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Biofuel Economics: Role of Irrigation in Growth of Biofuel Energy

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Cole Gustafson, NDSU Biofuels Economist Cole Gustafson, NDSU Biofuels Economist
In my forecast of new demand for North Dakota acreage to meet the federal biofuels mandate, I assumed demand for irrigated cropland would grow on par with dryland acreage.

By Cole Gustafson, Biofuels Economist

NDSU Extension Service

In several past articles, I described the 2007 Energy Independence Security Act and its implications for crop acreage demand, energy independence and the growth of North Dakota’s agriculture.

One question I received following this series was from Jerry S. with the North Dakota Irrigation Association. He wondered if I had fully accounted for the role irrigation could play in the development of North Dakota’s biofuels industry. His question has several dimensions that I would like to address this week.

In my forecast of new demand for North Dakota acreage to meet the federal biofuels mandate, I assumed demand for irrigated cropland would grow on par with dryland acreage. If the growth of the biofuels industry results in greater profitability per acre, demand for both dryland and irrigated acreage will increase. Therefore, additional land of both will be brought into production until that point when the economic returns are no longer positive. Initially, the growth of the biofuels industry won’t favor either irrigated or dryland producers. However, this balance could change, depending on future incentives.

As the biofuels industry continues to evolve, it is likely that biofuels will become an increasing share of liquid fuels utilized for irrigation. In the general economy, it is estimated that biofuels have reduced the cost of gasoline by 30 to 40 cents a gallon. If the costs of irrigation decline due to the greater availability of lower-cost biofuels, more acres of land will be irrigated relative to dryland production.

In addition to biofuels, irrigation costs also might decline if electricity becomes more affordable because of an expansion of wind, hydrogen, coal or nuclear energy sources.

However, evaluating the growth potential of irrigation simply on the basis of profit misses an important potential contribution. In addition to lowering energy costs, the general public also places great value in reducing energy price spikes or variability. Generally, irrigation lowers crop production risks. Consequently, irrigated crops produced for biofuels production could result in a more stable supply of feedstocks for biofuel plants. Eventually, this would stabilize both biofuel supplies and prices.

It is conceivable that feedstocks produced under irrigation could command premium prices. More stable feedstock supplies could enable biofuel plants to enter into longer-term marketing contracts for products that are more profitable. Premiums for irrigated production already exist in many specialty crops because of this advantage.

Another way this market premium could evolve would be through the biofuels tax credit with differential payments, depending on whether the feedstock was raised under irrigation. Fuel blenders utilizing irrigated feedstock could be eligible for a larger tax credit because their supply is more stable.

However, expanded irrigated production of biofuel feedstocks likely would face a number of challenges from environmentalists and other water users. In many regions, water is still a very scarce resource, so at least some people would question whether irrigated biofuel feedstock production is the highest and best use of our nation’s water resources.


NDSU Agriculture Communication

Source:Cole Gustafson, (701) 231-7096, cole.gustafson@ndsu.edu
Editor:Rich Mattern, (701) 231-6136, richard.mattern@ndsu.edu
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