1

Attachment 1

Estimate of Nebraska’s Cost of Compliance with the Republican

River Compact for the Water-Short Year 2006

Report

Dr. Bill Golden

Dr. Terry Kastens

Dr. Kevin Dhuyvetter

Dr. John Leatherman

Dr. Allen Featherstone

Dr. Tom Johnson

April 21, 2008

2

This report provides estimates of the economic costs that the state of Nebraska would have

incurred had the state taken the necessary steps to achieve compliance with the terms of the

1943 Republican River Compact and the May 19, 2003 Final Settlement Stipulation for the

Water-Short Year 2006 (averaging years 2005 and 2006). Put another way, the costs

computed here can be viewed as the benefits acquired by Nebraska for not being in

compliance. Note that this analysis considers only actions necessary to meet the Water-Short

Year test for 2006.

In a letter from the Kansas Department of Agriculture to the Republican River Compact

Administration dated December 19, 2007, Kansas outlined its remedy for Nebraska noncompliance

with the Final Settlement Stipulation. This included the shutdown of wells irrigating

514,610 acres. However, in the short run, Nebraska would have been able to meet the Water-

Short Year test for 2006 through the purchase of surface water and a lesser reduction in

groundwater acreage. Hence, the cost analysis employed here considers purchasing all

available surface water in Nebraska in 2005 and 2006, and then balances out the additional

requirements with groundwater shutdowns. This scenario for Water-Short Year 2006

compliance assumes groundwater pumping is stopped on 140,858 and 121,332 irrigated acres

in 2005 and 2006, respectively. This represents an area approximately one-half mile either side

of the river (Book, 2008).

This scenario to achieve compliance for Water-Short Year 2006 will have a lower cost to

Nebraska than the long-run proposal that requires considerably more acres to be retired.

However, it also should be pointed out that this short-run estimate likely will not bring Nebraska

into long-run compliance and thus the cost estimate provided here should be viewed as a shortrun

least cost solution. For example, in a future dry year, there may not be enough surface

water to purchase to make up the difference had only an average of 131,095 irrigated acres

been retired in 2005 and 2006.

The difference in irrigated and non-irrigated cash rents on land is a measure of the direct and

easily observable impact of turning irrigated land into non-irrigated land. But, it generally is

understood that economic impacts emanate beyond that which can be observed directly. This

is due to the interconnected nature of the economy. Businesses buy from and sell to other

businesses. Labor earns wages and salaries, and proprietors earn profits that are used to

purchase household goods and services. Thus, when an economic change occurs, it sets in

motion a “ripple” effect that impacts interlinked economic sectors elsewhere in the economy.

This means that the overall economic effect is greater than the direct effect by some increment

of value. This is more commonly known as the multiplier effect. By estimating the size of the

multiplier effect, it becomes possible to determine the magnitude and direction of the indirect

and induced (together referred to here as simply indirect) economic effects that are known to

accompany the observable direct economic changes. Impact Analysis for Planning (IMPLAN)

software was used to calculate the multiplier effect and estimate the direct and indirect impacts

of groundwater retirement on value added to the economy.

3

Change in crop revenue between irrigated and non-irrigated land is an input required of our

IMPLAN analysis. For that number we used the $217 per acre number provided in table 4 of

Supalla et al. (2006), who have computed an economic analysis of Nebraska irrigation in the

Republican River Watershed in 2006. Starting with that $217 per acre difference in crop

revenue, our IMPLAN analysis derived a total (direct and indirect) impact to value added (a

broad measure of total income and, thus, total state economic welfare) of $180.20 per acre.

Supalla et al. (2006) reported a measure of direct impact of $82/acre (from table 2 in their

report). Hence, this suggests a multiplier of 2.1976 (i.e., 180.20/82) to go from direct to total

impacts. In this report we use the difference in irrigated and non-irrigated land rent as a

measure of direct impacts, and subsequently use the multiplier to arrive at indirect or total valueadded

economic impacts.

Based on runs from the hydrologic model underlying our analysis, surface water purchased by

Nebraska to achieve compliance in 2005 and 2006 could not be delivered to the farm gate in

Nebraska for use there by Nebraska’s irrigators. Measured at the farm gate, 14,300 acre-feet in

2005 and 32,700 acre-feet in 2006 would not have been available to Nebraska farmers (see

Book, 2008 table 5).

Using the differences between irrigated and non-irrigated land rent as the measure of economic

cost requires an estimate of irrigation inches applied per acre to convert acre-feet of water at the

farm gate to acres of irrigated production. Based on average irrigation amounts for the affected

counties, it was assumed that 11.71 and 11.47 inches of irrigation water were applied per acre

per acre of land, for 2005 and 2006, respectively, whether associated with stopped

groundwater pumping or unused surface water. Because it is assumed that wells near the river

are shut down, we assume lost surface water usage cannot be made up with groundwater

pumping in areas affected.

A 3.41% annual interest rate is used to adjust all time-based dollar values to the present, which

“owe” Kansas in 2008 for its being out of compliance in only the years 2005 and 2006.

Table 1 shows rent values used in this analysis and the average number of irrigation inches

applied in the 22-county area of the Republican River Basin. For example, the direct impact of

stopping groundwater pumping on one acre in 2006 would be $85.20. Likewise, giving up one

acre-foot of water equates to a direct impact of $89.14 per acre given 11.47 inches of irrigation

water (0.956 acre-foot) applied per acre of land.

