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Comparing water options for irrigation farmers using Modern Portfolio Theory
- Source :
-
Agricultural Water Management . Dec2012, Vol. 115, p1-9. 9p. - Publication Year :
- 2012
-
Abstract
- 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. [Copyright &y& Elsevier]
Details
- Language :
- English
- ISSN :
- 03783774
- Volume :
- 115
- Database :
- Academic Search Index
- Journal :
- Agricultural Water Management
- Publication Type :
- Academic Journal
- Accession number :
- 83653247
- Full Text :
- https://doi.org/10.1016/j.agwat.2012.08.007