Water markets and drought: Lessons from the Rio Grande Valley

Scientists predict that the United States will experience more frequent episodes of drought in the coming decades. This is especially true in the Southwestern U.S., where farmers face the challenge of irrigating dry land with increasingly limited water resources.

One remedy, proposed by economists and environmentalists alike, is to establish a water market. In a water market, water users have legal entitlements to specific quantities of surface water. These “water rights” can be bought and sold so that a user can effectively acquire more water by paying a price. Economists like water markets because, in theory, they increase water’s productivity: farmers with high-value products, like berries, can buy water from farmers with low-value products, like wheat, and increase overall profit from the same unit of water. However, researchers have struggled to assess the actual impacts of water markets because good data on water right transactions is so limited.

In their recent study published in Advances in Water Resources, researchers Peter Debaere and Tianshu Li successfully manage to quantify the impacts of water markets by using changes in crop production as an indicator of water right transactions. The focus of their study, the Rio Grande Valley in Texas, has one of the few established water markets in the country. It also offered two critical advantages to the researchers. First, the region has excellent agricultural records. Second, the region is bordered by counties with similar topographies and drought patterns that do not have water markets. This allowed the researchers to compare the impact of drought on crop production in regions with and without a water market.

Their comparison of crop production changes in these two regions revealed that the presence of a water markets did indeed move water to more productive uses, especially in times of drought. They found that after the Rio Grande Valley established a water market in 1971, crop production in the region shifted towards crops that could use water more productively, suggesting that farmers with low-value crops were leasing their water rights to farmers with high-value crops. During drought, this effect was amplified, and more high-value crops were grown as a percent of overall crop production relative to non-drought years. In contrast, in counties without water markets, crop production did not shift towards more high-value crops in the period after 1971, and low-value crops maintained their share of overall crop production during drought.

Beyond measuring the impact of the Rio Grande Valley water market, Debaere and Li indirectly present a model for well-functioning water markets. In the Rio Grande Valley, farmers can easily access information on existing water rights and execute water transactions at a relatively low cost. The ease of executing transactions is aided by the presence of a Watermaster who oversees the market. The region also has highly diversified cropland, so there are economic gains to be made from transferring water rights from low to high-value crop growers. Finally, the Rio Grande Valley has limited groundwater supplies, which means that farmers can’t tap into groundwater during drought and must instead look to surface water transfers.

The case of the Rio Grande Valley shows that if certain regulatory and topographic conditions are met, water markets can effectively increase water’s productivity. With the increasing frequency of drought events in the United States pushing water resources to their limits, establishing water markets might prove key to increasing drought resiliency.