The value of water access security in agriculture

Institutions are crucial for the allocation of natural resources. Surface water allocation in the western U.S. follows the prior appropriation doctrine, which distributes water based on the date when water was first appropriated for beneficial use. Under this system, during times of scarcity, water is allocated by the seniority date of water rights, with holders of more junior rights losing access to water first. Curtailments of water access can influence the profitability of irrigated production. This is critical in the arid West, where many croplands depend on irrigation. The Ricardian theory of rent suggests a premium associated with senior water rights, given that the net present value of long-term economic returns is higher due to more secure access to water. In this study, we use a hedonic pricing model to infer the economic premium of accessing surface water through seniority of water rights. We do so by analyzing agricultural land sales as indicators of this premium in the absence of direct water rights sales data. In addition, we investigate the market valuation of storage rights and groundwater access. Specifically, we spatially link around 18,000 agricultural land sale transactions from 37 counties in Colorado with geo-coded data on their water rights. We find an average premium of access to surface water of about $6460 per acre, indicating a 64% higher value relative to comparable non-irrigated properties. Furthermore, we estimate the premium for water rights that are one year more senior in the portfolio to be about $46 per acre. Our results also indicate that properties with access to storage water rights and supplementary groundwater sell, on average, for 13% and 16% more, respectively, compared to irrigated properties with only surface water access. These findings highlight the importance of water security in shaping agricultural land markets and offer insights into how policy measures, such as expanding water markets or investing in storage reservoirs, can potentially improve allocation and reduce vulnerability for irrigated agriculture.