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Water market trends: transactions, quantities, and prices.

ABSTRACT

Appraisers are finding that water rights and other water-related assets are becoming a more common component of their valuations. This is likely to continue as competing uses strain the water supply. This article examines data on water sales and leases in multiple states and regions and establishes overall trends in total transactions, total quantity traded, and average prices based on the market data. The study finds that while total quantity traded each year through sales and leases is variable among the states and regions, with only a few exceptions the number of transactions and average prices for water sales and leases are rising.

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As all markets change and evolve over time, so has the western U.S. water market. Water in the western United States is leased and sold primarily in Arizona, California, Colorado, Idaho, Montana, Nevada, New Mexico, Oregon, Texas, Utah, Washington, and Wyoming. There also are a few transactions in Kansas, Nebraska, North Dakota, and South Dakota. Water is acquired for a variety of purposes, including agricultural use, municipal use, recreational use, and environmental restoration. Similar to housing and land, water can be bought, sold, and leased and can experience wide price variations within and across geographical areas. Also similar to the real estate market, water experiences price trends with booms as well as lulls. The creation of water markets over the past few decades allows analysis of price trends in regions with more established markets. A thorough understanding of price trends is an asset to appraisal professionals faced with valuing water rights, water infrastructure, water utilities, and other water-related assets.

Knowledge of the specific geographical water market, as well as the factors that go into determining water prices, is essential for anyone concerned with current and future water values, as water values and quantities traded vary widely across regions and time periods. This study examines water market transaction data for 1987-2007 and looks into overall changes and trends. States and regions are broken down by sale and lease data for each year. A sale is defined as a permanent sale or transfer of a water right, while a lease is defined as a temporary transfer of water from one user to another for a contracted length of time, with the original water right holder retaining his or her water right.

Knowledge of data trends for each region (number of sales or leases each year, average prices, and total and average quantities) also provides a useful picture of the water market. This research looks not only at trends within each state or region, but also at any observable trends across states and regions. Established water markets where the price trends can be observed include sale and lease transactions in California, Colorado, New Mexico, and Texas. State data on sales and leases from Oregon, Washington, and Idaho are grouped together in the study, and Arizona, Nevada, New Mexico, and Utah are grouped together to establish regional trends and changes. The two regions are the Pacific Northwest and the Intermountain Regions, respectively.

This article contributes to a number of previous articles addressing water transaction values, including the recent two-part series published by The Appraisal Journal on the appraisal of water rights by Herzog. (1) Two other formative articles on western water markets are "Transferring Water in the American West" and "Trends in Water Market Activity and Price in the Western United States" In the first article, Brewer et al. examine the movement of water from lower-valued agricultural demand to the higher-valued demands of urban and environmental users. (2) In the second article, Brown discusses water market trends over time while also looking at the categories of buyers and sellers for sales and leases. He also incorporates an econometric analysis of factors affecting transaction prices of leases and sales. (3) The current study adds to this research by carefully analyzing and comparing descriptive data on water transactions to identify any developing trends in established state and regional water markets and any key differences across states and regions.

For readers interested in international water rights, an article by Bjornlund and O'Callaghan addresses implicit and explicit water irrigation prices in northern Victoria, Australia. Implicit prices reflect transactions where farmland and water are sold together, while explicit prices are for water sold on its own for agricultural purposes. (4)

Data

To analyze water price and quantity trends, water market data for 1987-2007 was compiled using transaction information reported in the Water Strategist. (5) Water Strategist is a monthly publication reporting on issues such as water policy, legislation, and monthly water transactions. General information on each transaction includes the supplier, acquirer, purpose, quantity (in acre-feet), and price (per acre-foot), as well as a brief summary of the transaction. (6) Water Strategist is not an exhaustive source for water transactions, and consequently the study data is not inclusive of all transactions. The data in Water Strategistis, however, the most comprehensive source commercially available and well suited to providing an accurate, useful portrayal and comparison of state and regional water market Wends over the past two decades. (7) The previously mentioned research by Brewer et al. and Brown relied on Water Strategist for data, as did two other informative articles on western water markets by Loomis (8) and Brookshire et al. (9)

Water Strategist lists transactions each month by state and reports on sales and leases in seventeen western states. Due to the small number of sales and leases over the study period, no concrete trends could be seen in Kansas, Oklahoma, Wyoming, Montana, North Dakota, South Dakota, and Nebraska, and these states have not been included in the data set. States with both strong sales and leases data include California, Colorado, New Mexico, and Texas, and data for each of these states is included in the study.

Idaho, Oregon, and Washington are grouped together to form the study's Pacific Northwest Region. Individually these states do not have strong enough data to analyze separately, but due to their close geographical proximity and shared regional characteristics, both the sales and leases data are used from these states to form a regional picture of water trends. Another group of states--Arizona, Nevada, Utah, and New Mexico--form the Intermountain Region. Although these states have adequate data to examine individually, it is useful to examine this region as a whole as they share climatic and pricing similarities.

