More risk, more money: When are payments for water savings from limited irrigation profitable for farmers?

Abstract

As farmers in semiarid climates seek new ways of adding value to their operations, those with irrigation water rights are increasingly receptive to payments, or credits, for water sharing. Yet, past research on the economic feasibility of limited irrigation strategies for consumptive use (CU) savings seldom considers production risk. Using stochastic dominance, we compare the effect of three limited irrigation practices—deficit irrigation, root zone drying, and early crop maturity—on the returns to corn production for sprinkler and subsurface technology. Field-level simulations show that the practices reduce returns and increase risk, but credits for CU savings could make them economically viable for farmers. Larger credits (more money) incentivize limited irrigation at greater levels (less yield and more risk), but fully compensating farmers for risk-bearing will be costly. With sprinkler technology, root zone drying becomes risk-efficient at lower credit values than deficit irrigation. Deficit irrigation along with root zone drying become risk-efficient at the lowest credit values for subsurface technology. Thus, risk aversion could explain why some farmers choose not to share water even when credits are large enough, on average, to compensate for differences in expected returns. Improved knowledge about the profitability and risk of limited irrigation practices can increase the joint sustainability of irrigated agriculture and other societal water uses.