Irrigation technology adoption and its implication for water conservation in the Texas High Plains: a real options approach

Water shortage has been a significant issue for several decades in the Texas High Plains. Agriculture has been identified as the main activity contributing to this shortage. To address this issue, many efforts have been focused on the possible adoption of sophisticated irrigation systems with high levels of water application efficiency. In this study, the entry and exit thresholds for the low-energy precision application (LEPA) system are analyzed simultaneously in cotton farming in the Texas High Plains using a real options approach. The results show that the LEPA system is profitable only when cotton price is set above $1.59/kg. The exit (entry) threshold is consistently low (high) over a range of values for parameter changes including investment cost, exit cost, variable cost, risk-adjusted discount rate, and volatility rate, so it is unlikely that farmers with irrigation systems in place would leave them easily. This implies that to attain the goal of saving water, Lubbock County needs to focus on convincing current farmers to replace old irrigation systems with new ones. JEL classification: Q14, Q16, Q2