A Dynamic Regional Model of Irrigated Perennial Crop Production

Economic analyses of regional irrigated agricultural production typically make little distinction between perennial and annual crops despite the distinctive characteristics of perennials. Such factors include high planting costs, lags in production, long lifespan, and potentially long-lasting impacts of input use and weather shocks. This study establishes a fully dynamic model of irrigated perennial crop production in a regional context where annuals are also grown. Perennial crop area is modeled as a vintage capital stock with age-dependent yields. The model is applied to the Riverland region of South Australia to examine the possible effects of both temporary and permanent changes in water supplies and the establishment of water prices, which is then used to estimate agricultural water demand. The model demonstrates that annuals are fallowed during drought so that perennial crops may be preserved and how, due to the fixed costs of re-planting perennials, annual crops are used to smooth profits while recovering from a severe shock. In all scenarios, a very slow rate of convergence to the steady state is found, highlighting the need for models that capture the transitional dynamics of agricultural land use in areas with significant perennial production.