Results by State and Region

For each region, the total number of transactions, total quantity traded, and quantity-weighted average price are analyzed for the study period. Quantity-weighted average prices weight prices by how much quantity is sold at a certain price; this method is used for a more accurate assessment of average prices per acre-foot of water sold or leased. (10) All prices are adjusted using the Consumer Price Index and reported in 2008 dollars. The appendix includes tables on annual changes in prices.

California Transactions

California transaction data is shown in Figures 1 and 2.

Sales. The number of sale transactions in California is characterized by a period of high sales numbers in the early 1990s, followed by lull between 1994 and 1998, and then a steady, slightly increasing trend for the remainder of the period. Sales numbers in California are not large, with 10 being the highest number, but there always is at least 1 sale in each year. During the early 1990s, transaction numbers ranged between 6 and 9; then transaction numbers dipped, ranging from 1 to 5 sales. After 2000, the lowest number of transactions is 5 (2002) and the highest is 10 (2006). For the entire study period there are 108 sale transactions.

The early 1990s, when California sale transactions are at their highest, is a period of high volume traded, as total quantities of water sold are above 50,000 acre-feet from 1990 through 1993. Beginning in 1994, however, there is a sharp drop in total quantity followed by a series of sharply increasing peaks and plunging valleys. After 2001, there are consistently lower volumes sold and a decreasing total quantity trend. For the study period, the total quantity traded is little over 1 million acre-feet, which is the highest sales volume of all the regions.

As total quantity traded in California shows a slow decline, prices show a steady increase. Average prices in 1987 are strong at $1,800 per acre-foot, but fall well below $1,000 per acre-foot in 1988 and remain under $1,000 (and at times under $100 per acre-foot) until 1995, when they climb to $1,500 per acre-foot. After 1995, prices generally remain above $1,000 per acre-foot, and in 2007 prices jump to almost $4,000 per acre-foot. This most recent jump in prices does not appear to be related to any particular event and just represents across-the-board higher sale prices for the majority of sales.

Leases. The numbers of lease transactions in California start off low, with just 1 lease in 1987 and 3 leases in 1988. Due to the severe drought in the late 1980s and early 1990s, however, the number of lease transactions jump to 12 in 1989 and reach as high as 21 in 1992 before tapering off slightly. Looking at 1999 and beyond, there is a clear, steady upward climb in number of transactions. Total transactions are consistently above 10 through 2002, then jump to 20 lease transactions in 2003 and 2004. Finally in 2005 and 2006, there is a further jump, as lease transactions rise to 61 and 63, then finish in 2007 with 87 leases.

Looking into reasons behind these last increases in lease transactions, the data shows that for each of the final three years a single but different source is responsible for about one-third of the transactions. For 2005, about a third of the transactions can be explained by a series of one-year lease agreements from three state water project contractors to various water districts and counties. In 2006, the Bureau of Reclamation leased water from various landowners using dryland operations or groundwater substitution for the Klamath Water Bank in northern California. Finally, in 2007 various cities, counties, water companies, and water districts leased and supplied adjudicated groundwater in the West Coast, Central, and Main San Gabriel Basins in the Los Angeles area. Over the study period, there are a total of 438 leases of which over 50% occur in the last five years of the study period. California has the highest number of lease transactions out of all the included regions.

Total quantity of water traded through leases in California from 1987 through 2003 shows a clear, increasing trend with a series of peaks and valleys. One of the most notable peaks, occurring in the early 1990s, is the direct result of a severe drought and the establishment of the California water bank. The water bank protected permanent water rights, while at the same time allowing temporary transfers to ease drought burdens. During 2004-2007, there is a small drop off from the increasing trend, as total quantity begins a slight fall. In spite of this small drop in yearly quantity traded, the data still indicates a strong, increasing trend over the entire study period. What is unclear whether the small dip in quantity traded during 2004-2007 is the beginning of a decreasing Wend or just a brief valley before the next peak. Over the study period, California leases transferred over 11 million acre-feet of water, the highest amount transferred of any area in the study.

[FIGURE 1 OMITTED]

The number of lease transactions and total quantity traded per year display clear, increasing trends; however, average prices for California leases in the period do not show any discernable trends. Aside from a few exceptions, prices generally range between $50 and $200 per acre-foot. These exceptions include 1988, when prices dipped into the $20 range, and 1992 and 1996, when prices jumped to over $300. In the last five years of the study, prices are stable, ranging between $100 and $200 with little variation. Although there is not a clear increasing or decreasing trend, there is a trend of consistency.

Colorado Transactions

Colorado transaction data is shown in Figures 3 and 4.

Sales. Over the study period, Colorado has a large number of sale transactions each year, but in general, low volume per sale. The total number of sales in Colorado is 1,303, but total volume traded is only 254,035 acre-feet. This is in sharp contrast to California sales, where the number of sales is less than a tenth of Colorado's yet the total volume traded is four times as high. However, similar to California, the number of transactions per year in Colorado is increasing. The peak years for transactions in Colorado occurred in the late 1990s; transactions have since dipped some, but the overall pattern for the period shows a clear increase. With its 1,303 sales transactions, Colorado has the highest number of transactions of any region.

