How to Value Water Rights in Agriculture Investing
Access to water is a key prerequisite for successful agricultural investing, and yet pricing water into land deals and infrastructure remains a challenge. An analysis from U.C. Berkeley says: “The value of water … remains difficult to estimate because water markets and market prices exist only in a few regions of the world.”
Where water markets do exist – including in many key agricultural regions in the U.S. – prices can vary widely, and disruptions to water resources can affect the entire supply chain. In Colorado, for example, one fourth-generation farmer realized he could earn more by selling water instead of using it to grow crops on his land.
In short, water has become a commodity, and one common refrain that AQUAOSO hears from stakeholders is this:
“People don’t buy land anymore, they buy access to water.”
While the reality is slightly more complicated, the general idea is sound: without access to a water source, agricultural land doesn’t hold much value. In fact, it may become a liability and impossible to sell.
This post takes a close look at how to value water rights in agriculture and how GIS mapping tools and other data resources can help.
(Part of our Agriculture Investing Guide)
Water Rights in Agriculture
East of the Mississippi River, access to water is predominantly based on a riparian rights system: if land is adjacent to surface water, there is generally a right to use it.
But west of the Mississippi – where most of America’s food crops are grown – nearly all states use an appropriative rights system, which means that rights are not permanently attached to a piece of land: they can be lost, sold, or temporarily transferred. This gives rise to some counterintuitive scenarios. Farmers in some areas have found that it’s more cost-effective to sell their water rights than to use them:
“With his family’s century-old water rights, Kehmeier stores water in a reservoir…. Facing long odds on the farm in 2018, he sold [the water] for $100 an acre-foot — quadruple the normal price — to a nearby fruit grower.”
The Price of Water
In large part, the market value of water is rising due to climate change. The Western Slope region of Colorado, where the farm is located, has already seen temperatures increase by 2°C – twice as much as the planet has warmed as a whole.
We can expect to see more interest in smart water markets as water scarcity reaches more parts of the world. And while physical water trades are limited to a specific basin, more complex trades are not. Four years ago, The Guardian reported that “the largest dairy farm in Saudi Arabia purchased many thousands of acres of alfalfa fields in the desert east of San Diego, as well as the water rights for them.”
That’s because it was more cost-effective to buy water rights in California, and ship the crops to Saudi Arabia, than to purchase and transport physical water supplies.
In other areas, water prices are going up due to regulations like SGMA, which require watersheds to monitor and limit the amount of groundwater that farmers can pump, in order to restore depleted aquifers.
These complexities make it more difficult than ever to accurately assess the value of a piece of land and the water rights associated with it.
Water Rights Give Land Value and Long-Term Resilience
Faced with long-term water shortages, many growers are opting to change their crops or planting methods altogether. In Colorado, that has led to a shift to hemp, which “uses less than half the water compared with corn, hay or alfalfa. Last year, people rushed to plant about 14,000 acres” in the Grand Junction area.
However, farmers describe this as a “gamble,” since many variables – from weather to a bump in the marketplace – can limit ROI on untested crops.
Investors can reduce their risk by investing in agricultural land with secure water rights from the start. This allows growers to continue producing a crop – or grow more of it – when others can’t, giving them a competitive advantage in the market. If a drought or government regulations drive up prices of a particular crop, farmers with access to water rights can keep producing it without disruption.
Banking on Water Rights
Water rights are even more valuable when water can be collected during wet years and storeed for use during dry years. Some states have groundwater banking systems that provide credits to water rights holders to forgo or limit their water use in a given year, but farmers may also be able to store water on-site in a tank or reservoir. This makes it easier for farmers to use the water they need for their crops, and sell any excess water for further use when the price goes up.
But one must understand this: using these systems and tactics that conserve the world’s collective amount of usable freshwater – using what a farm or parcel needs, and then selling the rest for further, good use – helps conserve the water the planet has left and stimulates the economy at the same time.
Centralized Data and GIS Mapping Can Help Investors
Knowing that water rights can add value to a piece of land is step one. But there is still the matter of knowing which parcels of land have water rights attached and how to value water rights in a particular region. That’s where GIS maps and other water security tools come in.
Having access to accurate, up-to-date, and transparent data sets is key to making fast and informed decisions about water rights and reducing risk in investments. GIS, or Geographic Information Systems, provide more actionable information than traditional maps by incorporating multiple layers of geospatial data. For example, the U.S.G.S. explains that, “By knowing the geographic location of farms using a specific fertilizer, GIS analysis of farm locations, stream locations, elevations, and rainfall will show which streams are likely to carry that fertilizer downstream.”
How to Value Water Rights Using AQUAOSO
AQUAOSO’s Water Security Platform uses geospatial data to help investors identify and monitor water risk. The cloud-based mapping tool makes it easy to look up the boundary of a groundwater basin, up-to-date information on water rights and land ownership, and even reports on groundwater depth and endangered species zones.
Users can search for specific pieces of land, or view an entire region with a “point and click” interface. Users can also generate and export date-stamped reports to share with other stakeholders.
The Bottom Line
When it comes to agricultural investing, water rights shouldn’t be an afterthought. They make up an integral part of land deals.
Navigating water rights isn’t easy, so AQUAOSO is committed to providing intuitive tools that incorporate regulatory changes and GIS mapping data. With a centralized database available to all stakeholders – including lenders, investors, and growers – professionals can work together to create a more profitable and resilient agricultural system.
You can visit our resources page to find ebooks, podcasts, and other material, or simply contact us directly to schedule a demo or chat about any questions you have!
The 1980s saw a farming crisis that resulted in bankruptcies and defaults which left the nation’s wallet $4 billion lighter. In 2014, the state of California sought to create a new statewide water management system that would protect groundwater by instituting...
Executive reporting has evolved in recent years, with CEOs “taking on a broader array of responsibilities,” according to the Harvard Business Review. In part, that’s due to a combination of new technologies and new reporting requirements that are expanding the ways...
The modern financial business landscape is full of tough decisions, many of which are time-sensitive. The most valuable asset for making smart business decisions is being well informed. Unfortunately, given the vast amount of necessary but siloed decision support...