Use of Modern Portfolio Theory to Evaluate Diversification of Agricultural Land Use as an Adaptation to Climate Risks in the Tisza River Basin

Abstract

Adaptation is gaining attention as an inevitable answer to the challenges posed by climate change. The increasingly uncertain climatic conditions to which actors are exposed are becoming a constraint for their well-being. This chapter looks at diversification of agricultural land use as a key factor in reducing risk and as a means of coping with an uncertain climate. Borrowing from economic theory, this chapter illustrates how cropping patterns influence the expected revenue and risk. The standard deviation of the land use revenue is used as a proxy for climate risk. Agricultural land use is associated with two competing land use and water management strategies in the Hungarian Tisza River Basin: intensive agriculture protected by flood levees, and water retention areas with extensive cattle breeding and orchards. To cope with flood risk, the Hungarian government supports water retention and land use change to replace or complement the prevailing intensive agriculture dependent on flood levees and drainage. Our analysis shows that revenues from agriculture are well adjusted to the current climate variability. Considering recent revenues, a shift from intensive agriculture to extensive cattle breeding and orchards increases both the expected revenue from agriculture and the risk.