[FIGURE 2 OMITTED]

Total quantifies sold per year start out high in 1987, but this is followed by a clear decreasing trend. Throughout the study period, there are several small peaks and valleys, but overall there is a decline in total quantity sold.

The average sale price, however, is increasing in Colorado. During the early 2000s, the price skyrocketed from well under $10,000 per acre-foot to nearly $20,000 per acre-foot. Sale prices later taper downward a bit, but remain over $12,000 per acre-foot.

Leases. Water lease transactions started out low in Colorado, with no leases in 1987, a total of only 5 in 1988-1990, and then no leases again in 1991. After 1991, however, the pace picks up, with at least 2 leases every year through 2004. In the final study years--2005, 2006, and 2007--there is a large increase in the number of leases, with 10, 78, and 46 transactions, respectively.

Looking closer at the transactions occurring in 2006 and 2007, obvious explanations for the increase in the number of leases can be observed. The City of Westminster in 2006 entered into 45 lease transactions with various entities to provide reclaimed water for landscape irrigation. Also, irrigators entered into 16 one-year lease contracts with the Board of Water Works of Pueblo through a special lease offer of $20 per acre-foot. Similar lease transactions explain the continued increase in 2007, with Arkansas Valley water users entering into 16 one-year leases with the Board of Water Works of Pueblo. Also in 2007, the City of Denver entered into 10 lease contracts to supply customers with reclaimed water for landscape irrigation, golf courses, schools, etc. Over the study period, there were a total of 186 leases in Colorado.

[FIGURE 3 OMITTED]

The total quantity traded in Colorado leases peaked in the late 1990s and then quickly declined. However, total quantity sharply increased after 2004, and the increasing trend continues through 2007, which had the highest volume traded of any year (73,882 acre-feet). The increase in total quantity is not highly correlated with the increase in lease transactions, but is instead attributed primarily to a few high-volume leases. Over the course of the study period, Colorado traded the lowest volume of water leased of any region, with a total of 426,311 acre-feet; Colorado is the only region under 500,000 acre-feet traded.

After a quick price jump to just over $90 per acre-foot during 1988-1989, Colorado average lease prices sharply decline and remain low until prices again begin increasing in 2002. After 2002, the average prices range from about $83 up to $575, then back down to $83 in 2007. In spite of the lulls and peaks, overall average prices for leases are increasing during the study period.

New Mexico Transactions

New Mexico transaction data is shown in Figures 5 and 6.

Sales. The graph of New Mexico sale transactions resembles a horseshoe. The highest number of transactions occurring in a single year is 12 (1987), an amount not seen again until 2007. Between 1987 and 2007, there is a distinct decreasing trend, although transactions increase slightly in 2006 and 2007. It is too early to know whether the sale transaction numbers are rebounding on an increasing trend or will fall back to pre-2006 transaction numbers. For the study period, the total number of water sale transactions in New Mexico is 76.

The total quantity traded in sales appears to be on a decreasing trend as well. Starting off strong in 1987, total quantity is about 4,000 acre-feet, but sales do not reach and exceed the 1987 quantity level again until 1992. Most years see quantities traded well under 1,000 acre-feet. Only in 2006 is there a sign of a possible future increasing trend, as the total quantity exceeds 1,000 acre-feet when quantities reach close to 1,500 acre-feet in 2006 and 2,800 acre-feet in 2007. Over the study period, total quantity sold is 21,057 acre-feet, which is the smallest amount for sales in all the regions and the only area where total sales quantity is below 100,000 acre-feet.

Although there appears to be an overall decreasing trend for both the number of sale transactions and the total quantity of water sold per year, each of these categories does experience an increase over the final two years of the study. In contrast, average sale prices display an overall increasing trend, yet prices decreasing in the final two years. For the first half of the study period, average prices generally fall in the $1,000 to $2,000 per acre-foot range, while for the second half, prices generally are in the $4,000 to $5,000 per acre-foot range. The exceptions to these higher prices occur in 2006, when prices fall to about $3,800 per acre-foot, and in 2007, when prices fall to about $1,300 per acre-foot.

Leases. Between 1987 and 1999, the number of lease transactions in New Mexico range from 0 to 2, except for 1989, when there are 6 transactions. Beginning in 2000, there is a steady period of four years when there are 3 lease transactions each year, before dipping again to just I transaction in 2004. Transaction numbers dramatically jump to 15 and 12 respectively in 2005 and 2006, but then abruptly dip to I in 2007. The 2005-2006 increase is due the Bureau of Reclamation entering into various lease agreements to enhance stream flows. The stream flow enhancement was necessary to protect the endangered Middle Rio Grande Silvery Minnow as required under the Endangered Species Act. Overall, the number of lease transactions is increasing, it is unknown whether the 2005-2006 numbers are just a one-time spike or the beginning of steady increase in lease transactions. The total number of leases in New Mexico during the study is 63, the smallest number of all the regions.

