The value of water access security in agriculture

Institutions are crucial for allocating 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. During scarcity, water is allocated by seniority, with holders of more junior rights losing access first. Curtailments of water access influence the profitability of irrigated production, especially in the arid West where most croplands depend on irrigation. The Ricardian theory of rent suggests a premium for senior water rights, as the net present value of long-term returns is higher due to more secure access. We estimate this premium using a hedonic pricing model and agricultural land transactions as proxies for water-rights values. Our dataset links roughly 25,000 sales across 37 Colorado counties with geocoded information on associated water rights. Results show that surface-water access increases land values by about $6,300 per acre, or 64 % relative to similar non-irrigated parcels. Furthermore, we estimate the premium for properties that are one year more senior in water rights to be about $49 per acre. Our results also indicate that properties with access to storage and supplementary groundwater rights sell, on average, for 16% and 14% 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 of irrigated agriculture.