Irrigation Water Leasing in Colorado and Nebraska By George Oamek, PhD

Irrigators in Colorado and Nebraska are being encouraged to enter into water leasing arrangements with municipalities seeking permanent or emergency water supplies and with agencies responsible for providing instream flows for endangered species.

This encouragement comes from state resource agencies worried about balancing water’s competing uses and from the financial terms being offered for these leases. The Colorado Water Conservation Board is hoping that about 50,000 acre-feet of water currently used for irrigation can be shared in the future with rapidly growing municipalities and environmental interests in the South Platte River Basin.

These buyer-willing seller leases aim to prevent thirsty cities from outright purchasing the water rights, with the indirect impact of “drying up” rural communities dependent on irrigated agriculture. In Nebraska, the State Department of Natural Resources, local Natural Resource Districts and the Platte River Recovery Implementation Program are all experimenting with various forms of lease markets in order to restore the Platte River to a more natural condition.

Broadly termed alternative transfer methods (or ATMs) for water, these leases vary from long-term rotational fallowing where an irrigator agrees to fallow a portion of their operation on a regular rotating basis (such as one in three years), to dry-year options that are only exercised during severe droughts, to short-term traditional leases. To date, the leases have been more talk than action.

Rotational fallowing is currently being used in Colorado on a small scale, but other forms of leases have been rather slow to develop compared to agencies’ expectations. The reasons for slow adop- tion have been economic and cultural. With currently volatile com- modity prices and uncertainties regarding future water shortages, it appears irrigators want more than they have been offered.

Economic Prospects

From an economic perspective, prospective water purchasers tend to base their offers on the value of the water for irrigation use or, alternatively stated, the contribution the water makes to the irrigators’ profits. Although intuitively appealing, this contribution varies widely from year to year due to fluctuating commodity prices. Under current prices, for instance, the additional profit afforded by irrigation may be less than $100 per acre in some areas. However, with prices near their 2013 – 2014 levels, this return may be near $500 per acre.

In addition, irrigators know that the prospective purchasers’ other water supply alternatives may be much higher than this foregone profit. Irrigators may also be concerned that the good faith act of temporarily transferring some of their supplies might trigger legal action regarding the amount of water to which they actually have rights.

Cultural Considerations

From a cultural perspective, there has been a reluctance by some irrigators to enter into leases because it might “show their hand” with respect to how much water they use and need. There is a general level of trepidation about being the first in the neighborhood to try something new with such an important asset like water. Some irrigators view water as something too important to lease at any price.

So far, lease success stories have been on a small scale. The aforementioned Colorado rotational fallowing program has yielded about 500 acre-feet per year at a cost near $500 per acre. The Grand Valley Water Users Association is participating in another form of ATM, water banking, involving leasing about 3,200 acre-feet per year from local irrigators at $356 per acre. These prices are well above the water’s value for irrigation under current crop prices. Other ATMs are currently being investigated but have yet to show promise to fulfill Colorado’s 50,000 acre-foot goal.

For the 2016 and 2017 crop years, the PRRIP and Central Nebraska Public Power and Irrigation District have offered surface water irrigators within the district $220 per acre to fallow up to 2,000 acres on a year-to-year basis to enhance Platte River flows. In light of the low price of corn, about 1,100 acres were enrolled for 2016, primarily consisting of center pivot corners and smaller hard-to- irrigate parcels. Based on the modest success of 2016, the number of participants increased by 50 percent for 2017, but the number of acres enrolled has not yet fully utilized the program. Nearby, the Central Platte Natural Resource District is pilot testing an electronic auction market for groundwater irrigation water. For the 2017 crop year, the PRRIP bid $250 per acre-foot and only received 35 acre-feet at this price. Considering crop consumptive use and depletion allowances, this equates to about $200 per acre to the irrigator. Similar to the Colorado leases, the lease prices in Nebraska tend to be in excess of the water’s value in irrigation under current commodity prices.

For purposes of providing a framework for the sharing of increasingly scarce water supplies across multiple uses, irrigation water lease markets are still evolving. However, in an era of volatile commodity prices and increasing data availability, we know that irrigators have been able to negotiate a significant premium for their water in excess of its productive value.

George Oamek, PhD, is an economist with Headwaters

Corporation and is also on the staff of the Platte River Recovery Implementation Program’s executive director’s office. His 30-year career has focused on agriculture economics, including irrigation water leases, municipal water supply planning and methods for managing risks. He received

his undergraduate education at Colorado State University and his graduate degree from Iowa State University. He also operates his family’s Century Farm in Southwest Iowa. 35

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