Cooperative water trade as a hedge against scarcity: Accounting for risk attitudes in the uptake of forecast-informed water option contracts

Abstract

Season-ahead hydrologic forecasts hold the potential to inform water user decision making, provided forecast information offers value to targeted end-users, particularly in water-scarce regions. Yet, user willingness to trust forecast information is uncertain and often varied across similar user groups. Here, forecast uptake by agriculture users in semi-arid water rights managed basins is modelled to account for heterogeneous risk attitude and hydrologic variability. A season-ahead forecast of reservoir inflow is translated to water-trading rulesets through coupled reservoir allocation, i.e. per-water right allocation from the reservoir, crop-water, economic optimization, and demand derivation models. Theoretical growers, aligned in crop-type cooperatives, are modelled as potential exclusive water trading partners that, in years of scarcity may choose between forecast-informed water trading via option contracts, or one of two alternative water trade actions: persistence forecast-informed trading or no trading. Simulations across varied initial water rights endowment and farmer risk attitude allows for evaluation of expected investment of water rights in forecast-informed water trade. Results indicate farmer willingness to trust forecast information and subsequently invest rights option contracts trade is variable (28%–70%), and dependent on initial endowment of rights and alternative water trade action, manifested here as persistence-informed trade and no trade alternative. While variable, investment outcomes for probabilistic hydrologic simulations reveal long-term trade stability under nearly every forecast-informed water trading simulation, suggesting options contracts may be viable under a variety of water scarcity conditions. A key insight is that seasonal climate forecasts may prove to be quite valuable when translated through sectoral models, providing the tailored information to end users with diverse risk attitudes. This reinforces the potential in including forecasts in agricultural water resources decision support frameworks, as a hedge against water scarcity for farmers of varied earning potential.