IMPLICATION OF RISK IN IRRIGATION WATER TRANSFERS,

Irrigation farmers in the Lower Orange and Lower Crocodile rivers of South Africa were surveyed during 2003/2004 in order to study the impacts of water transfers and risk and risk aversion on resource use. Irrigation farmers in both areas appear highly risk averse as measured by the Arrow/Pratt risk aversion coefficient (especially for down-side risk). In the Lower Orange River, where water supply is fairly stable, income per cubic meter of water was an important variable in explaining water transfers. In contrast, water supply in the Lower Crocodile River is highly irregular. In the latter river, risk reduction appears to be more important in water reallocation. Results provide support for water markets. Survey data were analysed using principal components, logit and Ridge Regression. A theoretical contribution of the study is to standardise the Arrow/Pratt Absolute Risk Aversion Coefficient for scale and range of data. Policy risk and risk aversion also appear to be important in explaining expected future investment in irrigation farming in the Lower Orange River. Results show that farmers, who view water use rights as not secure, expect to invest less. The latter effect is thus amplified as farmers appear to be highly risk averse. Important policy implications are that farmers should be better informed about the practical implications of the new National Water Act and specifically water licenses