Before 1992, total quantity of water traded through New Mexico leases never exceeds 10,000 acre-feet. The 10,000 acre-foot barrier is broken in 1992; after 1992, the total quantity dips below the 10,000 acre-foot mark only four times in the following fifteen years. In 1997-2007, total quantity remains over 30,000 acre-feet traded per year, with the exceptions of 2004 and 2007. Note there was also a dip in lease transactions for 2004 and 2007, when the number of transactions fell to just 1. In spite of the quantity dips in 2004 and 2007, there is an overall increasing trend in the quantity of water leased. The total amount of water leased over the two-decade period is 660,587 acre-feet.

Until 2002, establishing any price trend is challenging as prices demonstrate sharp peaks and valleys ranging from less than $10 per acre-foot to more than $70 per acre-foot, and 2002 marks the beginning of a concrete trend of increasing average prices with a jump up to $111 per acre-foot. During 2005 and 2006, there are slightly lower prices of $89 and $98, but in 2007 prices jump again to $150 to continue the upward trend.

[FIGURE 4 OMITTED]

Texas Transactions

Texas transaction data is shown in Figures 7 and 8. Sales. Establishing a clear trend or pattern when looking at Texas sale transactions per year may not be possible. For every year except 2006, the number of sale transactions is below 10. In 2006, sales experience one of the most dramatic spikes in all the data, as the transactions grow from 4 in 2005 to 82 in 2006 and then decrease to only 2 in 2007. In 2005, the Edwards Aquifer Authority approved sales of Edwards Aquifer pumping rights, resulting in the 2006 sale spike. For the study period, the total number of sale transactions in Texas is 149, yet 82 of these, or 55%, occur in 2006.

The same sharp increase seen in the number of transactions per year is also seen in total quantity sold each year. However, the explanation for the increase is not due to the Edwards Aquifer sales, but rather a single transaction of 264,074 acre-feet in which the Canadian River Municipal Water Authority purchased groundwater from various landowners on the Ogallala Aquifer to meet future municipal needs. The total volume sold over the study period is over 650,000 acre-feet, yet 264,074 acre-feet, or 40% of the total quantity is linked to a single transaction. Aside from this clear spike, there is an increasing trend, but it remains to be seen if the trend is stable.

[FIGURE 5 OMITTED]

The average prices for Texas sales from 1987 to 2006 show a slow, steady increase in prices with a series of smaller peaks and valleys on an increasing trend. Adding 2007 data changes the picture, since prices rise from about $350 per acre-foot in 2006 to over $5,000 per acre-foot in 2007. The two sales occurring in 2007 are both sales of Edwards Aquifer rights with prices at $5,000 per acre-foot (in nominal dollars).

Leases. Similar to Texas sale transactions per year, lease transactions also experienced a large peak in 2006; however, the period leading up to the peak and following the peak differ. Between 1987 and 1996, the number of lease transactions per year range from 0 to 9 in Texas. For the next five years, the numbers range from 12 to 15. Lease transaction numbers dip just below 10 in 2002 and 2003 before rebounding again to 11 and 15 respectively in 2004 and 2005. The jump to double-digit lease transactions per year for most of the second half of the study period would be enough alone to signal an increasing trend, but lease transaction numbers in 2006 and 2007 concretely confirm the trend. The spike mentioned for 2006 is a jump to 157 lease transactions for the year. Although lease transactions decrease to 60 in 2007, this still exceeds the transaction numbers seen before 2006. The dramatic increase in lease transactions can be attributed to a few main events, including various one-year leases of lower Rio Grande surface water; various municipal water users, irrigators and mining interests acquiring leases from multiple parties; and leases from the Edwards Aquifer in south central Texas. Total lease transaction numbers in Texas for the period are 358, so about 61% of these transactions occur in the final two years of the study.

[FIGURE 6 OMITTED]

Before 1991, the total quantity of water leased per year in Texas ranges from 0 to about 2,500 acre-feet. From 1991 through 2005, the amount of water leased each year is an increasing trend with a series of peaks and valleys. Each valley is greater than the previous valley, and a peak in 1999 reaches over 380,000 acre-feet. For the three years following 2003, there is a consistent lull in quantity traded, as quantities dip down and range between around 19,000 acre-feet and 42,000 acre-feet before springing back up in 2007 to reach over 275,000 acre-feet. In spite of the lull in 2004, 2005, and 2006, the quantity of water leased per year in Texas displays a clear increasing trend, with the quantity leased over the study period totaling over 1.7 million acre-feet.

Overall, average prices for Texas leases remain flat. During the study period there are four years when prices rise over $200 per acre-foot. The highest price is $488 in 1995, but in general prices are well below the $200 per acre-foot mark. For eight of the final years, prices are below $100, leading to the conclusion that there is no increasing or decreasing trend in average prices for Texas leases.

[FIGURE 7 OMITTED]

Pacific Northwest Region Transactions

Pacific Northwest Region transaction data is shown in Figures 9 and 10.

