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Comparing water options for irrigation farmers using Modern Portfolio Theory

journal contribution
posted on 2023-05-17, 18:13 authored by Gaydon, DS, Holger MeinkeHolger Meinke, Rodriguez, D, McGrath, DJ
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.

History

Publication title

Agricultural Water Management

Volume

115

Pagination

1-9

ISSN

0378-3774

Department/School

Tasmanian Institute of Agriculture (TIA)

Publisher

Elsevier B.V.

Place of publication

Po Box 211, Amsterdam, Netherlands, 1000 Ae

Rights statement

Crown Copyright 2012

Repository Status

  • Restricted

Socio-economic Objectives

Assessment and management of benthic marine ecosystems

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