The estimated annual farm-gate value of crops produced and marketed from irrigated land in the 17 western states in recent years has been about $17 billion, ranging from $15 billion in 1978 to $19 billion in 1980. According to estimates for Texas, 54 percent of the value of irrigated production is used to pay for inputs and services purchased from the agricultural supply sectors.^[1] Yields from irrigated crop production provide inputs as raw materials for the livestock, food processing, fiber processing, and export sectors of the economy. Although specific estimates are not available as to the increment of production throughout the 17 western states that is due to the application of irrigation water (i.e., that part of total yield above the value of yield which could be produced on the same land if it were farmed dryland), it would appear that at least 70 percent of the value of production on irrigated lands can be attributable to irrigation and irrigation-associated inputs. Thus, without irrigation, $12 billion of unprocessed agricultural produce would not be available to the livestock, agricultural processing, and agricultural trades sectors of

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local, regional, state, national, and international economies. This amounts to 19 percent of the annual farm value of total national production of all crops. Thus, it should be clear that agricultural processing, trade, transportation, and input supply sectors, as well as consumers, have a significant stake in irrigated agriculture, and consequently should be concerned about maintaining agricultural viability in the face of declining water available for irrigation.

Research and Development[en2]Research and Development^[2]

Wide ranging opportunities for improved soil and water conservation, increased water and energy use efficiencies, and increased agricultural productivity are dependent upon further advances in agricultural research and technology development. A significant correlation exists between the level of investment in agricultural research and the gains in productivity and efficiency which exemplified U.S. agriculture until recent years.

Reductions in federal funding for agricultural research and development have only partially been offset by increased state and private research investments. A renewed and continuing priority for agricultural research and development, with emphasis on more water-efficient crops, cultural methods, irrigation technologies, soil and water conservation and related advances, is needed if U.S. agricultural productivity is to meet projected future demands for food and fiber.

Improved coordination and cooperation is needed among private and public sources of research support. Private support for research through colleges, universities, and experiment stations should be increased and continued. The business community can contribute through the continued in-house development of agricultural tools, products, and technologies both on its own and in cooperation with public research programs.

A significant research emphasis should be placed upon the development of more water-efficient varieties of principal crops and intensive investigation of new crops for adaptation to irrigated and dryland production conditions. As locally adapted plants with commercial potential are identified in the research phase, a market development strategy should be used to insure marketing success.

In addition to increased research and development to improve water management efficiency, a need exists for more large-scale

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and on-farm demonstrations of improved techniques and systems in order to accelerate their early and widespread adoption. Examples of conservation and resource use efficiency improvements that need to be emphasized are advances in water application methods and equipment, water-stress-tolerant crops and cropping systems, and conservation tillage practices. The private sector can assist in this effort by providing equipment, manpower, services, and publicity to conduct demonstrations.

An effective information capability at the local level is necessary to translate agricultural research and development advances into widespread use on farms. In addition, the local dissemination of relevant management information such as weather conditions and forecasts, soil moisture, and moisture requirements of crops for irrigation scheduling is needed. Networks in use now in some parts of the Midwest (Nebraska for example) have proven to be effective in disseminating information needed for farm operation.

More direct private and public participation in identifying resource management techniques with best potential for solving local problems will result in earlier acceptance and use of new methods, crops, and other research results. The private sector's news and information media should more adequately cover water conservation topics and explain the potential of new research. It's hard to compete with Hollywood, sensational war and murder stories, and sports, but the news media are letting the American people down in the half-hearted way water conservation, water development, and agricultural research are covered.

Agricultural research and technology development do not need a change in direction. However, a change in emphasis would be appropriate-toward greater yield per unit of input (water, fertilizer or energy), instead of maximum production volume. Continued funding by both private and public sectors is also essential. The job is not done.

Financing

Continued agricultural productivity is dependent upon economically strong and stable farms and ranches which return reasonable rates on invested capital and give fair returns to labor and management. Recent economic indicators reveal a dangerous national trend toward narrow margins of agricultural returns over costs. Without an adequate profit margin, farmers and

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ranchers cannot justify soil and water conservation. Financial incentives are necessary to facilitate the availability of investment capital and to encourage its use for purposes of soil, water, and energy conservation measures, and the long-term protection and maintenance of agricultural land and water.

