Abstract
Providing for increased water demands during periods of persistent drought and climatic variability may require water managers, users and planners to think differently about how water resources are allocated. A water marketing institution that allows water rights holders to reallocate water on a temporary basis could overcome these challenges with minimal conflict. In this paper, a water marketing institution that allows for the temporary reallocation of water rights in a spot and futures market is investigated. The results provide insight into three key questions: (1) how does trading impact the physical system, (2) does the value of water differ by trading agents, (3) how is economic welfare redistributed as a result of trading? Results of experimental treatments display minor impacts to the physical system, that prices differ across the different type of trading agents and the addition of a futures market has the ability to decrease market prices while increasing economic welfare as a futures market allows users to hedge against future water uncertainty.
Similar content being viewed by others
Notes
For instance the southwestern states are a semi-arid environment with little surface water flow, while the Pacific Northwest has large rainfall amounts with large surface water flows.
Current practices in the basin are that all water rights are adjudicated as 1907 priority under the doctrine of prior appropriation, creating a setting of homogenous water rights (see Phillips et al. 2011).
These reports stated that either an average water year would occur or a dry water year would occur without an estimate of inter-season water availability or across season availability.
Three treatments were conducted for each of the water allotment scenarios in the two different market settings, trading within the four months of a growing season and trading across the growing seasons.
References
Basta E, Colby BG (2010) Water market trends: transactions, quantities, and prices. Apprais J 78(1):50–69
Bellas A, Lange I (2008) Impacts of market-based environmental and generation policy on scrubber electricity usage. Energy J 29(2):151–164
Bjornlund H (2004) Formal and informal water markets: drivers of sustainable rural communities? Water Resour Res 40:W09S07. doi:10.1029/2003WR002852
Bjornlund H (2003) Farmer participation in markets for temporary and permanent water in Southeastern Australia. Agric Water Manag 63(1):57–77
Bosland PW, Bailey AL, Cotter DJ (1999) Growing Chiles in New Mexico. Working paper at New Mexico State College of Agriculture and Home Economics Guide H-230. http://cahe.nmsu.edu/pubs/_h/h-230.html
Brennan D (2006) Water policy reform in Australia: lessons from the Victorian seasonal water market. Aust J Agric Resour Econ 50(3):403–423
Brewer J, Glennon R, Ker A, Libecap GD (2008) 2006 Presidential address water markets in the West: prices, trading, and contractual forms. Econ Inq 46(2):91–112
Broadbent CD, Brookshire DS, Coursey D, Tidwell V (2014) An experimental analysis of water leasing markets focusing on the agricultural sector. Agric Water Manag 142:88–98
Broadbent CD, Brookshire DS, Coursey D, Tidwell V (2009) Water leasing: evaluating temporary water rights transfers in New Mexico through experimental economics. Nat Resour J 49(3/4):707–742
Brooks R, Harris E (2008) Efficiency gains from water markets: empirical analysis of watermove in Australia. Agric Water Manag 95(4):391–399
Brookshire DS, Colby B, Ewers M, Ganderton PT (2004) Market prices for water in the semiarid West of the United States. Water Resour Res 40(9):W09S04
Brower A (2004) ET toolbox, evapotranspiration toolbox for the middle Rio Grande. “A water Resources Decision Support Tool.” Water Resources Division Technical Service Center. Denver, Colorado. Bureau of Reclamation, United States Department of the Interior. http://www.usbr.gov/pmts/rivers/awards/ettoolbox.pdf
Brown TC (2006) Trends in water market activity and price in the Western United States. Water Resour Res 42:W09402. doi:10.1029/2005WR004180
Carlton DW (1984) Futures markets: their purpose, their history, their growth, their successes and failures. J Futur Mark 4(3):237–71
Chicago Board of Trade (2006) The Chicago board of trade handbook of futures and options. McGraw-Hill, Chicago, Prepared by: Julie Collins and Mark Melin
Chicago Board of Trade (1973) Commodity trading manual. Chicago Board of Trade, Chicago
Crase L, Pagan P, Dollery B (2004) Water markets as a vehicle for reforming water resources allocation in the Murray–Darling basin of Australia. Water Resour Res 40:W08S05. doi:10.1029/2003WR002786
Crase L, O’Reilly L, Dollery B (2000) Water markets as a vehicle for water reform the case of New South Wales. Aust J Agric Resour Econ 44(2):299–321
Czetwertynski M (2002) The sale and leasing of water rights in Western States: an overview for the period 1990–2001. Water policy working paper #2002-002, Georgia State University
De Mouche L, Landfair S, Ward FA (2011) Water right prices in the Rio Grande: analysis and policy implications. Water Resour Dev 27(2):291–314
Falk A, Meier S, Zehander C (2013) Do lab experiments misrepresent social preferences? the case of self-selected student samples. J Eur Econ Assoc 11(4):839–852
