Efficiency implications of water markets in the lower Orange and Crocodile rivers, South Africa.
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Date
2004
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Abstract
Irrigation farmers in the Lower Orange (Kakamas and Boegoeberg) and Lower Crocodile
rivers (between Nelspruit and Komatipoort) areas in South Africa were surveyed during
October 2003 in order to study whether water marketing has promoted efficiency in water
use. This study is a follow-up on research undertaken by Armitage (1999) in the Lower
Orange River area and Bate et al. (1999) in the Lower Crocodile River area. Factors
associated with future investment in irrigation farming were also studied in the Lower
Orange River Irrigation Scheme. Econometric procedures used included principal
component analysis, and logit and ridge regression. Results from the two areas will be
discussed separately.
Econometric results for the Lower Orange River farmers indicate that purchasers of water
rights produce lucrative export grapes and horticultural crops with relatively less raisin,
wine or juice grapes and less field crops; are more specialised in production (table grapes);
have more livestock (probably liquidity factor) and have a less negative view of the five-year
water license review period. The water market has facilitated a transfer of water use from
relatively lower value crops to relatively higher value crops, and also promoted the use of
more advanced irrigation technology. An investment model using Ridge Regression
indicates that the following variables are associated with increased future investment in
irrigation farming; higher expected profitability and lower levels of risk perception and risk
aversion (Arrow/Pratt). Results confirm that farmers who are more risk averse are likely to
invest less in the future as can be expected from theory. Policies that increase risk in
agriculture will have a significant negative effect on future investment in irrigation. What is
significant from the results is that irrigation farmers in the Lower Orange River area are
highly risk averse (down-side). Results also show that farmers who feel that water licenses
are not secure expect to invest less in the future. The latter effect is thus amplified, as
farmers appear to be highly risk averse. This has important policy implications, and
measures should be taken to improve the perceived security of water licenses. This could be
achieved by keeping farmers more informed about the practical implications of the New
Water Act (NWA) (Act 36 of1998) and, specifically, water licenses.
In the Lower Crocodile River area, almost all the water trades (permanent and rentals)
observed in this study were from farmers above the gorge to farmers below the gorge. It is
concluded that in the transfer of water some attributes in the purchasing area such as lower
production risk (sugar cane) and lower financial risk and better cash flow (bananas and
sugar cane) were more important than the expected income per cubic meter of water. Water
supply in this area is highly irregular, while sampled farmers were again found to be
extremely risk averse especially as far as down-side risk is concerned. The average water
price in this area in recent years (2002 to 2003) was between R2000 and R3000 per ha (l ha
= 8000 cubic meters). Buyers have large farms and are progressive farmers that purchase
(and rent) from many sellers (or lessors). It is concluded that information on water transfers
(sale prices and rents) is asymmetrical. Few permanent transfers have taken place in the
Crocodile River in recent years. It is concluded that there are reasons why transfers at
present are not processed, such as excess demand for water (due to the irregular flow of the
Crocodile River, and role players should discuss these reasons and possible solutions before
further action is taken.
Description
Thesis (M.Sc.Agric.)- University of KwaZulu-Natal, Pietermaritzburg, 2004.
Keywords
Irrigation farming--Economic aspects--Mpumalanga., Irrigation farming--Economic aspects--Northern Cape., Irrigation--Economic aspects--South Africa., Water-supply, Agricultural--South Africa., Water--Law and legislation--South Africa., Irrigation laws--South Africa., Water in agriculture--South Africa., Water rights--South Africa., Risk management--South Africa., Theses--Agricultural economics.