2006 climatic conditions. This run is detailed in section 2a of the March 11, 2008 Kansas City RRCA

meeting information provided by Nebraska.

2007.

4

The total (direct and indirect) cost associated with retiring 140,858 acres of irrigated land in

2005 and 121,332 acres in 2006 is estimated to be $53,081,441 in 2008 dollars (Table 2).

These retired acreages are based on the assumption that the maximum amount of surface

water available would have been purchased, thus making it unavailable to Nebraska producers.

This reduction in surface water would have been a total of 47,000 acre-feet (see Book, 2008

table 5), which is estimated to have a total cost, in 2008 dollars, of $9,844,763 over the 2005

and 2006 years (Table 3). Thus, the total cost to Nebraska of being in compliance under this

short-run scenario for the two-year period (2005 and 2006) is $62,926,203.

This report provides estimates of Nebraska’s economic gains due to non-compliance with the

Compact for Water-Short year 2006. It does this by estimating the economic costs that the

state of Nebraska would have incurred had the state taken the necessary steps to achieve

short-run compliance with the terms of the 1943 Republican River Compact and the May 19,

2003 Final Settlement Stipulation for this test of compliance.

Kansas has proposed a long-run solution for Nebraska to reach compliance that would require

retiring 514,610 acres from irrigated production. Because Nebraska could come into

compliance with this particular test of compliance with lesser groundwater acreage reduction, an

alternative was considered for this analysis. However, it is important to recognize that the

scenario considered here likely would not bring Nebraska into long-run compliance. This

scenario assumed Nebraska would purchase the maximum amount of surface water possible so

as to minimize the amount of acres irrigated with groundwater that would have to be retired.

The 2005 and 2006 cost for this scenario was estimated as $62,926,203.

The estimate of Nebraska’s gains provided by this report involves remedies predicated on

reduced groundwater pumping and reduced surface water usage. The number of acres

presumed transformed from irrigated to nonirrigated crop land, and the quantities of required

surface water reductions, were provided to the economics team (Book, 2008). Other

combinations of reduced groundwater usage and/or surface water reductions would yield other

estimates of Nebraska’s gains.

5

Book, D.E., “Analysis of Measures That Would Have Been Required by Nebraska to Achieve

Water-Short Year Compliance with the Republican River Compact in 2006.” Report to David

Barfield, Kansas Department of Agriculture, Division of Water Resources. April 18, 2008.

Johnson, B., Cornhusker Economics, “Nebraska Farmland Values and Cash Rents Rise

Sharply.” March 19, 2008 (and previous issues).

Minnesota IMPLAN Group, Inc. (MIG), 1999. IMPLAN Professional Software, Analysis, and,

Data Guide, Minnesota IMPLAN Group, Inc., 1725 Tower Drive West, Suite 140, Stillwater, MN

Supalla, Raymond, T. Buell and B. McMullen. 2006. “Economic and State Budget Cost of

Reducing the Consumptive Use of Irrigation Water in the Platte and Republican Basins”,

Department of Agricultural Economics, UNL. August 21, 2006.

April 21, 2008).

6

Year Irrigated Nonirrigated Difference Inches/acre2 Ac-ft/acre Diff/ac-ft3

2003 $122.20 $42.00 $80.20 15.99 1.333 $60.19

2004 $125.20 $44.00 $81.20 13.25 1.104 $73.54

2005 $128.10 $44.00 $84.10 11.71 0.976 $86.18

2006 $126.70 $41.50 $85.20 11.47 0.956 $89.14

2007 $137.40 $45.00 $92.40 n/a n/a n/a

2008 $164.90 $54.50 $110.40 n/a n/a n/a

2 County-level pumping amounts by year data provided by Nebraska.

3 Diff/ac-ft is the rent difference per acre adjusted to reflect one acre-foot of water.

1 Based on the average of the South and Southwest regions, where each region is a weighted average of center

pivot (80%) and gravity irrigation (20%). Source: Johnson

Rent Direct Indirect Total Adjusted Cost/Ac-Ft

Year Acreage Difference Costs Costs Costs Total Costs1 Gained2

2005 140,858 $84.10 $11,846,158 $14,186,894 $26,033,052 $28,788,080

2006 121,332 $85.20 $10,337,486 $12,380,117 $22,717,604 $24,293,361

Total $53,081,441 $1,171

1 Adjusted to reflect costs in 2008 dollars.

2 Based on a total of 45,316 ac-ft of surface water gained over this time period valued at the farm gate.

Acre Foot Value per Direct Indirect Total Adjusted Cost/Ac-Ft

Year Shortage Acre Foot Costs1 Costs Costs Total Costs2 Purchased

2005 14,300 $86.18 $1,232,413 $1,475,931 $2,708,345 $2,994,964 $209.44

2006 32,700 $89.14 $2,914,776 $3,490,720 $6,405,496 $6,849,799 $209.47

Total 47,000 $4,147,189 $4,966,651 $9,113,841 $9,844,763 $209.46

1 Based on acre-foot shortage and the value per acre foot derived from rent differences (Table 1).

2 Adjusted to reflect costs in 2008 dollars.