Water Markets in the West: Prices, Trading, and Contractual Forms

Abstract

Rising urban and environmental demand for water has created growing pressure to re-allocate water from traditional agricultural uses. But, for a variety of reasons, water markets are more complicated than are those for other resources. In this paper, we first explain these differences by examining water rights and regulatory issues. Second, we place our research in the context of other economics literature on water marketing. Third, we present new, comprehensive data on prices and the extent, nature, and timing of water transfers across 12 western states from 1987-2005. Prices are higher for agriculture-to-urban trades versus within-agriculture trades, in part, reflecting the differences in marginal values between the two uses. Prices higher for urban use are also growing relative to agricultural use over time. Markets are responding. The number of agriculture-to-urban transactions is rising over time, whereas the number of agriculture-to-agriculture transfers is not. Further, there is a shift from using short-term leases to using multi-year leases of water and permanent sales of water rights. This pattern underscores the need to consider the amounts of water obligated over time, rather than examining only annual flows in assessing the quantities of water traded as is the common practice in the literature. Considering committed water, we find that more is transferred and the direction of trading is different than if the focus is on annual flows. Finally, the data reveal considerable variation in water trading across the states.

Keywords: Water, Water Law, Trade in Water, Land Use, Property Rights