Innovation through alternative enterprises: the case of water management and producer incomes in Southwest Kansas

Abstract

The depletion of the Ogallala Aquifer presents an existential threat to the agricultural economy of southwest Kansas. Decades of conservation efforts, including improved irrigation efficiency, crop switching, and groundwater governance seem to have failed to arrest the threat. This research reframes the problem by shifting the focus from water conservation to income preservation. It assesses the economic feasibility of producing hydroponic greenhouse tomatoes in an area without a history of such production with the objective of preserving historical farm incomes. The empirical analysis was benchmarked against the 2000 to 2024 average net farm income of about $148,000 generated solely from crop production on a typical farm of approximately 1,467 acres in southwest Kansas. The typical farm size is the average of the average acreage in corn, wheat, soy, and sorghum production across southwest Kansas. Although net farm incomes and the Ogallala Aquifer were under severe pressure in the study area during this period due to extensive and intensive droughts, the study’s approach shows the scalability of the income equivalence strategy to the problem. The study shows that about 0.4 acre (17,504 ft²) of greenhouse, tomato price and yield of $2.31/pound and 15.44 pounds/ft², and total variable and fixed cost of $1.36/pound produced the benchmark net farm income. While tomatoes use a lot more water per acre, its production conditions in this study consumed less than one basis point (0.01%) of irrigation water currently used to produce the benchmark net farm income. The technical results above were shown to be economically feasible results under base scenario conditions of 20 years and 8.0% discount rate. The net present value (NPV) was $706,705 and the internal rate of return was 12.9%. The payback period was under 7.4 years, and the benefit-cost ratio was about 1.2%. The project’s economic feasibility was quite robust to tomato price and yield risk, indicating that the project is not economically feasible if these two variables decrease above approximately 17% of their base value. This is equivalent to a price of $1.92 and a yield of 12.8 pounds. The Monte Carlo simulation yielded an average NPV of $635,940, a median of $607,990, and a probability of viability of 58%. The 5% Value at Risk (VaR) for the 20-year NPV is about −$4.03 million, implying less than 5% risk of discounted cumulative losses from the project exceeding $4.0 million. On the other hand, the 95% VaR for the 20-year NPV is $5.30 million. These tail analyses notwithstanding; the Monte Carlo simulations indicated a 42% probability of negative NPV versus a 58% probability of a positive NPV. The research shows that it is economically feasible to produce an alternative crop in southwest Kansas using a novel technology that can preserve net farm incomes while saving a substantial volume of irrigation water. However, the 42% risk of loss over 20-years and base scenario parameter assumptions under the Monte Carlo simulation analysis call for implementation of downstream risk management strategies – supply management, strategic alliances, and value addition to extend shelf life – cannot be ignored if preserving farm incomes while simultaneously conserving the Ogallala is going to a viable solution in Southwest Kansas.