On-Farm Water Storage (OFWS) as Tool to Reduce Risk

Abstract

A stochastic benefit-cost analysis is used to analyze the profitability of irrigating from an On-farm water storage (OFWS) system using a center pivot irrigation system (CPIS) compared to a rain-fed production system for corn and soybean in the Southeast while also incorporating risk in the form of stochastic prices, yields and weather. Findings indicate that producer’s decision to invest in an OFWS is dependent on the existing rate of returns and risk aversion levels. When costs are paid up-front, net present values for irrigating from an OFWS are lower than that of rainfall when discount rates are just above 2%. Higher net present values for irrigation relative to rainfall production are realized when the cost of investment is financed rather than making an up-front payment at higher discount rates. Investing in an OFWS on small farm sizes is not a good option for risk averse producers but, under extreme risk aversion levels, decision makers may prefer to irrigate and insure their revenue at higher coverage levels than depend on rainfall. Cost assistance opportunities for crop producers to prevent downstream flow of nutrients from production fields through the use OFWS should be more than 40% to make irrigation more desirable than dryland production at 8% and 10% discount rates.