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Comparing water options for irrigation farmers using Modern Portfolio Theory

Citation

Gaydon, DS and Meinke, H and Rodriguez, D and McGrath, DJ, Comparing water options for irrigation farmers using Modern Portfolio Theory, Agricultural Water Management, 115 pp. 1-9. ISSN 0378-3774 (2012) [Refereed Article]

Copyright Statement

Crown Copyright 2012

DOI: doi:10.1016/j.agwat.2012.08.007

Abstract

For irrigation farmers, the deregulation of water markets and consequent emergence of water as a tradeable commodity calls for a method of comparing traditional on-farm water options (growing crops) with off-farm market options (selling water seasonally, or selling water licences permanently). The option to diversify farm income in this way is a desirable future adaptation strategy in response to decreased and more variable water supplies. We demonstrate a method for comparing such options based on their risk-return characteristics. A framework commonly used in the finance sector is adapted to agricultural water decisions, and illustrated using a case-study farm from Australia's Riverina region. In our example, a range of potential farm management practices are examined for several future water availability scenarios, and then compared with a fixed-return option (selling water entitlements to the Australian Government's current water buy-back scheme). We demonstrate how the attractiveness of the scheme for farmers depends on future water availability levels. For any future allocation level, the best way to use water on-farm varies with the value of the fixed-return option. The farmer's decision on what portion of their water entitlement to sell provides them with the opportunity to tailor their operation's risk-return performance. This method is universally applicable wherever there is a mix of variable and fixed-return options, and offers a framework to assist farmers in conceptualizing comparisons between traditional on-farm uses for water and newer, market-based options.

Item Details

Item Type:Refereed Article
Keywords:irrigation, farming systems modeling, Modern Portfolio Theory, efficiency frontier
Research Division:Agricultural and Veterinary Sciences
Research Group:Crop and Pasture Production
Research Field:Agronomy
Objective Division:Environment
Objective Group:Ecosystem Assessment and Management
Objective Field:Ecosystem Assessment and Management of Fresh, Ground and Surface Water Environments
Author:Meinke, H (Professor Holger Meinke)
ID Code:84970
Year Published:2012
Web of Science® Times Cited:10
Deposited By:Research Division
Deposited On:2013-06-07
Last Modified:2013-07-04
Downloads:0

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