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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 |
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Keywords: | irrigation, farming systems modeling, Modern Portfolio Theory, efficiency frontier |
Research Division: | Agricultural, Veterinary and Food Sciences |
Research Group: | Crop and pasture production |
Research Field: | Agronomy |
Objective Division: | Environmental Management |
Objective Group: | Marine systems and management |
Objective Field: | Assessment and management of benthic marine ecosystems |
UTAS Author: | Meinke, H (Professor Holger Meinke) |
ID Code: | 84970 |
Year Published: | 2012 |
Web of Science® Times Cited: | 21 |
Deposited By: | Research Division |
Deposited On: | 2013-06-07 |
Last Modified: | 2013-07-04 |
Downloads: | 0 |
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