Water Markets in the Lower Orange River Catchment of South Africa

Abstract

Irrigation farmers in the Lower Orange River were surveyed during October 2003 in order to study whether water marketing has promoted efficiency and to identify factors that affect future investment in irrigation farming. Econometric procedures (principal component and logit model) indicate that purchasers of water rights produce lucrative export grapes and horticultural crops with relatively less raisin, wine or juice grapes and less field crops; are more specialised in production; have more livestock (probably liquidity factor) and have a less negative view of the five-year review period. The water market has facilitated a transfer of water use from relatively lower value crops to relatively higher value crops, and also promoted the use of more advanced irrigation. An investment model using Ridge Regression indicates that the following variables are associated with future investment in irrigation farming; expected profitability, risk perception and risk aversion (Arrow/Pratt). Results confirm that farmers who are more risk averse invest less in the future as can be expected from theory. Policies that increase risk in agriculture will have a significant negative effect on future investment in irrigation. What is significant from the results is that irrigation farmers are highly risk averse (down side). Results also show that farmers who feel that water licenses are not secure expect to invest less in the future. The latter effect is thus amplified as farmers appear to be highly risk averse. This has important policy implications, and measures should be taken to improve the perceived security of water licenses. This could be achieved by keeping farmers more informed about the practical implications of the National Water Act (NWA) and specifically water licenses.

Water market transfers in South Africa: Two case studies

“…[31] The above findings are supported by a recent study in the same area [Gillett and Nieuwoudt, 2004]. In the latter study, 19 farmers who sold water and 14 who bought water were interviewed during December 2003.…”

“…Purchase prices vary significantly, indicating that there may be asymmetric information (buyers are better informed about prices than sellers). This is also the case in another river (Crocodile) where large buyers buy and rent water from many at different prices [Gillett and Nieuwoudt, 2004].…”

“…[16] Gillett and Nieuwoudt [2004] report a minimum price of R7201 (US$1 = R6.7) per ha and a maximum price of R10589 (the mean being R9276) for the area in 2002 (adjusted to 2003 rand). The minimum price for 2003 was R10,000 and the maximum was R18,000, showing the volatility in prices.…”

Water Marketing in the Crocodile River, South Africa

“…With this limited data, no comparisons between buyers and nonbuyers can be made. The median APARA coefficient for the five Crocodile River farmers measured 1.28, which was lower than the estimate of 2.44 for the Orange River Study (Gillitt et al, 2004). It is clear that irrigation farmers are risk averse, and when downside risk is measured, the farmers are more risk averse than anticipated in the questionnaire as almost all the farmers in the Crocodile study and in the Orange River study picked the most risk-averse category (an APARA coefficient of 3.28).…”

“…This study is also complementary to a recent study in the Orange River (Gillitt et al, 2004). The research objective in this study is to study whether water marketing in the Crocodile River has promoted efficiency and whether efficiency objectives are realised that were envisaged in 1999 Bate et al study.…”