Farm-Level Risk Management Using Irrigation and Weather Derivatives

Transfer—and a constant relative risk aversion utility function are used to examine corn irrigation strategies in Mitchell County, Georgia. Precipitation contracts are designed to help farmers manage risk. Three conclusions originate from the findings. First, the optimal irrigation strategy can greatly increase producers ’ certainty-equivalent revenue. Second, changes in water pricing policy would have a limited impact on the amount of water used. And third, across levels of risk preference, the precipitation contracts are not effective in increasing certainty-equivalent revenue or reducing cumulative water use. Key Words: irrigation risk management, water pricing policy, weather derivative contract JEL Classifications: D8, G22, Q15, Q25 Agricultural production has always been a risky endeavor, with stochastic weather con-ditions affecting farm production and revenue, and irrigation has been identified as an important risk management strategy (Boggess et al.). In Georgia, although annual rainfall is adequate for most agricultural crops, the distribution of rainfall across a year is highly unpredictable. Irrigation is extensively used in Georgia to offset the impact of rainfall variability on crop yield and to reduce the risk associated with weather variability. Recently, water scarcity has become a social and economic concern for policymakers in Georgia. Since irrigated agriculture has historically represented the largest consump-tive use in the state, a comprehensive water policy for Georgia’s future must address agricultural water demand. Simulation tools provide the opportunity to analyze water use efficiency and its impact on water scarcity (Morgan, Biere, and Kanemasu). Several studies have examined on-farm irrigation using the engineering notion of irrigation water (i.e., the ratio of water stored in the crop root zone to the total water diverted for irrigation) and have found opportunities for water savings while increasing yield (e.g.