Groundwater is attracting attention because of ongoing drought in the western and south-western US, as well as because of growing pressures on water resources from both agricultural and non-agricultural sources.1,2 Groundwater is an important supplement to precipitation and/or surface water in times of drought, which makes it a vital resource for agriculture. Correct valuation of an important but scarce resource such as groundwater is crucial because it provides information and incentive for landowners and managers to conserve and use that resource efficiently. Here, I briefly discuss what we know about the value of groundwater for irrigation and what challenges remain to be addressed in its correct valuation. A key point I will make is that the exact measurement and valuation of groundwater access is complicated.3 In turn, this makes it difficult for policy makers, managers, and other stakeholders to make economically informed decisions about groundwater management.4,5
Generally, we know that irrigation, whether through surface or ground water, can improve crop yields and protect against crop loss due to drought. Thus, we expect farmland with access to irrigation water to have higher sale values. This has been confirmed through multiple studies in the case of surface water.6-14 It is also accepted that groundwater access for irrigation raises land values. For example, this shows up in studies of farmland rental rates and sales prices in regions where irrigated and non-irrigated fields are both available. Recent farm surveys from regions overlying the High Plains Aquifer reveal that the value of irrigated land is found to be higher than non-irrigated land by approximately $1,700-3,000/acre in Nebraska, $1,500/acre in Kansas, and $200-4000/acre in Texas.15-17 Land rental rates for corn in eastern Colorado (a region likely to be irrigated by the High Plains Aquifer) for irrigated land were found to be seven times higher than those for non-irrigated land.18
At the same time, other studies have suggested that in some regions, access to groundwater does not affect the value of the farmland,7,12 or that its effect is meaningful only in the incidence of severe drought when access to surface water reduces.8 This somewhat surprising result could be due to the context under which many of these studies were conducted, i.e., regions of the western US where surface water is the predominant source of irrigation.
From a statistical perspective, it is unlikely that the entire difference between irrigated and non-irrigated land values is due to differences in water access. Soil quality, weather patterns, water rights trading and other laws associated with the land, year-to-year fluctuations in crop revenue and interest rates – all of these can have a confounding effect on land values. For example, despite the large differences in irrigated and non-irrigated land values in Nebraska, access to water ranked much lower than other factors influencing land values in the most recent farmland value report for Nebraska.15 Another study found that the value of irrigation water in Colorado, Nebraska, and Kansas was highest not in semi-arid regions where irrigation was the primary source of water, but rather in regions with high crop productivity where irrigation was used mostly as a supplement to precipitation.19 Similarly, in regions adjacent to growing urban and rural residential areas, it is not straightforward to distinguish whether the value of water is due to its present use (e.g., crop production) or to potential future uses that the market envisions (e.g., municipal water supply). Anecdotal evidence suggests an increasing demand for small parcels of land with water access for drilling and fracking in northern and western Texas overlying the High Plains Aquifer. This has led to a dramatic rise in land values.17 Similarly, land values on the Front Range of Colorado, especially those with water rights, have been rising primarily due to suburban development.20
Systematic economic analyses can help in separating the value of groundwater as a source of irrigation from the confounding factors noted above. Existing scientific studies for the High Plains Aquifer do confirm a positive premium associated with access to groundwater.21-23 The most recent study finds that groundwater access in Kansas increased farmland values by as much as 50%.24 Yet, methodological challenges exist in precisely allocating the contribution of groundwater access to land value. In studies based on small samples, it is difficult to separate the estimated value of water from inherent characteristics of the sample (such as soil and weather conditions, local laws, and institutions) that may lead to development of irrigated land as well as elevated land values. Similarly, using aggregate land values instead of actual farmland sale values may not provide accurate market information.
There are also conceptual challenges to measuring access to groundwater, primarily because of its relative ‘invisibility’. While surface water is publicly managed through dams and reservoirs and its access is measured through water rights associated with the land, the case for groundwater is different. Groundwater is mostly managed privately by building wells on land that overlies an aquifer. A key measure of groundwater availability for a farm owner or land appraiser is the well yield. Well yield is the volume of water that can be readily extracted from a well per unit time. It determines the area of a crop that can be irrigated with enough water to match the peak daily water demand of the crop. However, well yield is private information and not easily available. Moreover, well yield is simply not known for land that has not yet been developed for irrigation but has potential for such development in the future. The saturated thickness of an aquifer is sometimes used as an estimate of well yield. It is, however, a noisy proxy because it represents the ‘stock’ of water in the aquifer rather than its availability for immediate extraction. As a result, using saturated thickness in econometric analysis may lead to inaccurate estimates of the economic value of water.25 A related concern is distinguishing between the value of non-irrigated land with and without the potential for development of irrigation from groundwater. The difference between the two captures the future value of groundwater. For Nebraska, this difference is currently relatively narrow (between $125 and 730/acre).14 It is not clear if this is because of anticipated restrictions on water use, the cost of land development for irrigation, or simply market inefficiency and failure to reflect the true value of the land.
The frequency and intensity of droughts in arid and semi-arid parts of the US are projected to increase in the future, potentially leading to higher demand for groundwater for irrigation.1,26,27 This calls for new management strategies to prevent or reverse the overuse of groundwater. The correct valuation of groundwater and its contribution to land values is vital information that is likely to become even more important in the future. Such information may help to motivate a landowner to conserve groundwater in order to maintain the long-term value of their land. For policy makers, framing groundwater conservation in terms of preserving long-term asset values may be a more compelling approach than framing it in terms of regulatory costs that must be borne by farmland owners.28
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15. Jansen, J. and Stokes, J. (2021) Nebraska Farm Real Estate Market Highlights 2020-2021. Center of Agricultural Profitability, University of Nebraska-Lincoln.
16. Reid, R. (2021) Kansas Agricultural Land Values and Trends, 2021. Kansas State University and American Society of Farm Managers and Rural Appraisers.
17. Texas Rural Land Value Trends (2020). American Society of Farm Managers and Rural Appraisers and Real Estate Center, Texas A&M University.
18. Beiermann, J., Tranel, J.E., Young R.B., (2022) Custom Rates for Colorado Farms and Ranches in 2021. Colorado State University Extension.
19. Rimsaite, R., Gibson, J., & Brozović, N. (2021). Informing Drought Mitigation Policy by Estimating the Value of Water for Crop Production. Environmental Research Communications, 3(4), 041004.
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23. Hornbeck, R., & Keskin, P. (2014). The Historically Evolving Impact of the Ogallala Aquifer: Agricultural Adaptation to Groundwater and Drought. American Economic Journal: Applied Economics, 6(1), 190-219.
24. Sampson, G. S., Hendricks, N. P., & Taylor, M. R. (2019). Land Market Valuation of Groundwater. Resource and Energy Economics, 58, 101120.
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