Economic Arrangements to Improve Dry-Year Supply Reliability in the Lower Colorado River Basin

Abstract

The precarious balance between water supply and demand in the Lower Colorado River Basin leaves water users in the Basin vulnerable to dry-year supply variability. Particularly during drought, temporary water transactions can facilitate an efficient reallocation of water from low-value uses to uses with a relatively higher marginal value. This research is an analytical and empirical investigation into temporary, market-based water transfers to stimulate an efficient reallocation of water during drought. Temporary water leases across the western U.S. between 1987 and 2005 are analyzed using two stage least squares (2SLS) techniques to compare and explain the determinants of the price of the West’s water leases. Dry hydrologic conditions are shown to increase the price of leased water in virtually all state and regional models analyzed. Also, water leased for agricultural use is found to be less expensive than water leased for municipal or environmental purposes in most models. To inform drought-responsive lease arrangements, this research demonstrates the residual or farm budget approach to estimate net returns over variable costs for select field crops in Yuma and La Paz counties in Arizona. Estimates range from -$50.00/AF of water applied for upland cotton produced in Yuma County to a high of $67.37/AF of water applied for alfalfa in La Paz County. As a point of comparison, NROVC for head lettuce are estimated at $1,425.20/AF of water applied. Such estimates can be useful in negotiations over compensation payments for voluntary irrigation forbearance programs.