Risk Management for Arable Farms: Irrigation and Weather Derivatives

With the Water Framework Directive (WFD), the European Union has established a legal framework for the protection of all aquatic ecological systems including groundwater. In this paper the economic impacts of the WFD for irrigated agriculture with regard to the reduction of water withdrawal permits and various scenarios are analyzed. The results show that decreasing water permits cause decreasing total gross margins and increasing risks. To handle these additional risks, weather derivates are a proper tool, but they cannot fully compensate the losses of total gross margins. The paper illustrates the potential of an IT-based whole farm risk programming approach that helps farmers to manage a portfolio of more or less risky activities in due consideration of their level of risk acceptance.