Financial Institutions

Many conservation methods and facilities have complex technical requirements, high costs, and high risks. Financial institutions can increase the availability of investment capital by ensuring that loan officers, personal service bankers, and other decision makers are informed of state-of-the-art conservation and efficiency technology. New attitudes toward risk and investment are needed. For example, a tailwater recovery system does not provide the same collateral security as a piece of farm machinery, but can serve as a valuable and profitable water conservation practice.

The same requirements for state-of-the-art information are relevant for operational financing. A farmer may need to purchase more chemicals than usual in order to adopt a successful minimum tillage operation which may conserve both water and energy. Financial institutions must be aware of current research and development in order to assist the farmer in financing early adoption of effective soil and water conservation equipment, materials, and management technology.

Business Community

Agricultural service and supply businesses can also cooperate with the farmer to accelerate adoption of operational improvements. These businesses must stay informed about products, equipment, and methods which have the best potential for improving efficiency of resource use at the lowest costs. While businesses cannot be expected to invest in unproven technology, early and widespread adoption of proven products and methods is contingent, to some extent, upon availability.

Financing practices such as deferred payments and minimal-interest charges are already available from some farm equipment dealers. These types of assistance need to be made available for new water conservation management tools as they become marketable. Businesses reap benefits when aiding the farmer, in the longer term. If the farmer doesn't have a dollar, no salesman is going to have a chance to get it.

Consumers

In a specialized economy, the food supply of the nation, and to some extent foreign markets, is somewhat contingent upon a dependable, long-term supply of water for irrigation. About 19 percent of crops produced and sold in the United States come from irrigated land. Without irrigation water this production would not occur, and the price of commodities would be much higher. Thus it behooves the general public as consumers to understand that irrigation water and water conservation are extremely important to their own interests. Consumers must be willing to support public funding for water conservation research and for water supply development. The public must understand more about agricultural water problems and more about the processes for solving them.

Conclusions

The farmer, banker, and businessman are interdependent upon each other in an agricultural community. There should be greater communication among the groups in a cooperative long-range plan to maintain economic viability in the community. It is also apparent that the general public is dependent upon the agricultural community. Through communication with legislators and other elected officials, the public can greatly influence the viability of agriculture and the wise and efficient use of the nation's soil and water.

Discussion:
Marvin Duncan

(The views expressed herein are solely those of the author and do not necessarily represent the views of the Federal Reserve Bank of Kansas City or the Federal Reserve System.)

Black has written a paper which effectively presents the viewpoint of farmers. While I find much in that viewpoint to agree with, I will also try to broaden the perspective to include more macro-level considerations.

The perspective of the paper seems to be that because of the importance of farm production to the nation's food supply and to its economic activity, water should continue to be available for irrigation. In the first instance-the importance of irrigation water to the nation's food supply-it is increasingly difficult to convince consumers and policy makers that the nation's food supply is in any jeopardy as a result of marginal shifts of irrigated land out of crop production or into more extensive production. Nowhere is this more evident than in the production of food and feed grains, where carryover stocks are the largest since the early 1960s. With current policy emphasizing reductions in the acreages devoted to such crops in order to reduce the burdensome supply, the loss of water to irrigate such crops is primarily a micro-policy question relating to the economic well-being of the producers affected and the community infrastructure supporting them. Consumers have also become aware at times of excess supply problems among vegetable and fruit producers. Television news programs showing oranges being destroyed in an effort to support prices of frozen orange juice make indelible imprints on consumer audiences.

To be mounted successfully, the food supply argument must be cast in terms of future decades. In that context, a case might be made for strategic irrigation investment, both public and private.

In the second instance-the importance of food production to the nation's economy-the argument is a weak reed if the reference is to the efficiency of resource use in the national economy. Cash receipts from the sale of farm products average only about 5 percent of the final sale of goods and services in the United States each year. Indeed, the reallocation of water resources to higher value uses often enhance economic growth, at national, state, and local levels. This frequently means a partial shift of water resources away from agriculture to industrial and urban uses.

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An institutional framework for reallocating water is, of course, necessary. A market system that compensates losers and charges gainers the value of use of the water moves the economy to higher levels of economic performance.

