Wednesday, July 7, 2010

Value of Water - Murray-Darling v. Ogallala

Just read a recent article in the Australian that was reporting on the reduction of irrigation water use in the dwindling Murray-Darling system.  The article reports that:  “The federal government has so far bought back 803 billion litres of water entitlements, which has cost $1.28 billion.”  I have always thought that the Murray-Darling basin of SE Australia is much like the Ogallala Aquifer of the central US in that the overdraft levels, the irrigation footprint, and perhaps most importantly, the rhetoric about the importance of water is very similar between the two areas.  It got me thinking - If my sense of the similarities are true, shouldn't the offered price to retire water rights look similar as well?

The AU calculations are roughly:  803 billion liters equals 615,000 AF.  A cost of $1.28 billion AUD = $2,075 AUD per AF.  The current exchange is:  1 US $ = 1.217 AUD.  In US dollars, the cost to the AU government of buying these 615,000 AF is roughly equal to $1,700 US per AF.  At $1,700 US per AF, and 1.22 AF being applied to each acre in our Ogallala HPA’s, each acre of land would need to be paid $2,078 US to match the Australia situation.  

Based on 100 or so bid proposals to permanently retire water rights in our GMD, the going rate was hovering right at $2,000 per acre of irrigated land needed to retire the full consumptive water use on each acre.  

Unless my calculations (or logic) are wrong, seems like the value of irrigated water in our two areas is far more similar than dissimilar, and we're very much in the ballpark with the Australian government's assessment of the value of water rights.  Jeesch, I hope Zetland doesn't get a hold of this evaluation!


  1. Wayne -

    This is most intriguing. The price being paid in New Mexico appears to be *far* greater. Groundwater pumpers, primarily municipalities, are required to buy up and retire surface water irrigation rights to offset the effects of their groundwater pumping on the Rio Grande. There's no requirement to publicly disclose water rights sale prices, so we don't really know for sure the going rate. But a recent public document from one of the folks engaged in the trade put the typical price these days at about $18,000 per acre foot of water rights. Given that each acre of land has a bit shy of 3 acre feet of associated water rights, that means senior water rights are worth something in excess of $50,000 per acre of land. It's possible I'm missing something that makes an apples-to-apples comparison invalid, but it seems like a huge difference.

  2. John:

    For openers, there seems to be a difference between the value of water that a municipality or industry buys for the right to continue the purchased use, and the value of the same quantity of water that is more simply going to be retired, or not used. For example, a city here in our district recently bought water rights from an irrigator to convert to M&I use, and paid about $3,500 per AF (consumptive AF). The average payment rate bid in by 100 of our other local irrigators to simply retire their rights was just between $1,700 and $2,000 per AF.

    Some possible drivers for this circumstance: 1) New supplies desired (or needed) by cities is fairly rare and because of water right transfer limitations here in KS, can only be supplied by a very small subset of very adjacent water right owners. This usually increases the price. 2) The offerings of retirement payments are in "hot spot" areas that are more likely candidates for enahanced management by regulation, adjudication, or state adjustment due to impairment complaints. These situations are all "wild cards" that will drive water right reductions without any compensation or payment what-so-ever, so they tend to keep the going rate considerably lower.

    However, while these situations likely are the reason for our local differences, they don't explain the difference between $3,500 here and $18,000 in NM. When you figure it out, let me know! :)

    Now that you mention it, I was under the assumption that the AU program was simply retiring irrigation demand from the Murray-Darling system rather than transferring that 615,000 AF to other uses. This is why I was not overly surprised at the similarity of computed price. But I really don't know for sure if I assumed correctly or not.

    My guess is that the $18,000/AF you all pay and the $3,500/AF we pay is an expression of the regional market differences. Colorado CU water rights are much closer to your values than ours, and they're right next door to us, but in a state where water rights are much more closely controlled, and under a very strong system of prior appropriation. Their marketing system (and likely yours too) is far more developed than here in KS, where we just started closing rivers and groundwater basins to new development in the past 15 years or so.

    Maybe this is one for DZ! Thanks for the comment and queries. An apple-to-apples comparison may be asking too much. Wayne.