Risk‐efficient portfolio crop choice with amended water and irrigation policies in northern Germany

Abstract

Purpose -Increasing environmental concerns have placed the need for an enhanced water resources management on the policy agenda. In this context, a restrictive regulation of water withdrawals for irrigation has gained in importance. The purpose of this paper is to investigate how a reduction in water quotas and increased water prices affect risk-efficient crop choices and the related economic implications for northern German farmers. Design/methodology/approach -The authors apply a whole-farm risk programming approach to a typical arable farm in northern Germany. By using irrigation field trials, production activities with varying irrigation intensities and inherently incorporated crop yield uncertainty are defined. Findings -In contrast to increased water prices, a reduction in water quotas leads to higher water savings and lower economic disadvantages for farmers. Due to an adjusted portfolio crop choice, as well as irrigation intensity, the reduction in the expected total gross margin is partially offset. Research limitations/implications -This example ensures volumetric water monitoring at the farm level which, however, remains a major pitfall in many other countries. From a methodological perspective, the crop yield distribution choice might affect the findings. Likewise, the consideration of downside risk in an irrigation context appears to be interesting for future research. Originality/value -This is the first paper to compare the implications of differentiated water quotas and water pricing schemes suggested by the European Water Framework Directive, while taking risk-efficient crop portfolio considerations into account. This approach facilitates water reallocation not only between crops, but also in terms of the crop-specific irrigation intensity. Crop yields are based on a unique panel of micro data rather than expert opinions or simulations.

The role of weather derivatives and portfolio effects in agricultural water management

“…Moreover, crop yield variability appears to increase involving further risks for farmers (Finger 2012;Garrido et al 2006). In order to mitigate the economic disadvantages caused by restrictive water and irrigation policies, farmers may reallocate the available irrigation water between crops, adjust the crop-specific irrigation intensity or alter crop portfolios to better balance risks (Buchholz and Musshoff 2013).…”