Dry Deals: Cash Rents in a Water-Stressed West

Abstract

This thesis examines how climate and other variables explain differences in irrigated cropland cash rents across counties in the Colorado River Basin (CRB), which has faced extreme water scarcity for decades. Previous studies using the Ricardian approach to estimate how climate affects the U.S. agricultural land values rely on value data from the USDA Census ofAgriculture. These data combine values for irrigated and non-irrigated cropland, pastures, forestland, and residential property, which may respond to climate in different ways. Sales values may also suffer from unobserved non-farm impacts, biasing estimates. This study applies the Ricardian approach, instead relying on irrigated cropland cash rents, which avoids these problems. In CRB counties, there is a strong negative correlation between temperature and precipitation, as well as correlations between seasonal climate variables. As a result, there was a high degree of multicollinearity in the data, which was addressed by applying ridge regression methods. Historical cash rents are higher in six low desert counties in Southern California and Southwestern Arizona, compared to other counties in the CRB. Under mid-century projections, cash rents increased by $50-$66 per acre in low desert counties and by $2-$32 per acre in other CRB counties. Percentage increases were larger in the other counties, as they have lower baseline rental rates. Being on the U.S.-Mexico border, a possible proxy for farm labor availability, has a strong and positive effect on cash rents. This border effect is larger than the climate effect in our analysis. Warmer temperatures may increase the potential to grow high-value, labor intensive crops, but this requires large supplies of labor. Counties on the U.S.-Mexico border have access to such labor supplies from Mexico, while other counties do not. Results from regressions interacting winter temperatures and border effects were consistent with the hypothesis that counties may not benefit as much from winter warming if they do not have access to complimentary labor supplies from Mexico. Future access to abundant labor from Mexico might be a vulnerability in this region, highlighting that agricultural productivity is influenced by more than just climate factors.