Sales. From 1987 through 2005, the number of sales per year across the Pacific Northwest Region (Oregon, Washington, and Idaho) never exceeds 4, with 0 sales in the 2000. In 2006, sale transactions jump to 9, which is due to 5 purchases from the Oregon Water Trust. Transaction numbers fall to 6 in 2007, but still remain high enough above their historical numbers to hint at a possible increasing trend for Pacific Northwest Region water sales. For the entire study period, there are a total of 59 sales in the Pacific Northwest Region, the smallest number of all the regions.

Although there is a possible upward trend in the number of sales, the same cannot be said for total quantity traded per year. In 1991, there was a big spike in quantity due primarily to the Idaho Power Company's water purchases from the Upper Snake River Water Bank. But, aside from this single increase, a clear increasing or decreasing trend is difficult to establish for the Pacific Northwest region. The total volume sold for the study period is 588,744 acre-feet.

Average sale prices, in contrast to total quantity traded, do show a noticeable increasing trend. From 1987 through 1999, prices generally are below $200 per acre-foot. In 2001, the average price spikes to over $1,100, then decreases and levels off in the following years. However, prices remain well above $200 per acre-foot, ranging from about $315 to $750.

[FIGURE 8 OMITTED]

Leases. There are zero lease contracts in the Pacific Northwest Region in 1987. From 1988 through 1996, leases per year are in the single digits, but break into the double digits in 1997 with 10 leases. In the final years of the study, leases per year rise to 24 in 2005, 74 in 2006, and 108 in 2007. In 2006, 52 out of the 74 lease contracts can be traced to the Bureau of Reclamation leases for the Klamath River water bank, while about 90 of the 108 leases in 2007 are due to irrigators in Idaho entering into single-year lease contracts with district rental pools. The total number of leases for the Pacific Northwest Region is 316 and the total quantity traded is over 5.5 million acre-feet.

Although the total quantity leased per year shows a series of peaks and valleys, these peaks and valleys establish a clear increasing trend for quantities traded in the Pacific Northwest Region. The average quantity leased per year is also a series of peaks and valleys; however, since the number of leases per year is increasing, average quantity leased per year shows a decreasing trend.

Average annual lease prices in the Pacific Northwest show a weakly increasing trend. Aside from a huge price spike in 2001, when the Bonneville Power Administration had agreements to lease back water from irrigators for power generation uses, prices have been steadily (although slowly) increasing over the past two decades. Severe drought conditions and power shortages drove Bonneville Power Administration to lease back irrigated water from over 700 irrigators in order to enhance stream flow for endangered fish, continue to provide hydropower, and ease the electrical burden of the irrigation process.

[FIGURE 9 OMITTED]

Intermountain Region Transactions

Intermountain Region transaction data is shown in Figures 11 and 12.

Sales. Sale transaction numbers start strong in the Intermountain Region (Arizona, Nevada, New Mexico, and Utah) in the study period. In 1987, 1988, and 1989 the number of transactions is 40, 24, and 25, respectively. Transaction numbers then dip over the following ten years, with the highest number of transactions reaching just 11. Finally in 1999, transaction numbers begin to steadily increase and in the five years following 1999, transaction numbers range from 12 to 19 per year. Transaction numbers continue to increase each year and finish at 72 transactions in 2007. This increase in transactions over the final few years is also seen individually in Arizona, Nevada, and New Mexico, so it is not surprisingly that the regional data shows the same trend. Utah sale transactions are declining over this period, but the actual number of sale transactions is small enough not to influence the overall regional data. For the Intermountain Region, there are a total of 448 sales during the study period.

[FIGURE 10 OMITTED]

While numbers of sale transactions are on the rise, both total volume and average volume sold are declining. Total volume over the years has seen spikes and drops and although the declining trend is not pronounced, it is not impossible to see. Since total volume is declining and the number of transactions per year is increasing, this indicates the average volume sold per year is decreasing. Total volume sold during the study period is 779,699 acre-feet.

Until 2006, average sale prices in the Intermountain Region appear to be steadily but slowly increasing, without any major peaks or valleys, and prices generally ranging between $500 and $2,000 per acre-foot. (The exception occurs in 2003, when prices are higher, at about $5,500 per acre-foot.) In 2006, however, the average price skyrockets to over $14,000 per acre-foot and remains high, at close to $10,000 per acre-foot in 2007. Looking at the states included in this region individually, all of them display sharply increasing prices in 2006. In 2007, all of the states except for New Mexico continue to show price increases. New Mexico's price decline in 2007, therefore, is strong enough to influence the regional data and cause an overall small decline in price for 2007.

Leases. For the Intermountain Region in 1987-2004, the number of leases per year is in the single digits; the smallest number of leases per year is 2 and the largest number is 9. In both 2005 and 2006, the number of leases per year jumps to 17, but in 2007 the number again drops into the single digits (4 transactions per year). The spike in lease transactions for this region in 2005 and 2006 is directly related to the increase in the number of leases in New Mexico for these years, as the Bureau of Reclamation leased water from multiple suppliers to enhance stream flows for the Middle Rio Grande Silvery Minnow. New Mexico transactions contribute 15 of the region's 17 transactions in 2005 and 12 of the region's 17 transactions in 2006. The total number of leases over the study period is 128, but the data does not show a clear trend in numbers of lease transactions for the region.

