Year of Publication

2006

Document Type

Dissertation

College

Agriculture

Department

Agricultural Economics

First Advisor

Jerry R. Skees

Second Advisor

Robert R. Reed III

Abstract

This dissertation comprises theoretical and empirical models to manage watersupply risk in irrigated agriculture. While irrigation is by itself a strategy to regulate thesupply of water for farm use, water systems that depend on surface water sources are stillsubject to the random inflows that feed their reservoirs. Depending on the size of thereservoir, the demand for irrigation, and the seasonal distribution of inflows, wateravailability may decrease to levels that severely constraint agricultural production. Thisdissertation begins with a theoretical examination of on-farm cropping decisions underwater endowment risk. However, the analysis is extended to the use of a risk-sharinginnovation to transfer the water availability risk outside an irrigation district. Specifically,the design, use, and economic feasibility of an inflow-based derivative are studied for theRio Mayo irrigation district, located in Northwestern Mexico.On the theoretical front, the analysis consists of modeling the on-farm economicsof hedging against uncertain irrigation endowments. The basic model starts by analyzingthe role of crop diversification. As expected, the firm responds to higher degrees of risk,as measured by the variance in the supply of water, by allocating less land towards thewater-intensive crops. The underlying motivation in these strategies is the need to avoidthe relatively larger reductions in productivity sustained by water-intensive cropportfolios. However, crop diversification comes at the cost of reduced profits. As analterative to crop diversification, the model is modified to study the role of an institutionthat transfers water contingent on the states of nature. The extension shows that, undercertain conditions, enrolling in such a scheme produces the same profit as undercertainty.In the empirical component of the dissertation, the economics of an inflow-basedderivative are examined. The modeling strategy consists of simulating the economicenvironment and hydrological profile of the Adolfo Ruiz Cortinez Reservoir on the RioMayo irrigation district. Specifically, a stochastic dynamic simulation model is developedthat captures the intra and inter seasonal risk aspects associated with water risk and wateruse for irrigated agriculture. The results indicate that the inflow-based derivative is aviable instrument in the terms of affordability (i.e. premiums) and yield effective incomeprotection (i.e. risk reduction).

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