Water Rights Security Is Capitalized into Agricultural Land Values
Shahin Bahrami is a postdoctoral research associate; Mani Rouhi Rad and Rodolfo M. Nayga, Jr., are professors of Agricultural Economics at Texas A&M University
Agriculture in the western United States is highly dependent on irrigation. However, access to water is not equal across farms. Western states typically rely on the Prior Appropriation Doctrine (“first in time, first in right”), under which some users’ rights to water access are more secure than the rights of others. For example, when supplies are scarce, senior appropriators are more likely to receive their full allotment, while junior appropriators are less likely. Access to storage rights can also increase security in water access.
Differences in security matter economically. Less reliable access to water increases production risk, limits crop choices, and increases the likelihood of costly adjustments, such as fallowing or crop switching. Economic theory, therefore, predicts that more secure water access should be capitalized into land values, just as other risk-reducing attributes are priced in asset markets.
Recent empirical evidence from Colorado supports this prediction (Bahrami, Rouhi Rad, and Nayga, 2025). A hedonic pricing analysis of 25,000 agricultural land transactions shows that irrigated land sells for roughly 64% (approximately $6,300 per acre) more than comparable dryland parcels. Land markets place a significant “security premium” on the reliability of the water rights portfolio. On average, our results indicate that each additional year of seniority in a water rights portfolio increases irrigated land value by about $49 per acre. Furthermore, markets capitalize on assets that mitigate surface water volatility. Specifically, access to water storage rights increases land value by an average of 16%, while supplemental groundwater access adds a 14% premium.
Our results highlight the importance of water security for agricultural production. This finding has two implications in the face of increased uncertainty surrounding surface water availability under climate change. First, investments that increase water security, beyond average water availability alone, can generate welfare gains by reducing production risk and costly adjustment. Our analysis provides a monetary estimate of the potential benefits of such investments through increased agricultural land values. Benefits may be more effectively justified when tied to observable land-value premiums generated by enhanced water security, while also informing how the benefits of such investments are distributed across agricultural producers.
Second, given the heterogeneity in water access security under the Prior Appropriation Doctrine, water markets can facilitate the reallocation of water toward users with higher marginal values of reliable supply, improving allocative efficiency under scarcity. At the same time, the increasing value placed on water reliability highlights the need for water rights institutions that are not only clearly defined but also perceived as fair, as inequitable allocations risk undermining market participation, social legitimacy, and long-run resource sustainability.
References
Bahrami, S., Rouhi Rad, M., Hrozencik, A., Perez Quesera, G., & Nayga Jr, R. M. (2025). The Value of Water Access Security in Agriculture. Unpublished, Working Paper.
The Department of Agricultural Economics at Texas A&M University advances economic research that improves understanding of how agricultural production and resource management affect farmers, consumers, and society as a whole.
