IMPACT OF BIOFUEL DEMAND ON WATER ALLOCATION IN THE GREAT PLAINS DEREJE B. MEGERESSA UNIVERSITY OF NEBRASKA LINCOLN

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1 IMPACT OF BIOFUEL DEMAND ON WATER ALLOCATION IN THE GREAT PLAINS DEREJE B. MEGERESSA UNIVERSITY OF NEBRASKA LINCOLN

2 BACKGROUND Concerns about availability of fuels and climate change led to the introduction of biofuel programs Impacts of these programs and the relationship between the food and fuel markets have become major topics of economic research Numerous research showed introduction of biofuel program increased commodity prices There is also a general consensus that biofuels can have a significant effect on water use and water quality

3 Water use-may not be serious issue in areas where irrigation is used as a supplement. But, there is a serious concern in areas where irrigation is the main source of water For instance, about 75% of the crops are irrigated and 61% of corn is irrigated (NE) Almost all irrigated crops in the region (NE, SD & KS) depends on the Ogallala aquifer o Examining to what extent the change in output prices driven by biofuel policy program would affect water use and its implication on Ogallala aquifer

4 LITERATURE REVIEW Studies were carried out to estimate irrigation water demand (water price & crop choice) Little research have been done to examine the effect of crop prices on water allocation Estimate from change in output prices is missing (from policy discussion and water demand literature)

5 Mullen et al (2009) examined the impact of commodity prices on water demand in the humid climate Such estimate are useful in areas where irrigation is used as a supplement. In areas irrigation is the main source of water, using such estimate is inaccurate It can not be used for prediction and policy analysis

6 OBJECTIVES To examine the impact of output and input prices change associated with biofuel feedstock production on irrigation water demand (KS, NE, &SD)

7 MODEL (QUADRATIC PROFIT FUNCTION) AT OPTIMAL LEVEL-SHADOW VALUES ARE EQUAL ACREAGE ALLOCATION MODEL WATER ALLOCATION MODEL

8 DATA State level data required for the study (from NASS & FRIS) Five major irrigated crops (Corn, Soybeans, Alfalfa, Wheat, and Sorghum) Energy expense to pump water from the wells (water price) Indicator variable added because the data came from three states

9 ESTIMATION PROCEDURE Two separate systems of equations (Water and Irrigated Acreage allocation) were fitted Each system has four equations (corn, soybeans, wheat and alfalfa) Symmetry and homogeneity restrictions were imposed prior to estimation SUR model (Zellner s estimation procedure) applied Bootstrap applied to estimate standard errors for the elasticities

10 LAND ALLOCATION ELASTICITIES (OUTPUT PRICE) CORN WHEAT SOYBEANS ALFALFA Sorghum CORN ACREAGE WHEAT ACREAGE SOYBEANS ACREAGE ALFALFA ACREAGE

11 GENERAL TREND IN ACREAGE AND PRICE IN NEBRASKA

12 GENERAL TREND IN ACREAGE AND PRICE IN NEBRASKA

13 CROP PRICE & OWN ACREAGE EFFECTS Corn Water Demand Wheat Water Demand Soybeans Water Demand Alfalfa Water Demand Crop Price (NS) (NS) Own Acreage

14 WATER PRICE EFFECTS Corn (water Price) Wheat (water Price) Soybeans (water Price) Alfalfa (water Price) Water Demand

15 CLIMATIC FACTORS EFFECTS Corn Water Demand Wheat Water Demand Soybeans Water Demand Alfalfa Water Demand Precipitation Temperature

16 CONCLUSION Producers have improved water use and management practices through time. Our findings suggest that water demand for a crop is less sensitive in drier climate because of additional cost. Result demonstrates use of water increases with higher prices, which are expected with increased biofuel demand. Biofuel policy combined with biorefineries water demand and climate change will further stress the Ogallala aquifer.

17 CONCLUSION It is vitally important to pursue policies that would encourage the sustainable management and use of the resource. Future research need to address issues that would contribute to its sustainable use: Examining whether or not producers are using the resource efficiently is useful for future intervention