The effect of water supply uncertainty on farmers’ choice of crop portfolio

This paper analyzes the effect of water supply uncertainty on farmers’ choice of crop portfolio. The paper presents an innovative model to estimate the value of uncertainty of water supply, and then tests the model using data from Israel. The modeling results provide support to the hypothesis that uncertainty induces farmers to prefer crops whose growth requires less agricultural capital accumulation, despite their lower profitability (agricultural capital referring to trees and other plants which take a significant period of time to mature). This is due to the risk that in a given year water supply will fall below a certain minimal level, thereby causing loss of all accumulated capital. The paper also examines a government intervention policy for mitigating uncertainty: use of reclaimed wastewater in crop irrigation as a supplement for freshwater supply. The costs associated with constructing the required wastewater reclamation and supply facilities are compared to the benefits of additional farm income earned through a more certain on-farm water supply. It is shown that under certain conditions implementation of this policy is indeed economically worthwhile.