[FIGURE 11 OMITTED]

Although the annual total quantifies experience years of high volume and sharp quantity increases, the overall total quantity in lease transactions in the region is declining. The highest quantity of water leased for the region occurs in 1990-1996. Each year shows a volume of water traded at least in the hundreds of thousands of acre-feet, the low being just below 500,000 acre-feet and the high at over 1.4 million acre-feet. However, in 1997 the total volume traded falls to just over 71,000 acre-feet. Aside from a spike in total quantity leased in 2001 (1.5 million acre-feet), the total volume remains under or just around 100,000 acre-feet per year through 2007. Over the study period, the total quantity of water leased is 8.6 million acre-feet.

For about the first ten years of the study, average prices for leases in the Intermountain Region appear to be decreasing, then, with a series of small peaks, prices begin to slowly rise. Prices generally remain under $100 per acre-foot until 2001 when the price reaches $200 per acre-foot and again in 2003 with a price of $130 per acre-foot. Prices make a final jump in 2006 and 2007 with $162 and $550 per acre-foot respectively. Arizona's lease prices are the highest of four states in the region, and due to a few high volume transactions in 2006 and 2007, Arizona's prices strongly influence recent regional price trends.

[FIGURE 12 OMITTED]

Conclusion

This study analyzes water sales and leases for each of the states and regions in the study area, and reports on the number of transactions, total quantity traded, and average price per year. When looking across the data and comparing all states and regions together, some general trends can be identified. The number of transactions each year show increasing trends, or at least weakly increasing trends, for both sales and leases in all states and regions, with the only exception being New Mexico water sales. These findings support Brown's observation, noted earlier, that leases across the West have been rising in recent years. (11) Since transaction numbers are rising in most areas and regions, yet total quantity traded is not always increasing at the same pace, average volumes per transaction tend to be decreasing. This may be the result of decreasing transaction costs for both sales and leases as the western water market continues to develop.

Trends in total annual quantity traded vary across states and regions. Looking at sales, there are decreasing volumes of water traded each year with the exception of Texas, where volumes are moderately increasing. Leases, on the other hand, are becoming the more common vehicle for trading, with increasing volumes of water leased over the period examined in California, Colorado, New Mexico, Texas, and the Pacific Northwest Region.

Finally, looking at average prices over time, there is not a single state or region where either sale or lease prices are declining. Average lease price trends for California and Texas appear to be flat over time, but average sale and lease prices for all other states and regions are increasing. The highest average sale prices are in Colorado, while the highest average lease prices are in the Intermountain Region. The Pacific Northwest Region has the lowest sale and lease prices, likely due to the region's relative abundance of annual supply compared to agricultural and urban demand.

The Appendix provides tables showing percent change in average annual prices for both sales and leases. This highlights price variability over time in water markets and may also indicate a market that is not yet stable. In certain states, there are periods of significant price increases and decreases for sales and leases. For example, Colorado sales show a positive percent change for each of the final three years of the study period, which corresponds to the price increases on Colorado's price graph. For New Mexico sales, the opposite can be seen, with percentage decreases over the final three years. When looking at California sale price percent change, a lot of variability is seen between years, which plays out on the sale price graph as series of peaks and valleys, but with an overall upward trend.

As for percent changes in lease prices, there are several stand-out years for both the Pacific Northwest Region and Intermountain Region. In 2001, there is a distinct percent increase in average price for the Pacific Northwest Region, which is the result of a big price spike. For the Intermountain Region, there is a clear rise in percent change over the final three years. When looking at California and Texas, yearly price variability is similar to other states; however, the magnitude of variability appears less than other states or regions where there are clear, large, price spikes. Since both California and Texas lease prices show a flat trend line over the study period, the smaller magnitude in yearly percent change is fitting.

Although prices vary greatly within and between states and regions, and prices are dependent on a multitude of factors, the one common thread through the previous two decades is that water prices are rising. Looking forward, with climate uncertainties, growing urban communities, and increasing populations, one can only anticipate prices will continue to rise, leading to an ever-increasing need to understand the nature and value of water.

