The Value of Water
An Uncomfortable Nexus between Value and Price
I have yet to encounter a person who denies the importance of water. Instinctively we know we need water to survive and thrive. Water is essential for life and health. Water is a defining characteristic of Earth and it’s abundant in the universe.
Of all the molecules in the universe, the one most important to humanity is water.
Water is the third most abundant molecule in the universe, after hydrogen gas (H2) and carbon monoxide (CO). About 71 percent of the Earth’s surface is covered by water.
https://www.thoughtco.com/definition-of-water-in-chemistry-605946
The distribution of water is so extensive we tend to call water by its unique source, like Lake Mead, the Mississippi River, or Sierra Nevada snow pack. We appreciate water because of our personal experience. In this sense, water is implicit. It’s used in language to illustrate a description like an unspoken truth.
Water off a ducks back.
Come hell or high water.
You never miss the water until the well runs dry.
Essential Water
The challenge we face is recognizing the new reality of water in the 21st Century. Water molecules are abundant in the universe but clean fresh water is much rarer.
Only about 2.5 percent of the Earth’s water is fresh water. Nearly all of that water (98.8 percent) is in ice and ground water.
https://www.thoughtco.com/definition-of-water-in-chemistry-605946
The story of water being cheap and abundant in the American West was brought to you by federal government projects and state subsidy, pots of money which have all but dried up. The burden of new supply and maintenance has been localized and transferred to consumer buyers.
We shouldn’t be surprised to find property owners and enterprises of all sorts engaging in water transactions when new or additional water supplies are needed. Water is essential for our economy. The availability of water underpins property rights, food, energy, and the security of the public good. From steak to the Internet, from a farm to Silicon Valley, all depend on available water. Water is essential to our social and economic prosperity.
14% Annual Water Market Growth in Texas
Those of us fascinated by water markets are the first to admit the lack of comparable data is a problem for the future security of water. That is why we developed a data model to track and analyze water transactions. Our pilot project started in Texas because it’s one of the largest and fastest growing water markets in the country.
Wholesale water purchasing in Texas has increased markedly in the 21st century growing on average 14% a year. By 2014 the amount of water purchased grew to 4.2 million acre feet in Texas, about 29% of total state-wide water use in that year. 36 million acre feet has been purchased, about 16.5% of total state-wide water use.
Texas Water Development Board Annual Statewide Water Use
Water transactions include the lease or purchase of water rights, and the purchase of physical water supply. Spot contracts are one-time and may be for temporary supply or permanent acquisition. Term contracts are long-period acquisition agreements with service periods typically 30-100 years.
Price of Water
Wholesale transaction data is useful to evaluate the market value of water because each contract is independently negotiated. The price paid for water rights or supply is determined by arms-length negotiation, very different than retail rates.
What is the price of water? The question is a pain point, like “what price are we going to have to pay now”? Psychologically we are braced for bad news when we hear the words price and water used together. Yet, most of us have bought a bottle of water at a convenience store. We see a bottle of water priced like a Coke, $1.50 for 16.9oz, and willingly pay. The price of water matters when you are the one doing the buying.
Cities are leasing water rights to secure water permits for large scale groundwater projects. Developers are tasked to secure the water before they can get a building permit for a new real estate development. Deep pocketed investors are investing in future water supply by buying up farm land. Corporate acquisitions and mergers come with water rights that are not priced into the value of the purchase.
If the owner of a Farm and Ranch property is approached to lease their water rights how are they supposed to evaluate the offer without price data? What is the opportunity cost? If that same owner decides to sever the water rights from the surface estate, how is an appraiser supposed to evaluate the water rights? How is the sale price of the property to be determined? Water is not currently priced into real estate. It’s as if the availability of water is assumed and that is a mistake. The price of water matters because what is a property worth that has no water?
Comparable Data
Our proprietary database records the year a water contract was executed, or the last amendment. The data comes from analysis of about 5,000 water contracts. By looking at the year water contracts were executed we can see water scarcity (extreme weather insecurity) is a motivating factor for buyers. Drought isn’t the only motivation of buyers but there are clear leaps in volumes secured contractually during extreme weather events.
The Importance of Groundwater for Property Markets
The trends are clear, water is increasingly secured through wholesale transactions and groundwater is an important source for future water supply.
Overall, since 2000 there has been 140% increase in the total amount of new water guarantees based on volumes transacted. 2.3 million acre feet for the 30-year period between 1970 and 1999 increasing to 5.56 million acre feet for the 15-year period between 2000 and 2014. A formal spot market has also developed.
The most significant finding is the 1,138% increase in groundwater guarantees. Groundwater rights and supply contract volumes increased to 2.26 million acre feet between 2000 and 2014.
The water market is widespread. Many different segments within real estate are affected including commercial, industrial, farm and ranch, residential, and undeveloped land. There are an estimated 30 million properties with water features and rights. Ownership and control of groundwater is an emerging hot spot in real estate.
344% Increase in Groundwater Prices
Volumes aren’t the only thing that’s been increasing. As groundwater markets heated up so have the prices paid for wholesale water. The average price paid has gone up 93%, from $250.95 per acre foot to $485.52 per acre foot. The price for groundwater increased 344% to $2,425.25 per acre foot. We isolate for the price paid specifically to acquire the water right or water supply in a given year, excluding other costs wherever possible.
Groundwater prices are driving the increase. Surface water prices actually declined on average between periods, falling to $99.75 per acre foot.
Note the pull-back in prices in 2014. A quick look at weather data shows the end of 2014 was the start of what would be a wet and rainy period.
[A] record-breaker for Texas, according to State Climatologist John Nielsen-Gammon.
From Sept. 1, 2014 through Wednesday, the average rainfall across Texas was 75.17 inches, topping the previous record of 74.85 inches that occurred in 1942.
http://www.star-telegram.com/news/state/texas/article99589107.html
The drop in water prices appears to be due to fewer transactions and cheaper price. When it’s raining it’s a buyer’s market for water.
