An agro-economic approach to framing perennial farm-scale water resources demand management for water rights markets

Abstract Water rights and corresponding markets work to address water scarcity by establishing tradable, limited-access permits to water resources. Under certain water rights law, rights holders face uncertainty in terms of right allocation value, which is set annually based on reservoir storage, expected inflow, and expected future conditions. Such is the case in the Elqui Valley, Chile, where the economy is driven by agriculture, which requires water rights to ensure profitable yields due to a mismatch between the season of precipitation (May-August) and growing season (September-April). Perennial crop farmers address allocation uncertainty by securing additional water. A farm-scale agro-economic demand modelling framework is developed which utilizes the temporary transferability of rights to describe how grape famers may engage optimally in water markets to maximize annual profits (2000–2015), and produces an upper bound on grape farmer price negotiation space for desired allocation transactions. The results show grape farmers holding 1.0 and 2.25 water rights per-hectare could increase expected profits by 98% and 27%, respectively by engaging optimally in the temporary water market. Over the period evaluated, a grape farmer holding a single water right may expect to engage in market activity 80% of years; two rights require farmers to engage during 30% of years; with seven rights market engagement is avoided. The broader insights of the research suggest where rights holders accurately assess the value of water, optimal engagement strategies can be developed that add to farm-scale profitability, and act as an assessment of whether existing rights ownership matches risk tolerance.