Appendix
Table 1 Percent Change in Average Sale Prices

Year   California   Colorado   New Mexico    Texas

1987       --          --          --          --
1988     65.69%       71.19%      9.60%        6.96%
1989     82.85%       26.43%     16.55%       42.71%
1990     15.30%       81.22%     23.35%        1.60%
1991     35.60%      103.71%      8.49%       70.04%
1992    155.76%        2.68%     35.97%      176.70%
1993     26.10%       71.22%     96.43%      140.89%
1994    168.99%      369.08%     24.50%       16.44%
1995    576.36%        1.18%        N/T       53.43%
1996     57.97%       58.23%     32.78%#      68.34%
1997     73.36%       32.68%     43.37%      253.17%
1998    663.42%        2.33%        N/T        5.47%
1999      2.16%        1.61%    135.78%#      38.90%
2000     67.44%      499.64%     21.86%       44.50%
2001     42.63%        5.36%      1.99%      133.85%
2002     62.89%       40.31%      1.40%       65.42%
2003    106.47%       57.41%      5.03%      456.88%
2004     44.45%       83.14%      0.78%       48.05%
2005     72.92%       65.96%      2.18%       11.30%
2006     41.26%       32.39%     23.31%       70.22%
2007    239.64%       67.02%     64.48%     1372.87%

Year   Pacific Northwest   Intermountain

1987          --                --
1988       8424.90%            84.53%
1989         85.75%            33.03%
1990         91.07%            28.22%
1991         15.42%            48.58%
1992       2999.78%           267.54%
1993         60.15%            19.68%
1994         71.59%             2.88%
1995       1160.10%            15.03%
1996         44.42%            57.80%
1997          7.77%            28.63%
1998         76.79%           427.93%
1999       1033.20%            59.25%
2000            N/T            49.99%
2001        344.88%#          341.29%
2002         45.46%            11.40%
2003         11.68%            72.65%
2004         37.96%            50.44%
2005         26.55%            32.71%
2006        138.55%           539.94%
2007         38.31%            33.57%

Notes: N/T stands for no transactions in that year.

Percentages in bold follow a year without transactions so
the percent change was calculated using the previous year's
price.

Note: Percentages in bold indicated with # follow a year without
transactions so the percent change was calculated using the
previous year's price.

Table 2
Percent Change in Average Lease Prices

Year   California   Colorado   New Mexico    Texas

1987                    N/T                     N/T
1988     90.16%       0.00%       3.97%       0.00%
1989    192.39%     645.92%      51.23%      45.67%
1990      9.62%       1.53%         N/T         N/T
1991    191.16%       N/T        82.53%#    110.31%#
1992     81.35%      72.25%#     34.06%      45.98%
1993     68.48%      44.14%      88.25%     158.04%
1994     13.30%       8.28%    1332.46%      56.89%
1995     28.13%     251.21%      63.92%      51.13%
1996    251.95%      56.73%         N/T      91.95%
1997     76.18%      31.94%     158.45%#     16.43%
1998     13.95%      34.72%      87.20%     142.63%
1999     22.59%       7.12%     360.30%     332.10%
2000     17.01%     119.22%      64.01%      65.48%
2001     71.35%      76.01%      19.18%      13.93%
2002     44.64%     116.09%     115.58%      62.54%
2003     17.82%     588.98%       1.12%      35.35%
2004      7.23%      57.07%       9.22%      57.56%
2005      3.09%      63.90%      25.76%      59.58%
2006     67.36%      63.01%       9.78%      31.52%
2007     21.81%      42.34%      53.08%     142.50%

Year   Pacific Northwest   Intermountain

1987            N/T
1988          0.00%            16.46%
1989         13.60%            57.80%
1990        101.47%            79.09%
1991         91.92%            19.50%
1992         26.75%             3.17%
1993         65.26%             3.19%
1994          1.18%            26.37%
1995         42.47%             0.38%
1996        103.73%             3.85%
1997         20.37%             5.21%
1998         36.07%            78.62%
1999         56.05%           372.38%
2000          2.16%            15.16%
2001       3566.71%           215.24%
2002         72.88%            63.26%
2003         47.66%            78.41%
2004         33.26%            66.25%
2005         19.33%            68.23%
2006         52.34%           116.04%
2007         75.26%           238.02%

Notes: N/T stands for no transactions in that year.

Percentages in bold allow a year without transactions so
the percent change was calculated using the previous year's price.

Note: Percentages in bold is indicated with # allow a year without
transactions so the percent change was calculated using the
previous year's price.


We thank the National Oceanic and Atmospheric Association, as well as the Bureau of Reclamation, for grant funding for this project. We would also like to thank Dr. Rosalind Bark for her review of this paper, as well as Lana Jones and Jennifer Pullen for their prior work on the water transactions database. Any errors are the responsibility of the authors.

Web Connections

Internet resources suggested by the Lum Library

Annual Normalized Prices for Water Resource Projects--USDA Natural Resources Conservation Service

http://www.economics.nrcs.usda.gov/cost/

normalizedprices/index.html

Office of Water--U.S. Environmental Protection Agency

http://www.epa.gov/ow/

Water Data for the Nation--U.S. Geological Survey

http://waterdata.usgs.gov/nwis

Water Online

http://www.wateronline.com/

Water Resources of the United States--U.S. Geological Survey

http://water.usgs.gov/

Water Supply Forecasting--U.S. Department of Agriculture Natural Resources Conservation Service

