Economic Efficiency of Short-Term Versus Long-Term Water Rights Buyouts

Journal of Agricultural and Applied Economics, Aug 2008 by Wheeler, Erin, Golden, Bill, Johnson, Jeffrey, Peterson, Jeffrey

Because of the decline of the Ogallala Aquifer, water districts, regional water managers, and state water officers are becoming increasingly interested in conservation policies. This study evaluates both short-term and long-term water rights buyout policies. This research develops dynamic production functions for the major crops in the Texas Panhandle. The production functions are incorporated into optimal temporal allocation models that project annual producer behavior, crop choices, water use, and aquifer declines over 60 years. Results suggest that long-term buyouts may be more economically efficient than short-term buyouts.

Key Words: dynamic production function, nonlinear optimization, Ogallala Aquifer, water rights buyout

JEL Classifications: Q30, Q32, Q38

Agriculture in the Great Plains is heavily dependent on groundwater supplies from the Ogallala Aquifer. Over 70% of the total value of crop production in the area comes from irrigated acreage overlying the aquifer, which encompasses 174,000 square miles and under lies parts of eight states: Texas, New Mexico, Oklahoma, Colorado, Kansas, Nebraska, South Dakota, and Wyoming (Alley, Reilly, and Franke). The abundant supply of feed grains produced with water from the Ogallala Aquifer fuels the livestock, meatpacking, and ethanol industries. Additionally, the area produces approximately 32% of the national production of cotton (National Agricultural Statistics Service [NASS]). Many of these industries are vertically integrated so that changes in one industry will impact the others, having a ripple effect on the economy. The unfortunate consequence of this integration is that regional economies have become precariously water dependent.

The Ogallala Aquifer has very little recharge and is essentially a finite resource. In portions of the Ogallala Aquifer, up to 40% of the predevelopment storage has already been depleted (Feng and Segarra), and the overdraft continues to take place. Current aquifer decline rates foretell the eventual demise of irrigated agriculture and conversion to dryland production, which may have a significant long-term negative economic impact on the area. Faced with this situation, policymakers, state water managers, and other stakeholders are investigating conservation policy alternatives aimed at reducing current levels of groundwater consumption and extending the economic life of the aquifer. In order to extend the economic life of the aquifer and maintain the economic base of the region, both voluntary and mandated policy intervention may need to be considered.

The development and implementation of effective water management strategies for irrigation in the Great Plains is a multidimensional problem and may be more important there than anywhere else in the United States. Policymakers must weigh not only the potential water savings that may be generated through a particular water conservation strategy but also the implementation costs and the potential impacts on the regional economy (Amosson et al.). Other considerations include the incentives that may be required for producer adoption and the regulations and monitoring that may be necessary to ensure that water savings are realized. Failure to address the aforementioned factors can lead to the development and implementation of water conservation strategies that may not reach the goals or may not have the impacts originally intended by water policymakers.

The public policy debate over the sustainability of the aquifer is significant. Several policy alternatives have been suggested, including water taxes, mandatory reductions in current water allocations, voluntary water retirement programs, incentive programs aimed at reducing the planted acreage of water intensive crops, incentive programs aimed at increasing irrigation efficiency, and incentive programs aimed at temporarily converting irrigated land to dryland production. In order to make informed decisions, policymakers need accurate information concerning the economic impacts of these various policies.

This research considers two policy scenarios as well as a status quo scenario for nine counties of the southern High Plains of Texas: Cochran, Floyd, Gaines, Hale, Hockley, Lamb, Lubbock, Terry, and Yoakum. These are relatively high-water-use counties that accounted for 1,243,800 irrigated cotton acres, 25,800 irrigated grain sorghum acres, and 38,400 irrigated wheat acres in 2006 (NASS). The three scenarios include 1) a status quo scenario in which no change is made to current water policy, 2) a long-term water rights buyout program where the cropland is permanently converted to dryland production, and 3) a short-term water rights buyout program where the cropland is converted to nonirrigated production but allowed to resume irrigated production after 15 years. Therefore, the objective of the study is to evaluate the efficiency of both long-term and short-term water rights buyout policies.

The concept of purchasing and permanently retiring water rights is relatively new. Ise and Sunding evaluated the state-sponsored purchase of agricultural water rights in the Lahontan Valley of Nevada. Golden evaluated the water rights buyout program in the Rattlesnake Subbasin of Kansas. Supalla, Buell, and McMullen compared the state's cost of purchasing water rights to the state's cost of leasing water rights in Nebraska. The concept of a short-term water rights buyout program is also relatively new. The Environmental Quality Incentives Program (EQIP) provides a voluntary conservation program for farmers and ranchers. Within Kansas, EQIP funds from the Natural Resources Conservation Service are used to suspend irrigated production for four years. The Conservation Reserve Enhancement Program is being used in Nebraska and Idaho to suspend irrigated crop production 14 to 15 years.