Valuing Colorado's Agriculture: A Workshop for Water Policy Makers Monday, October 7, 2013 Cheyenne Mountain Resort, Colorado Springs Colorado Agricultural Water Alliance Colorado Water Institute Moderator: Richard G. Brown Sand Dollar Research Frank A. Ward Ag, Consumer, and Environmental Sciences (ACES) College New Mexico State University

2 Road Map Opportunity costs Common denominators Assessing comparative economic values Developing flexible water transfer institutions Use of nonmarket approaches for valuing water

3 Opportunity Costs The difference between bad and good choice: –Bad choice limits itself to visible effects. –Good choice accounts for both effects that are seen and those that must be foreseen. Difference: when immediate effect is favorable, later effects can prove disastrous. Bad policy pursues a small current good followed by a great future cost. Good policy pursues a great future good, at the risk of a small present cost.

4 Opportunity Costs Definition: Economic value displaced by transferring water from its current use when water is scarce. Measurement: The loss of benefit from the highest valued choice displaced by the alternative chosen. Efficiency: For water, measuring opportunity cost helps ensure that scarce water is used efficiently. Guidance: Measuring the value of water in irrigation guides choices on how much should be kept in irrigation and protected from transfer.

5 Common Denominators Example: Ag to urban water transfers that avoid ‘buy and dry.’ Use of common denominators to guide policy –Will measure all costs –Will minimize costs –Will compensate for costs –Will respect constraints to avoid unacceptable costs –Will require total benefits (urb) > total costs (ag) If these 5 conditions aren’t all satisfied, the transfer may fail to serve the state’s welfare.

6 Assessing Comparative Economic Values An important legal principle in Colorado limits water transfers: No injury Economic value of water in irrigation that allows comparison to value for urban use: –What irrigators are willing to accept in payment (wtap) for an ag-urban water transfer that avoids injury to the water right holder –What community of origin is wtap for the ag-urban water transfer to compensate for a water transfer avoids injury to the community

7 Developing flexible water transfer institutions Rotational fallowing (transfer varying amounts of water by year, ditch, and grower, depending on urban need) –Growers take water out of lowest valued crops –Vary crops, ditches, and growers by year –Flexible, avoids loss of water right –Avoids buy and dry –RF reduces the opportunity cost of water displaced from irrigated agriculture. And it helps urban users find the cheapest source of water. Community of origin could reveal their value of water in ag by paying growers to keep water in agriculture.

8 Use of nonmarket approaches for valuing water Efficiency Value: Economic values of water not observed from market prices Approaches: Infer value of water in existing uses that would be displaced by transfer –Willingness to pay for current water use –Willingness to accept in payment in place of water Constraints satisfied: Important values of water that cannot be measured but cannot be violated by any ag to urban transfer.

9 Farm Income Produced By Irrigation Water One data source - cost and return enterprise budgets targeted by crop, time, place, and irrigation technology. –Crop price –Water Price –Water use (ET) –Yield –Production cost/acre –Land in production Historical prices paid for water transfers

Marginal Value of Water Consumed in Irrigation, Lower Rio Grande Project Area, NM 2013 ($/A-F Depleted) % full surface water % energy price subsidy depth to pumping SWGW

11 References (short list) R.A. Young and S.L. Gray (1972), The economic value of water: Concepts and empirical estimates, Unpublished Report to the National Water Commission. CSU F.A. Ward and Ari Michelsen (2002), “The Economic Value of Water in Agriculture: Concepts and Policy Applications,” Water Policy. R.A. Young, Determining the Economic Value of Water: Concepts and Methods (2005), Resources for the Future.