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Investment in Irrigation Systems under Weather Uncertainty

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

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.

Suggested Citation

  • Heumesser, Christine & Fuss, Sabine & Szolgayova, Jana & Strauss, Franziska & Schmid, Erwin, 2011. "Investment in Irrigation Systems under Weather Uncertainty," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 114536, European Association of Agricultural Economists.
    • Handle: RePEc:ags:eaae11:114536
    DOI: 10.22004/ag.econ.114536
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    References listed on IDEAS

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    1. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    2. Erwin Schmid & Franz Sinabell & Markus F. Hofreither, 2007. "Sustainability in Practice: A Case-Study on the Reorientation of Common Agricultural Policy in Austria," Chapters, in: Uwe Schubert & Eckhard Störmer (ed.), Sustainable Development in Europe, chapter 7, Edward Elgar Publishing.
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    4. Strauss, Franziska & Formayer, Herbert & Asamer, Veronika & Schmid, Erwin, 2010. "Climate change data for Austria and the period 2008-2040 with one day and km2 resolution," Discussion Papers DP-48-2010, University of Natural Resources and Life Sciences, Vienna, Department of Economics and Social Sciences, Institute for Sustainable Economic Development.
    5. Cetin, O. & Bilgel, L., 2002. "Effects of different irrigation methods on shedding and yield of cotton," Agricultural Water Management, Elsevier, vol. 54(1), pages 1-15, March.
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    7. Tozer, Peter R., 2009. "Uncertainty and investment in precision agriculture - Is it worth the money?," Agricultural Systems, Elsevier, vol. 100(1-3), pages 80-87, April.
    8. Kiniry, James R. & Major, D. J. & Izarralde, R. C. & Williams, J. R. & Gassman, Philip W. & Morrison, M. & Bergentine, R. & Zentner, R. P., 1995. "Epic Model Parameters for Cereal, Oilseed, and Forage Crops in the Northern Great Plains Region," Staff General Research Papers Archive 894, Iowa State University, Department of Economics.
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    Keywords

    Farm Management; Risk and Uncertainty;

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