Investment in Irrigation Systems under Weather Uncertainty

Christine Heumesser, Sabine Fuss, Jana Szolgayova, Franziska Strauss and Erwin Schmid

No 114536, 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland from European Association of Agricultural Economists

Abstract: Irrigated agriculture will play a crucial role to meet future food demand, but a sustainable water resource management in agriculture is crucial as well. Therefore, the European Water Framework Directive promotes several measures, e.g., the adoption of adequate water pricing mechanisms or the promotion of water-saving irrigation techniques. Since production conditions such as weather and climate development are uncertain, farmers might be reluctant to invest in a water-saving but capital intensive irrigation system. We apply a stochastic dynamic programming approach to analyze a farmer’s optimal investment strategy for either a water–saving drip irrigation system or sprinkler irrigation system under weather uncertainty and assess the probability of adopting either irrigation system until the year 2040. We design two policy scenarios: (i) irrigation water pricing and (ii) equipment subsidies for drip irrigation, and investigate how they affect the farmer’s optimal investment strategy. Our case study analysis is performed for the region Marchfeld, a typical semi-arid agricultural production region in Austria. We use data from the bio-physical process simulation model EPIC (Environmental Policy Integrated Climate) which accounts for 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. Even water prices do not increase the probability to adopt a drip irrigation system, but rather decrease the probability to invest into either irrigation system.

Keywords: Farm Management; Risk and Uncertainty (search for similar items in EconPapers)
Pages: 11
Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:ags:eaae11:114536

DOI: 10.22004/ag.econ.114536

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