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Water Resources Management

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01-09-2012

Investment in Irrigation Systems under Precipitation Uncertainty

Published in: Water Resources Management | Issue 11/2012

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Abstract

Efficient agricultural water management is indispensable in meeting future food demands. The European Water Framework Directive promotes several measures such as the adoption of adequate water pricing mechanisms or the promotion of water-saving irrigation technologies. We apply a stochastic dynamic programming model (SDPM) to analyze a farmer’s optimal investment strategy to adopt a water-efficient drip irrigation system or a sprinkler irrigation system under uncertainty about future production conditions, i.e. about future precipitation patterns. We assess the optimal timing to invest into either irrigation system in the planning period 2010 to 2040. We then investigate how alternative policies, (a) irrigation water pricing, and (b) equipment subsidies for drip irrigation, affect the investment strategy. We perform the analysis for the semi-arid agricultural production region Marchfeld in Austria, and use data from the bio-physical process simulation model EPIC (Environmental Policy Integrated Climate) which takes into account site and management related characteristics as well as weather parameters from a statistical climate change model. We find that investment in drip irrigation is unlikely unless subsidies for equipment cost are granted. Also water prices do not increase the probability to adopt a drip irrigation system, but rather delay the timing to invest into either irrigation system.

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Due to the complex geological genesis of the Vienna Basin, about 312 soil types can be differentiated in Marchfeld (Anonymous 1972). These have been grouped into five soil clusters, according to the amount of total available soil water capacity in 1.2 cm soil depth and humus content in the topsoil (BFW 2009).

In this section, profits for an irrigation system are calculated for the case that the irrigation system is switched on. This implies that it is used optimally throughout the year. Optimal use is determined endogenously by the EPIC model (cp. section 2.2.).

We use mean commodity prices in our analysis as we concentrate on the effects of weather uncertainty on crop yields and consequently profits, and not market uncertainty. OECD-FAO (2011) suggests that agricultural commodity prices are likely to remain higher during the next 10 years compared to the previous decade with a risk of upside price volatility. The authors also state that yield induced fluctuations in production have been a prime source of international price volatility. They suggest that weather-induced variations in crop yields could become an even more critical driver of price volatility in the future. To account for a higher level of prices, we use average commodity prices of the years 2005–2009 (Statistics Austria), in which the price hike of the year 2008 is accounted for.

Although the production of corn results in relatively high dry matter crop yields on both soil types, it yields relatively low average profits compared to, for instance, carrots production which has a relatively low dry matter crop yield but yields high average profits. Amongst others, this difference in profits can be explained by varying revenues, a product of fresh matter crop yields and commodity prices. Corn has a low dry to fresh-matter conversion coefficient of 1.17 and a relatively low average commodity price of 121.8 €/t. In contrast, dry to fresh matter crop yields of carrot production are converted by a factor of 8.3 and subject to commodity prices of 236 €/t.

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Title: Investment in Irrigation Systems under Precipitation Uncertainty
Publication date: 01-09-2012
Published in: Water Resources Management / Issue 11/2012
Print ISSN: 0920-4741
Electronic ISSN: 1573-1650
DOI: https://doi.org/10.1007/s11269-012-0053-x

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