Risk and the Demand for Supplemental Irrigation: A Case Study in the Corn Belt

Rapid increases in irrigated acreage in the Corn Belt states during recent years have renewed interest in the associated questions of water resource management and the economic feasibility of supplemental irrigation. Corn plant growth and the associated grain yield is particularly sensitive to moisture stress during pollination (June or July), when soil moisture is especially variable. By reducing moisture stress in these periods, supplemental irrigation can increase and stabilize corn yields. The focus of most economic feasibility studies of irrigation has been to compare the increases in crop revenues to the costs of irrigating-a cost-benefit approach. It has been suggested, however, that stability of yields, and thus the reduction of risk, should be considered among the benefits from irrigation (Carson, Wheaton, Mannering). Although cost-benefit studies have been used to explain the rapid adoption of irrigation in humid areas by exploring the impacts of prices, costs, and technology changes; no thorough analysis has been made of the impact of risk aversion on the demand by farm firms for supplemental irrigation. This study evaluates the implications of risk aversion for the derived demand for supplemental irrigation of corn using a case study approach.