If, however, the economic argument is directed toward a region, such as the Texas High Plains, it is on more solid ground. For without irrigation water, that area may see less economic activity as its agriculture shifts to dryland crop production or reverts to pasture land. The adjustment from intensive agriculture with high land values and a large supporting community infrastructure to extensive agriculture under dryland conditions could be painful. But it is during the adjustment period that the trauma is experienced.

Most economists and policy makers might agree that the transition could require some public investment and policy attention. It is less clear that the need for public investment in water transfer would be indicated. If such a transfer were proposed in the present environment, users would be expected to bear a significant, if not major, share of the cost.

Where interbasin transfers of water might be involved, the problems facing water users would be particularly difficult. The cost of the transfer and the institutional barriers involved are likely to be insurmountable. Those giving up the water, moreover, would have to be compensated somehow. The battle over water sales from South Dakota's Oahe Reservoir for use in coal slurry transportation in Wyoming is, I think, only an initial indication of the economic and legal problems to be resolved.

Black has emphasized the importance of agricultural research in improving the efficiency of water use and increasing agricultural production. This point is an important one. The benefits of previous investment in research have been great and are apparently cumulative, each new technological development building on previous developments. Similarly, it can be argued that reductions in public and private investment in agricultural research will, over time, have an increasingly deleterious impact on the competitive position of agriculture and on its profitability.

The emphasis Black places on making more efficient use of water and on developing crops adapted to lower quality water or smaller quantities of it is also excellent. Finally, he correctly emphasizes the importance of public and private roles in technology transfer. The public-private partnership in support of agricultural research, development, and technology transfer has been highly productive. We would ignore that record at considerable

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long-term risk to agriculture and to the American economy. Companion to this point is the need for continued investment in education. Education is the impetus for both research and technology transfer.

Several relevant issues are not addressed in Black's paper. I will now turn to some of the more important of these. The economic and the financial environment in which agricultural production occurs has changed significantly in recent years. As a result of the deregulation of financial institutions and innovations in financial markets, agricultural borrowers and lenders have been thrust rapidly and firmly into the broader U.S. financial market. Moreover, U.S. capital markets have become increasingly integrated into world capital markets. As a consequence, agriculture must now pay competitive rates for capital. In combination with national macro-economic policy and procedural changes, this new environment has resulted in more volatile and somewhat higher interest rates to farmers and to other borrowers.

The Federal Reserve System's pursuit of a monetary policy directed toward restoring price stability combines with the likely prospect of very large federal budget deficits to suggest upward pressure on interest rates throughout the 1980s. In addition to the stubborn problem of cyclical deficits that had existed previously, recent taxing and spending policies by the federal government may have created a secular deficit problem of significant size. The competition for credit from all sources may be strong enough in this decade to cause real interest rates to remain at or above the top end of their historical range of 3 to 5 percent. This would be far higher than the near-zero real interest rates of the 1970s. Moreover, austere government budgets at all levels will likely result in federal government loan funds to individuals and government units being priced at or near the cost of money to the federal government.

If these conditions prevail, public and private investment in agriculture and water development may differ from that of past decades when large long-term projects were undertaken. Public funding will be more scarce, and greater emphasis will be on private funding of projects or full payback of any public investment involved. All else equal, higher discount rates favor projects with short useful lives or those with payouts concentrated in the early years of operation. Projects with rapid payout are also more consistent with the lending activities by most private financial institutions.

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A disparity between the market discount rate and a socially desirable discount rate designed to encourage long-term investment in water development projects-or other infrastructure investments-may prevail under the circumstances outlined. Such a disparity could present a problem for public resource development policy. Resolving the problem could involve increased public investment in such infrastructure at all levels of government. However, without such a change in public policy, it seems clear that private investment in water projects, as well as investment by state and local governments, will grow as a proportion of total project costs.

At a micro-level, effective managers of borrowed capital can expect more access to agricultural loan funds in the future, partly because of the finance industry changes outlined. Lenders are apt to be aggressive in serving the credit needs of farmers, but they expect their loans to be serviced in a predictable manner. Moreover, confidence in collateral lending has been shaken by recent declines in farmland values. Thus, greater emphasis will be placed on cash flow lending. For farmers, this likely means:

1) More attention to cash flow analysis in evaluating loan proposals;

2) More performance-oriented evaluation of loan customers;

3) More knowledgeable lenders with increased specialization in institutions and in staff;

4) A greater understanding of long-term trends in agriculture by lenders and farmers; and

5) A more knowledgeable, specialized, and innovative support sector for agriculture.

