2007 ( Table 4 ). A similar pattern emerged in the calculation of incremental gross margins 1000 m³ of net water diverted with the highest ($272 1000 m³) in 2005 and the lowest ($152 1000 m³) in 2007, though incremental gross margins 1000 m³ were not much higher in 2004 and 2008 (sixth column in Table 9 ). Gross margins 1000 m³ and incremental gross margins 1000 m³ were substantially higher in the Oldman River sub-basin in every year of the analysis, and generally lowest in the Red Deer River sub-basin.

Discussion

Irrigation plays an important role in crop production in Southern Alberta with total gross margins from crop production on irrigated land always much higher than those on an equivalent area of crop production on dryland. Furthermore, the incremental gross margins from irrigated crops in organized irrigation districts in Southern Alberta appear to be quite stable over the years, even when relatively large annual changes in farm output and input prices have occurred. During the five years of the analysis, despite sharp changes in output and input prices and fairly large changes in patterns of crop production, the average annual incremental gross margins from irrigation totaled $244 million, with the lowest during those five years being $218 million in 2007 and the highest $271 million in 2005. This is an annual average of about $495 per hectare planted and $191 1000 m³.

This study used the residual method to estimate the incremental gross margin of water on irrigated crop production. Hellegers and Davidson (2010) noted that only a small number of studies have employed the residual method. As well, the specific approach taken by the few researchers who have published the results of their studies on the incremental financial contribution of irrigation water have been different. For example, Doak et al. (2004) estimated the net contribution of irrigation to GDP at the farm gate in New Zealand to be about $920 million in 2002/03 from 475,000 ha of land, much higher than the average incremental gross margins of $244 million from about 493,000 ha found in this study. However, the New Zealand study included fruit crops (apples, kiwifruit and grapes) that are not viable in Southern Alberta, and animal production (milk, meat and venison). Any benefits that redound to the livestock industry in Southern Alberta as a result of irrigated crop production in the region were not considered in this study.

Samarawickrema and Kulshreshtha (2008) used the residual method to estimate the short run producer surplus of irrigation water on the 2004 irrigated crop areas in Alberta and Saskatchewan. They reported producer surplus from irrigated crop production in Southern Alberta of $294$376 ha¹ and the value of water (difference between short run producer surplus of irrigated and dryland crop production divided by water diverted) of $39$53 1000 m³. The results of this study showed gross margins from irrigated production of crops varied from $440$784 ha¹ and incremental gross margins varied from about $115 1000 m³ (in the Red Deer sub-basin in 2004) to $322 1000 m³ (in the Oldman River sub-basin in 2005) with an average among all sub-basins that ranged from a low of $153 1000 m³ in 2007 to a high of $273 1000 m³ in 2005 ( Table 9 ).

While Samarawickrema and Kulshreshtha (2008) found a lower short run producer surplus arising from irrigation water in 2004 than the gross margins that were found in Alberta sub-basins in this study, a number of factors could explain the differences in results of the two studies. Data used in their study were less comprehensive; for example, costs were based on budgets rather than survey data as used in this study. The Samarawickrema and Kulshreshtha (2008) study used ten-year average crop prices (19942003) as opposed to the annual 20042008 farm-gate prices used in this study. Samarawickrema and Kulshreshtha (2008) do not make clear which variable costs were deducted from total returns in their study. In this study, costs of family labour, land, taxes, water rates, licenses, insurance and depreciation on farm equipment and buildings were excluded in the calculations of gross margins, which lead to higher gross margins than if some or all of those costs were deducted. Results from this study are in line with those of Pinfold et al. (2007), though their study covered only a single year (2004) and did not disaggregate the four river sub-basins.

As discussed by Hellegers and Davidson (2010), several technical and data problems are associated with the use of the residual approach in estimating the incremental gross margin of irrigation water. An important issue is to decide exactly which costs to deduct from gross revenues in calculation of net revenues. The approach taken in this study, which is consistent with most other studies of its type, was to deduct the costs of resources that varied with the production of crops and to exclude all costs that were fixed or not priced in the market, such as land taxes, depreciation on machines and buildings, and also family labour. However, in a strict comparison of irrigated and dryland cropping systems, it could be argued that some part of the depreciation of machines and buildings should be counted, especially for specialized assets that would not be used in dryland production. Anecdotal evidence and commentaries from irrigation officials and farmers indicate that yields of irrigated crops do not vary much from year-to-year (except for small areas that are struck by hail or other localized weather or pest events) as farmers tend to adjust the amount of water they apply to their crops based on need. Water is provided free of charge to farmers in Southern Alberta (the only costs are its application on the land and a fixed, area-based tax) and is in plentiful supply (except for the extreme drought year of 2001 when one irrigation district suffered periodic shortages). As of 2011, publicly available data on yields of various irrigated crops are not available. For this study, it was necessary to rely on five-year average yield data that were provided by the provincial crop insurance agency. As a result of using average yields in this study, incremental increases in gross margins in dry years would be understated (when dryland yields would be less than average, but yields on irrigated land would not be much affected due to the ability to add supplemental water to the growing crops) and overstated in dry years (when dyland yields would be higher than average). The cost of production data also had some deficiencies due to insufficient sample sizes and apparent uneven questioning for some crops, especially the forage crops. A high priority for future research of this type in Southern Alberta should be to improve the collection of yield and cost of production data on a continuing, annual basis.

Despite these problems, results obtained in this study provide solid evidence that water used for irrigating crops in Southern Alberta has provided significant financial benefits for farmers and these benefits seem to persist over a wide range of commodity prices and farm input costs. The results also indicate that large differences exist in gross margins and incremental gross margins ha¹ and 1000 m³ of net water diverted among the four sub-basins and across years due mainly to different soil productivities, cropping patterns chosen by irrigators, input and product prices, and amounts of net water diverted in response to rainfall patterns throughout the growing season. Results from this study should be useful as irrigators, irrigation district managers and others concerned with water allocations in Southern Alberta debate changes in future water management and policy schemes. For example, He et al. (2012) recently reported that switching from existing seniority-based allocations of water to existing license holders to proportional water sharing policies in times of water shortage in the Bow River sub-basin in Southern Alberta could lead to significantly improved economic benefits. If changes are made to the amount of water that is available or how water can be used for irrigation, this will have an impact on the overall gross margins and, possibly, the distribution of gross margins to irrigators in Southern Alberta. However, this study does not provide estimates of the marginal value of water in its various uses. More carefully calibrated studies of this type are needed to inform the debate about possible changes to the management and policy changes that some groups are advocating.

No attempt was made in this study to estimate the benefits of water in uses other than cropping in Southern Alberta, the predominant consumptive use of water in that region. However, a full accounting of the benefits of water diverted for irrigation would need to include its usefulness for watering livestock, supplying water to some small villages and agri-processing businesses, and recreation.

Acknowledgements

Funding for this project was provided by the Alberta Water Research Institute, for which the authors express their appreciation. We also thank two anonymous reviewers and the associate editor of this journal for their helpful comments.