Farmers' exposure to risk and their temporary water trading

In this article, the role of water markets in helping farmers manage the risk of water shortage is studied. Using farm survey data from Australia's southern Murray-Darling Basin, one of the most active water markets in the world, we tested the relationship between farmers' exposure to risk and their decisions to purchase and sell water allocations (temporary water) on the market. Farmers experiencing higher variability in profit and facing more downside risk purchased greater volumes of water allocations in general. Purchasing water allocations on the market is found to be a risk-reducing strategy, in particular for farmers in the horticultural sector. There is only very weak evidence to support the notion that selling water allocations is associated with reduced risk exposure.