Hedging the risk of hydrological drought in irrigated agriculture. The role of precautionary savings

Abstract

This paper explores the viability of precautionary savings as a hydrological drought risk management instrument in irrigated agriculture. To that end, first, the Drought Savings Account (DSA) is proposed as a personal savings account to which farmers make regular contributions, with withdrawals allowed in the event of water supply gaps to guarantee a minimum income. Second, the implementation of the proposed instrument is empirically assessed in an illustrative case study using an innovative simulation approach. Results obtained suggest the DSA is actuarially sound, supporting its implementation as a cost-effective instrument to hedge hydrological drought risk.