Florence R (2002) Haying FAQ. http://www.sheepscreek.com/rural/haying.html
Futures Industry Association (1984) An introduction to the futures markets. Futures Industry Association, Washington
Garcia P, Leuthold RM (2004) A selected review of agricultural commodity futures and options markets. Eur Rev Agric Econ 31(3):235–72
Getches DH (1997) Water law in a nutshell. West Publishing Company, St. Paul
Gorton G, Rouwenhorst KG (2006) Facts and fantasies about commodity futures. Financ Anal J 62(2):47–68
Gould GA (1989) Transfer of water rights. Nat Resour J 29(2):457–478
Gould GA (1988) Water rights transfers and third party effects. Land Water Law Rev 23:1–41
Hadjigeorgalis E (2009) A place for water markets: performance and challenges. Rev Agric Econ 31(1):50–67
Hansen K, Kaplan J, Kroll S (2014) Valuing options in water markets: a laboratory investigation. Environ Resour Econ 57(1):59–80
Hansen K, Howitt R, Williams J (2008) Valuing risk: options in California water markets. Am J Agric Econ 90(5):1336–1342
Herrera E (2000) Economic importance of the pecan industry. Working paper at New Mexico State College of Agriculture and Home Economics Guide Z-501. http://cahe.nmsu.edu/pubs/_z/z-501.html
Howitt R, Hansen K (2005) The evolving western water markets. Choices 20(1):59–63
Kennedy/Jenks Consultants (2011) Willamette river TMDL east and west TMDL alternatives due diligence evaluation. http://www.corvallisoregon.gov/modules/showdocument.aspx?documentid=6360
Kerr S, Newell R (2005) Policy-induced technology adoption: evidence from the U.S. lead phasedown. Resources for the future, discussion paper # 0814245
Levitt SD, List JA (2007) What do laboratory experiments measuring social preferences reveal about the real world? J Econ Perspect 21(2):153–174
Libecap GD (2005) The problem of water. NBER Hoover Institute. http://www.aeaweb.org/assa/2006/0108_1300_0702.pdf
Loomis J (2011) What’s to know about hypothetical bias in stated preference valuation studies? J Econ Surv 25(2):363–370
Loomis J, Quattlebaum K, Brown TC, Alexander SJ (2003) Expanding institutional arrangements for acquiring water for environmental purposes: transactions evidence for the Western United States. Water Resour Dev 19(1):21–28
Markham JW (1987) The history of commodity futures trading and its regulation. Praeger Publishing, Westport
Malliaris AG, Urrutia JL (1998) Volume and price relationships: hypothesis and testing for agricultural futures. J Futur Mark 18(1):53–72
Murphy JJ, Diner A, Howitt RE, Rassenti SJ, Smith VL (2000) The design of ‘Smart’ water market institutions using laboratory experiments. Environ Resour Econ 17(4):375–394
National Climatic Data Center, Historical Climatography Series 4–2. http://www.cbrfc.noaa.gov/wsup/westwide/westwide.cgi?2007
Parsons J, Cotner S, Roberts R, Finch C, Welsh D, Stein L (1997) Efficient use of water in the garden and landscape. AgriLIFE Extension at Texas A&M University, Department of Horticultural Science. http://aggie-horticulture.tamu.edu/extension/homelandscape/water/water.html
Pennings JME, Leuthold RM (2000) The role of farmers’ behavioral attitudes and heterogeneity in futures contracts usage. Am J Agric Econ 82(4):908–19
Phillips F, Hall GE, Black M (2011) Reining in the Rio Grande. UNM Press, Albuquerque
Smith VL (1982) Microeconomic systems as an experimental science. Am Econ Rev 72(5):923–955
Smith VL (1976) Experimental economics: induced value theory. Am Econ Rev 66(2):274–279
Smith VL (1962) An experimental study of competitive market behavior. J Polit Econ 70(2):111–137
Sterman J (2000) Business dynamics: systems thinking and modeling for a complex world. Irwin/McGraw-Hill, Chicago
Shupe SJ, Weatherford GD, Checchio E (1989) Western water rights: the era of reallocation. Nat Resour J 29(2):413–34
Summit A (2011) Marketing the Colorado River: water allocation in the American Southwest. Water Hist 3:45–62
Tisdell JG (2011) Water markets in Australia: an experimental analysis of alternative market mechanisms. Aust J Agric Resour Econ 55(4):500–517
Turral HN, Etchells T, Malano HMM, Wijedasa HA, Taylor P, McMahon TAM, Austin N (2005) Water trading at the margin: the evolution of water markets in the Murray–Darling basin. Water Resour Res 41:W07011. doi:10.1029/2004WR003463
Yoskowitz DW (2002) Price dispersion and price discrimination: empirical evidence from a spot market for water. Rev Ind Organ 20(3):283–289
Author information
Authors and Affiliations
Corresponding author
Additional information
This material is based upon work supported in part by SAHRA (Sustainability of semi-Arid Hydrology and Riparian Areas) under the STC Program of the National Science Foundation, Agreement No. EAR-9876800, and SILPE (Science and Impact Laboratory for Policy and Economics) under the U.S. Geologic Survey’s Science and Decision Center, Sponsor #G10AC00303.
Rights and permissions
About this article
Cite this article
Broadbent, C.D., Brookshire, D.S., Coursey, D. et al. Futures Contracts in Water Leasing: An Experimental Analysis Using Basin Characteristics of the Rio Grande, NM. Environ Resource Econ 68, 569–594 (2017). https://doi.org/10.1007/s10640-016-0032-4
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10640-016-0032-4