IWRA Proceedings

AbstractVariability in crop yields due to stochastic weather events impacts the profitability of farming activities. Farmers adopt a wide array of strategies to manage risk, from investments in risk-reducing practices and technologies to financial instruments such as crop insurance. Irrigation is often used to supplement erratic or insufficient rainfall: it is expected both to increase yields and to decrease their variability. However irrigation comes at a cost: financial costs are born by farmers who need to pay for irrigation equipment, maintenance and pumping. There are also social costs in regions where water is scarce and could be allocated to more profitable uses from the viewpoint of society. An analysis of French farms accounts shows that in a number of regions cultivating irrigated maize, the gain in yields is often offset by irrigation costs. In other words, the expected net revenue is only marginally improved by irrigation. The massive recourse to irrigation, in such case, can only be explained by: (i) the Common Agricultural Policy additional premia paid to irrigated farms. This was true until 2005. However they are now being progressively phased out and are not anymore an explanatory factor; (ii) the role that irrigation plays in the farmer’s risk management strategy. We wish to investigate in more depth the latter point. In particular, we want to assess to what extent irrigation contributes to reduce the risk of exceptional big losses (also called downside risk exposure), compared to other risk-reducing technologies, and what are the risk preferences of farmers. Such analysis could then be useful to help designing other ways of managing farming risks – ie through a carefully designed insurance system or through a more generous natural disaster national fund. It would allow then to redirect irrigation water to more essential uses, which is crucial in the context of global warming and increased weather instability. We analyse farm-account data of a sample of crop farms in France over the period 2002 to 2005. We use a flexible moment- based approach to estimate farmers’ risk preference and to analyse the impact of irrigation on the mean, variance and skewness of yields and farm profits for different types of crops (mainly maize and wheat). We show that irrigation has a beneficial effect on the distribution of yields and profits: it decreases the variance and reduces the skewness. Our results indicate that irrigation is a tool to reduce downside risks. Based on these results, we can also measure how risk-averse farmers actually are, by calculating the average risk premiums for different types of farmers. Overall, we can confirm that farmers use irrigation to reduce the risk of undergoing potentially big losses. This may indicate that farmers do not have access to other –more efficient and less environmentally costly – instruments to manage risks. It is planned to conduct a follow-up survey with farmers to test the robustness of our results and assess the feasibility and acceptability of other risk management tools, such as insurance contracts, allowing farmers to get equivalent coverage against downside risks and reducing at the same time irrigation water consumption.