A reliable supply of drinking and irrigation water is important for global agricultural production and food security. Water scarcity can lead to reduced agricultural yields (affecting agricultural producers), high food prices (affecting urban consumers) and instability in food production, which can be especially devastating to the global poor.
Since water is artificially cheap or even free in most countries, the crop mix chosen by farmers is largely determined by expectations of crop yields and market prices, not by the desire to minimise water use. Similarly, the availability of alternative cheap and water-efficient technologies in crop production, such as specially bred crop strains which need less water, water-saving irrigation equipment or labour-intensive farming methods, will determine their attractiveness to famers. Another useful tool is enforceable water allocation rules, which determine when and under what circumstances water may be withdrawn. This shows that changes in economic and agricultural policy can have direct and indirect effects on the demand for as well as supply of irrigation water.
To improve water availability during droughts, an innovative water storage system has been developed in the Netherlands for potato growers. This entails storing water in the soil while it is abundant (during winter) so that it can be used in periods of water scarcity (summer). Wageningen Economic Research has calculated the value of this storage system to assess whether it is profitable for farmers and/or society. Specifically, the value of the additional water has been determined based on the extra yield and other benefits made possible by an extra cubic metre of water. These additional yields were calculated based on observations of potato harvests by individual farmers in the Netherlands over a 14-year period. The expected frequency and severity of future water shortages mean that this innovative water storage system is economically attractive.
Dry years can be beneficial for individual potato farmers as the price increase can outweigh the fall in yields. This price effect of droughts is not accounted for in the hydrological models currently applied to compute the effect of drought on physical yields. Using a simple economic model based on price elasticities, Wageningen Economic Research computed the price effects of dry years on potato farmers. These effects depend on the entire area affected by droughts and the Dutch share of the crop on the world market: the larger the Dutch share on the world market, the greater the price rise.
Wageningen Economic Research is collaborating with Utrecht University to expand its world water model (PCR-GLOBWB) with a module that simulates farm behaviour. The hydrological model computes the quantity of irrigation water used, distinguishing three types of water: water available in the soil from precipitation, renewable water from sources such as rivers, and non-renewable groundwater. In this model, farmers react if a decrease in water availability is reflected in the price of irrigation water. The left panel of the figure above shows how potato yields decrease in tandem with the availability of non-renewable groundwater in all the countries considered. However, the shadow price of this irrigation water is rather high in dry countries like Egypt and Spain which produce substantial potato yields but use relatively small quantities of non-renewable groundwater (see right panel). Based on the results shown in the graphs, the hydrological model will be expanded through substitution between non-renewable and renewable water and investments in efficient irrigation techniques.
Wageningen Economic Research recently started a project which explicitly integrates water use in the MAGNET model. This can either assume water supply to be fixed or calculate it through external hydrological models. This allows us to explore scenarios for how the global and national economies can adjust to changes in the availability of irrigation water and to calculate how changes in economic policy and the structure or patterns of growth would affect water demand.