Using a Crop Simulation Model to Understand the Impact of Risk Aversion on Optimal Irrigation Management

We studied optimal irrigation management by risk-averse farmers with different soil types under limited well capacity. Our modeling framework allowed us to assess the optimal adjustment along the intensive margins (i.e., changes in seasonal irrigation depth) and along the extensive margins (i.e., changes in irrigated area). Our empirical application uses AquaCrop to simulate corn yields with historical weather in southwest Kansas under a large number of potential irrigation strategies. We show that risk aversion significantly increases total water use, especially for low and medium well capacities. While farmers decreased irrigated area due to risk aversion, the increase in water use occurred because it was optimal to increase the seasonal irrigation depth to reduce production risk. The increase in seasonal irrigation depth arises mostly from reduced management allowable depletion (MAD) levels in the initial crop growth stages of corn. Counterintuitively, risk aversion had a smaller impact on water use for a soil with a smaller soil water holding capacity. This result arises because optimal irrigation under risk neutrality is larger for soils with a smaller water holding capacity. Our results highlight the importance of accounting for risk aversion when estimating the optimal irrigation management strategy and show that the impact of risk aversion differs significantly by well capacity and soil type.