Mitigating water shortages in a multiple risk environment

This paper estimates the economic value of irrigation water shortfalls and mitigation responses of farmers in the Lower Rio Grande Valley of Texas. The water shortage levels closely correspond to supply shortfalls experienced by the U.S. during the 1990s when Mexico fell behind on treaty delivery obligations. We identify and evaluate a range of crop choices, appropriate irrigation technology use, water source substitution, and other mitigation strategies used by farmers to deal with water shortages. The effects of exogenous crop price and yield risk, as well as other structural considerations are incorporated in the estimation of the marginal value of irrigation water. Results show that South Texas farmers react to risk by diversifying their crop mix, with implications for the imputed value of water and soil resources. The inclusion of exogenous risk refines the prediction of what decision makers would have grown assuming strict Mexican treaty compliance. The resulting marginal values reflect grower adjustments for risk using crop mix, irrigation level, and irrigation technology. The aggregate damage estimates using this approach are realistically smaller than previous damage estimates that were based on fixed cropping patterns and average water values.