Understanding the Price of Water
AcreValue teams up with WestWater to bring transparency to water rights market
Our mission at AcreValue is to help the agriculture industry understand and analyze farm values. In the West, farm values cannot be analyzed without considering access to water. As a first step towards addressing this important variable, we’ve teamed up with WestWater Research to bring information about water rights into our platform. AcreValue users will have exclusive access to WestWater’s Waterlitix data, the largest and most comprehensive source of water right sale and lease information in the United States.
Our WestWater partner, Clay Landry, provides some insight into the market:
The Growing Value of Water
As the Nation’s largest water user, farmers and ranchers have always understood the importance of water. The US Department of Agriculture estimates that agriculture accounts for nearly 80% of the nation’s water use and over 90% in many western states. Now more than ever, other sectors of the economy are starting to realize just how important water is to their financial future – from housing development to the power sector to Wall Street portfolios. No sector seems to be immune.
Water Rights Market
Throughout the West, water rights determine how water is allocated when supplies are scarce. Nearly every farm and ranch in the western US that irrigates has some type of water right, contract or ownership interest in water. In most cases, these rights were established under an antiquated legal concept known as the prior appropriation doctrine, which gave the first person to divert water for a beneficial use a property interest in continued use of that water. Each western state has developed its own laws and regulations governing water rights that are unique to local issues and customs. As a result, water right systems across the West are notoriously arcane with a complicated set of rules.
Markets for water rights have emerged over the last thirty years to meet growing demands and solidify existing water supplies across the arid western United States. These markets have developed in response to traditional large scale water users seeking out alternatives to constructing costly new infrastructure projects. In 2015, more than $800 million and nearly 2.0 million acre-feet of water rights were traded through purchases and leases – the agricultural sector represented nearly 80% of the total supply of volume traded.
Water rights markets are highly regionalized and typically are defined by surface and groundwater hydrologic boundaries. Currently, there are over 25 established and emerging regional markets across the West. The most active of these include California’s Central Valley, the northern front range of Colorado and the Pacific Northwest.
The Value of Water
The value of water rights is highly regional and varies significantly. Several factors influence the value of water rights including location, current use, water right reliability, legal complexity of the right, and buyer type among others. In Colorado, for example, CBT water shares, which have a streamlined and established regulatory process, trade at prices 3-4x higher than other water rights in the same area that are subject to more complex regulatory reviews. In California, during the recent drought, agricultural buyers drove prices to all-time highs as they outbid cities for the first time to secure water for recently planted tree nut orchards. The development and growth in water market activity around the West has driven the emergence of sales of water rights separate and distinct from land.
Opportunities and Challenges for Water Right Owners
Legal and regulatory disputes over water rights will increase as supplies are stressed by drought and growing demand. On the flip side, the development of markets for water are creating opportunities for water right owners to supplement farm income through water sales and leases.
The following are a few sensible steps that water right owners should take if they are concerned about legal challenges or are interested in exploring water marketing opportunities.
1. Know Your Water Rights – Water rights are like any other asset and require managing. Your rights will define how much water you’re entitled to, as well as, when and where it can be used. Water rights can take a variety of forms including the right to divert directly from a river or groundwater source. Properties within an irrigation district or ditch company may hold a contract or share certificate that entitles them to a portion of the water right held by the district or company. There may be additional covenants and restrictions as well as assessments if your water is supplied through a district or ditch company.
2. Maintain Good Records – Make sure you have copies of your water rights. This includes contracts or share certificates if you’re in a district or ditch company. Most water rights have an administrative record that is maintained by the state agency responsible for regulating water. The administrative record should date back to the year that your right was established, which in some cases may be as far back as the mid 1800s. Additionally, maintaining good water use records will help quantify and protect your water rights. This becomes particularly important if you anticipate a sale of your farm property. Most informed buyers will want to confirm that the water rights have been used and that there is no risk of forfeiture due to lack of use.
3. Map Your Water Rights – Mapping your water rights is important to first, confirm you own the water right, and second, to confirm that your current irrigation practices match up with the authorized place of use under your water rights. Comparing landownership parcel maps with water right maps will help confirm ownership. Second, farming practices or field alignment often change over time resulting in water use outside of the authorized place of use. This may not be a major issue and can usually be corrected through a regulatory process with your state water management agency. You may also want to consider mapping any pipelines or ditches that you rely upon for water delivery to your property especially if your headgate or delivery system is located on a neighbor’s property. You will want to confirm and verify easements for these structures.
In conclusion, to take advantage of opportunities in the water market and effectively market your rights, make sure you have the ownership documentation in place, your water use history recorded, and maps verified. And stay tuned in the coming months for water market data to become available on acrevalue.com!