Fuel, crop, and water substitution in irrigated agriculture

This paper examines how changes in electricity costs can alter input use in farming and the resulting composition of output. The agricultural sectors of two states, Arizona and Colorado, are modeled using nonlinear optimization methods to estimate responses to changing relative fuel costs. Simulation results suggest that farmers respond systematically to increases in electricity costs, and do so in ways that involve three areas of change: (1) the substitution between water and other inputs; (2) the crop allocation on irrigated land; and (3) changes in the total irrigated area. For both states, higher electricity prices lead to reductions in water use, with most of these reductions accounted for by reductions in electrically pumped groundwater use, with own-price own-price elasticities on the order of -0.64 and -0.68 for Arizona and Colorado, respectively, a result comparable to estimates obtained econometrically elsewhere. The results also confirm complementarity between energy and irrigated land and substitutability between energy and dryland acreage.