http://www.wcc.nrcs.usda.gov/wsf/

Water Supply & Sanitation--World Bank

http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/

EXTWAT/O,,contentMDK:21706928~menu

PK:4602430~pagePK:148956~piPK:216618~theSitePK:4602123,00.html

The World's Water (Data)--Pacific Institute

http://www.worldwater.org/data.html

by Elizabeth Basra and Bonnie G. Colby, PhD

(1.) Steven J. Herzog, "The Appraisal of Water Rights: Their Nature and Transferability," The Appraisal Journal (Winter 2008): 39-46; and Steven J. Herzog, "The Appraisal of Water Rights: Valuation Methodology," The Appraisal Journal (Spring 2008): 122-131. Readers interested in the development of the water appraisal literature may want to review two additional articles on water rights valuation that appeared in The Appraisal Journal over a decade ago: Bonnie G. Colby, "Alternative Approaches to Valuing Water Rights," The Appraisal Journal (April 1989): 180-196; and Bonnie G. Colby, "Recent Trends in Southwestern Water Values," The Appraisal Journal (October 1991): 488-500.

(2.) Jedidiah Brewer, Robert Glennon, Alan Ker, and Gary Libecap, "Transferring Water in the American West: 1987-2005," University of Michigan Journal of Law Reform 40, no. 4 (2006-2007): 1021-1053.

(3.) Thomas C. Brown, "Trends in Water Market Activity and Price in the Western United States," Water Resources Research 42, no. 9 (2006).

(4.) Henning Bjornlund and Brian O'Callaghan, "A Comparison of Implicit Values and Explicit Prices of Water," Pacific Rim Property Research Journal 11, no. 3 (2005): 316-331.

(5.) Water Strategist, Analysis of Water Marketing, Finance, Legislation and Litigation, Private Publication, Stratecon Inc., 1987-2007, http://www.waterstrategist.com. The data in this study and article is used with permission from Water Strategist, all rights reserved.

(6.) An acre-foot of water is the amount of water that would cover one acre to a depth of one foot (about 326,000 gallons).

(7.) Most transactions in Water Strategist have an easily identifiable price and quantity for each sale or lease. There are, however, transactions for which the data provided could not be used. Examples of data that were excluded include data from transactions (1) where land and water sold together and a separate price for the water is not provided; (2) where either the price or quantity is not disclosed; and (3) where the transaction is a result of a donation or an exchange without a listed price. There also is a small number of transactions where the price or quantity listed in the transaction is given as a range, or where multiple prices and quantities are reported in a single transaction. In these cases, an average or weighted average price and quantity is used.

(8.) John B. Loomis et al., "Expanding Institutional Arrangements for Acquiring Water for Environmental Purposes: Transactions Evidence for the Western United States," Water Resources Development 19, no. 1 (2003): 21-28.

(9.) David S. Brookshire et al., "Market Prices for Water in the Semiarid West of the United States," Water Resources Research 40, no. 9 (2004).

(10.) The following is an example of how this value is calculated. Suppose there are three sale transactions in Arizona in 1993: (1) 33,250 acre-feet of water sold for $1,050.00 per acre-foot, (2) 11.05 acre-feet sold for $615.38 per acre-foot, and (3) 25 acre-feet sold for $1000.00 per acre-foot. First, the quantity sold is totaled for the three sales to obtain a single total quantity number (33,250 + 11.05 + 25 = 33,286.05). Then, the quantity of water sold for each transaction is multiplied by the corresponding price per acre-foot (33,250 x $1,050.00 = $34,912,500.00; 11.05 x $615.38 = $6,799.95; 25 x $1,000.00 = $25,000.00) and these are summed to obtain a single number that represents the total amount paid for water in Arizona in 1993 ($34,912,500.00 + $6,799.95 + $25,000.00 = $34,944,299.95). The next step is to divide the total amount paid by the total quantity sold ($34,944,299.95/33,286.05 = $1,049.82). Lastly, since all prices are in 2008 dollars adjusted using the Consumer Price Index, the final reported average price for Arizona sales in 1993 is $1,543.31.

(11.) Brown, "Trends in Water Market Activity."

Elizabeth Basta is a master's degree student in the Department of Agriculture and Resource Economics at the University of Arizona. Her previous educational experience includes a bachelor's degree in environmental economics from Western Washington University as well as studies in South and Central America. Prior to beginning graduate studies she worked for The Nature Conservancy in Arlington, VA. Contact: ebasta@email.arizona.edu

Bonnie G. Colby, PhD, is a professor at the University of Arizona, where she has been a faculty member since 1983. Her expertise is resolving disputes over the environment and conflicting uses of natural resources, drought and climate change adaptation, water management, water markets and transactions, and water policy. Colby has authored over one hundred journal articles and seven books, including Water Markets in Theory and Practice; Arizona Water Policy: Management Innovations in an Urbanizing, Arid Region; and Braving the Currents: Evaluating Environmental Conflict Resolution in the River Basins of the American West. She has provided invited testimony on these matters to Native American tribal councils, state legislatures, courts, and the U.S. Congress. Contact: bcolby@email.arizona.edu
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