Water Marketing During Droughts: the Role of Risk and Expectations in the Agricultural Water Markets

Farm production is surrounded by uncertainty. Between planting and harvesting manyrandom events such as plagues, droughts and sudden changes in commodity prices, may affectfarmers’ revenues. Agriculture in arid and semi-arid zones is highly dependent on rainfall, whichintroduces an additional risk during droughts. This research posits the hypothesis that watermanagement in agriculture during droughts strongly depends on the risks farmers face and ontheir expectations, based on past drought experiences. Specifically, it is hypothesized thatfarmers’ participation in the water spot or water rights markets are a function of their individuallevels of risk, the variability of water supply and irrigation efficiency, the type of crops grownand the severity and frequency of past droughts. To evaluate these hypotheses, data werecollected from a sample of 333 farmers in the Limarí River Valley in Northern Chile, during theunprecedented drought that took place from 1994 through 1997.

Published by Asociación de Economistas Agrarios de Chile