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Water trading as a risk-management tool for farmers: new empirical evidence from the Australian water market

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  • Zuo, Alec
  • Nauges, Celine
  • Wheeler, Sarah

Abstract

Farmers are well known to be risk-averse. Although a considerable literature has focused on the role water markets play to allocate water more efficiently, none has explicitly studied the risk management role water markets play in irrigators’ decision making. We used a two-step empirical procedure to estimate the impacts of variability in profit and downside risk in profit on the volume of water allocation purchased and sold using an unbalanced panel data sample of 1,449 farm observations across four industries in the southern Murray-Darling Basin in Australia from 2006-07 to 2009-10. We show that farmers experiencing higher variability in profit and facing more downside risk purchase greater volumes of water allocations, and this is supported across all irrigated industry sectors (namely, dairy, broadacre, horticulture, and viticulture). There was only weak evidence found for the broadacre industry to suggest that higher variance in profit and greater downside risk drive greater volume of water allocations sold. The different findings between buying and selling water allocations are reflective of the fact that water allocation sellers represent a more heterogeneous group of farmers than water allocation buyers, and that sellers of water allocations may be more strategic in general with their farm management overall.

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Bibliographic Info

Paper provided by University of Queensland, School of Economics in its series Risk and Sustainable Management Group Working Papers with number 149885.

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Date of creation: 2012
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Handle: RePEc:ags:uqsers:149885

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Keywords: water allocation; farm management; murray-darling basin; water trading; Environmental Economics and Policy; Resource /Energy Economics and Policy; Risk and Uncertainty; Q25;

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  1. Wheeler, Sarah & Bjornlund, Henning & Zuo, Alec & Shanahan, Martin, 2010. "The changing profile of water traders in the Goulburn-Murray Irrigation District, Australia," Agricultural Water Management, Elsevier, vol. 97(9), pages 1333-1343, September.
  2. Jeffrey LaFrance & Rulon Pope & Richard Just, 2008. "Agricultural Arbitrage and Risk Preferences," Working Papers 2009-01, School of Economic Sciences, Washington State University.
  3. Wheeler, Sarah Ann & Bjornlund, Henning & Shanahan, Martin & Zuo, Alec, 2008. "Price elasticity of water allocations demand in the Goulburn–Murray Irrigation District," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 52(1), March.
  4. Glyn Wittwer, 2011. "Confusing Policy and Catastrophe: Buybacks and Drought in the Murray–Darling Basin," Economic Papers, The Economic Society of Australia, vol. 30(3), pages 289-295, 09.
  5. Marianne LEFEBVRE & Lata GANGADHARAN & Sophie THOYER, 2011. "Do Security-differentiated Water Rights Improve Efficiency?," Working Papers 11-14, LAMETA, Universtiy of Montpellier, revised Jun 2012.
  6. R. Quentin Grafton & Gary Libecap & Samuel McGlennon & Clay Landry & Bob O'Brien, 2011. "An Integrated Assessment of Water Markets: A Cross-Country Comparison," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 5(2), pages 219-239, Summer.
  7. Hughes, Neal, 2011. "Estimating irrigation farm production functions using ABARES irrigation survey data," 2011 Conference (55th), February 8-11, 2011, Melbourne, Australia 100564, Australian Agricultural and Resource Economics Society.
  8. Phoebe Koundouri & Céline Nauges & Vangelis Tzouvelekas, 2006. "Technology Adoption under Production Uncertainty: Theory and Application to Irrigation Technology," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 88(3), pages 657-670.
  9. Javier Calatrava & Alberto Garrido, 2005. "Spot water markets and risk in water supply," Agricultural Economics, International Association of Agricultural Economists, vol. 33(2), pages 131-143, 09.
  10. Stephen C. Beare & Rosalyn Bell & Brian S. Fisher, 1998. "Determining the Value of Water: The Role of Risk, Infrastructure Constraints, and Ownership," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 80(5), pages 916-940.
  11. Bell, Rosalyn & Gali, Jyothi & Gretton, Paul & Redmond, Ineke, 2007. "The responsiveness of Australian farm performance to changes in irrigation water use and trade," 2007 Conference (51st), February 13-16, 2007, Queenstown, New Zealand 9454, Australian Agricultural and Resource Economics Society.
  12. Adam Loch & Henning Bjornlund & Sarah Wheeler & Jeff Connor, 2012. "Allocation trade in Australia: a qualitative understanding of irrigator motives and behaviour," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 56(1), pages 42-60, 01.
  13. Chavas, Jean-Paul & Holt, Matthew T, 1996. "Economic Behavior under Uncertainty: A Joint Analysis of Risk Preferences and Technology," The Review of Economics and Statistics, MIT Press, vol. 78(2), pages 329-35, May.
  14. Kim, Kwansoo & Chavas, Jean-Paul, 2001. "Technological Change And Risk Management: An Application To The Economics Of Corn Production," 2001 Annual meeting, August 5-8, Chicago, IL 20605, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
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