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 Type:	Refereed Article
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:	20
Deposited By:	Research Division
Deposited On:	2013-06-07
Last Modified:	2013-07-04
Downloads:	0