On balance, farmers can look forward to ready access to credit from an increasingly efficient and sophisticated rural finance market.

Discussion:
W.D. Farr

Whatever expertise I have as a discussant of Blake's chapter comes from a practical knowledge of water and irrigation. I live in the State of Colorado where irrigated agriculture first developed. My experience comes from ownership of intensively

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cropped irrigated farms, plus cattle ranches producing hay and pasture for beef production.

Our subject is the impacts of limited water for agriculture in the semiarid West. This is not a new subject or a new problem; we westerners have faced it for a hundred years. Water for agriculture has always been limited by agriculture's ability to pay. Some areas in several states have had Bureau of Reclamation projects. These projects all had repayment contracts without interest, which was a small subsidy. However, the original farmer who signed the repayment contract had to develop raw land, build improvements, and suffer through those pioneering years. These Bureau of Reclamation projects have developed large areas into high tax-producing segments of our western economy.

The nonfederal water projects in the western states were built by mutual ditch and reservoir systems with blood, sweat, and tears and, because of a shortage of capital, always at a minimum. Eventually, if they were successful and if additional water was available, enlargements to the systems were made.

Now, as we approach the year 2000, millions of people want to move west and enjoy the climate and living conditions. These additional millions of people have direct impact on our limited water.

The impacts are many and varied and differ in each state and every river drainage. There is no uniform solution. One basic law of western water is "It must be put to beneficial use." The question finally gets down to "What is the most beneficial use?" In some areas, irrigated agriculture is not especially productive and has seldom been very financially rewarding. In that situation, the water should move to cities and industry because that is the most beneficial use.

In many places the urbanization of large areas increases runoff substantially, which adds to the water supply for downstream agricultural users. This runoff water, plus the increased volume from city wastewater treatment plants, may add nearly as many irrigated acres downstream as was lost due to urbanization upstream.

The climates of our western states vary dramatically. A few states have mild climates; others have fairly short growing seasons. Agriculture does not use water constantly the year around. Cities and industry need uniform supplies every day. With new and additional uses the whole water supply of any given river drainage must be restudied and developed to assure maximum

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use. In areas where underground water from a rechargeable aquifer is part of the supply, then the studies and developments need to combine total available water supplies. Business and financial interests need to be very much involved in plans of this kind.

Most of the water that has been developed in the western states was developed for agricultural use and hydro-power production. Now there are additional new needs for water. Most areas have some additional water that can be developed for the increased demands of industrial and urban use. These projects usually have been considered as feasible but too expensive for agricultural use. This is an area where financial and business interests can use their influence and financial resources to see that these remaining water resources be built first before agricultural water is removed from the land for other purposes.

Another area where business and financial interests can be extremely helpful is to insist that the water supplies of each area be better managed in order to assure the best usage of every acre-foot of water available each year.

In my judgment, time and economic values will settle most agricultural problems. Farmers growing high priced fruit and vegetable crops on a year around basis can pay more for water than a farmer in Colorado growing corn silage for cattle feeding.

Agriculture and irrigation helped build the West. Crops that filled the need of eastern consumers were produced. Large industries such as the beet sugar industry developed and prospered. Today it is a declining industry because food demands have changed, transportation costs have increased, and cane and fructose sugars are cheaper. Sugarbeets were a great irrigated crop, but are being forced out because of world food and money problems. Sugar is, however, just one example of the changes being forced on agriculture that actually have little to do with water.

It is obvious that every country of the world and certainly each state in the United States is being forced to study what agricultural crops can be grown in their areas to yield the best financial return. Economic barriers will influence greatly the impact of limited water. In many areas and under differing conditions, people, cities, and industry may be the better use for limited water.

Banks and other financial and business interests need to be well informed of the problems ahead, as well as committed to be part of the solution.

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Water is finite in the West. Every community, county, and state will have to make their own judgments as to how their water supply is best divided and utilized. In some areas those decisions are already on the horizon. In other areas they are still one or two generations away. But in the planning and development or redevelopment of our water resources, that is not much time. We must face these challenges and proceed in implementing programs or projects that will be in the best total interests of the citizens of our respective states.