Value of a Water Right
Wednesday, September 11, 2019
Farmer Jones sells his 40-acre raspberry farm, which has a water right, for $25,000/acre. Soon thereafter, Farmer Smith sells her 65-acre raspberry farm, which lacks a water right, for $19,000/acre.
To what extent is this $6,000/acre difference in sale price related to water rights? Does it matter?
According to the Washington State Dept. of Ecology, the Nooksack River Basin is one where “demands for water exceed supply, where many claims for water remain outstanding, where conflicts exist among water users, and where tribal senior water rights have not been quantified.”
One of the major issues underlying these problems is the amount of water used for agricultural irrigation without authorization from Ecology; more than 40 percent of that water lacks claims, permits or certificates. Although this situation has existed for more than three decades, Ecology has done little to resolve it in a systematic fashion.
Our research estimates the value of Whatcom County farmland with a water right relative to farmland without a water right. Our hope is that this unrealized economic value is large enough to, at long last, stimulate a suitable policy response. By suitable, we mean a solution that provides farmers with sufficient water rights to irrigate their crops and that tribal concerns are addressed, primarily increasing streamflows in fish-bearing streams during the critical low-flow summer months.
We focus on agricultural irrigation because it accounts for about 70 percent of Whatcom County water use during the summer.
The data and analyses presented here suggest that farmland with a water right is worth about $7,000 per acre more than comparable land without a water right. Spread over the 18,600 acres that are irrigated without a water right, the aggregate value is $130 million.
The analyses used three disparate datasets:
- Water rights from Ecology, its Geographic Water Rights Information System. These data were used to determine the spatial distribution (locations and acreage) of water rights for agricultural irrigation in Whatcom County.
- Crop distribution data for 2014 from the Washington State Dept. of Agriculture. These data were used to determine the spatial distribution of crops and the use and types of irrigation equipment in Whatcom County.
- Property sale prices from the Whatcom County Assessor’s Office, along with the size, zoning code and transaction date for each property.
Because these three databases were created and are maintained by different agencies and for different purposes, there inevitably arose inconsistencies among them.
As an example, the crop distribution data treats farm fields, whereas the sales data treats parcels of land.
The end result, after adjusting for errors and limitations in the data, was 463 farmland property sales between 1984 and 2018.
We used the national Consumer Price Index to roughly adjust for inflation in property values over time. All prices reported here are in 2017 dollars; 2019 prices would be 4 percent higher.
We began our analysis with data from the mid-1980s because Ecology’s instream flow rule for the Nooksack River basin went into effect in January 1986. This rule set minimum flows (in cubic feet per second) for many locations within the basins; generally speaking, these flows are not met during the low-flow summer months. We analyzed the data in five-year aggregates because the number of suitable property sales for some years was very small.
The price of farmland increased, although erratically, from the mid-1980s through 2018. These increases occurred for both land with and without a water right. However, over all time periods the price of land with a water right was higher than for land without a water right. The average difference was almost $4,200/acre.
Although Ecology finalized the Nooksack instream flow rule in 1985, it was not clear until the early 1990s that Ecology was no longer able to issue new water rights in the Nooksack River basin. Thus, the first several years of data in this analysis are not relevant to understanding how the existence of a water right affects the value of farmland.
Indeed, the data show very little difference between the values with and without a water right for the three five-year periods from 1984 through 1998. It is not until 1999 that the two lines diverge significantly. Because of this on-the-ground reality, we looked more closely at the period from 2000 to 2018.
The period from 2000 through 2018 shows land prices, both with and without a water right, increasing over time. Prices for land with a water right were consistently higher than for those without a water right, with an average difference of $7,000/acre. A recent review of farmland values in Washington (conducted by ECONorthwest), based on data from the 2017 Census of Agriculture, shows a $7,400 per acre premium for irrigated over nonirrigated farmland.
Joshua Grandbouche, Katelyn Bigby, Lucas Dubois, and Eric Hirst authored this report. Complete report: https://cbe.wwu.edu/files/2019_Valuing_Water_Rights.pdf