May 26, 2015: Need Land Value? Just Add Water
Nancy Zalutsky
Need Land Value? Just Add Water

Water Rights Drive Land Value
I have worked with Montana water users as a paralegal and a consultant for more than 20 years, and I’ve often heard complaints about the high cost of obtaining new water use permits or investigating, protecting or changing existing water rights. One rancher remarked that he could buy hay for his cattle for years with the money he was spending on a water attorney. So, why should that rancher or anyone else spend money to preserve their water rights? The reason is that land and water are long term, lasting assets and the value of farm and ranch land is largely derived from the corresponding water and water rights.

Why? Because agricultural land value is driven by its productivity, and in the arid West, productivity is dependent on water. I decided to pose the question of how water is tied to land value to leading realtors that deal in high end, large properties. Tim Murphy, a Real Estate Partner at Hall and Hall in Bozeman, Montana, described the importance of water clearly: “Unless the land has a spring, stream or ditch on it, you can’t even water stock. The land is virtually worthless except as open range.”

The value of the aesthetic and recreational appeal that natural water features such as streams, ponds, lakes, wetlands and rivers and manmade reservoirs add to land is less easily measured.  Whether the water adds to the productivity or the beauty of a property, it increases the marketability and value of the land.

For Value, Add Water.
Irrigation In Montana, a 2008 report to the Montana legislature states that only about 18% of all harvested cropland in the state is irrigated, but irrigated crops represent a higher percentage of the agriculture sector output because of higher yields and the ability to produce higher value crops on irrigated land. The 2013 Farm and Ranch Irrigation survey compiled by the USDA compares spring and winter wheat yields for irrigated and non-irrigated acreage. The state-wide winter wheat yield from irrigated land was 69.9 bushels per acre while non-irrigated cropland produced 36.1 bushels. Spring wheat yields followed a similar pattern with irrigated production at 63.1 bushels per acre, while the dry land production was 35.6 bushels.  Higher yield per acre means more revenue per acre, which in turn means more valuable land per acre.  What does this mean for land operators, buyers, sellers and lenders? It demonstrates the importance of knowing and managing water rights to ensure the longevity of irrigation operations and the long term value of agricultural land.

Ditch and Hay Field  Dry Field

Irrigated Acreage Is Worth 2 To 4 Times More Than Dry Land.
Montana property tax assessments are based on the productivity of the land.  In one eastern Montana County, irrigated hay land producing 2.67 tons per acre is assessed at $571.40 per acre; while non-irrigated wild hay ground producing 1 ton per acre is $299.00 per acre. In this case, irrigated hay fields are worth 91% more than non-irrigated grassland.

Irrigation also affects the sale value of land, as shown by a few Montana rural land listings. Dry land in eastern Montana is offered at $450-$500 per acre, while 1,534 acres irrigated with contract water is listed at $2,275 per acre and 400 acres of “productive irrigated bottomland” is priced $1,687 per acre. Both Tim Murphy and Mike Swan, Owner and Managing Broker at Swan Land Company, agree that irrigated land is more valuable than dry land.  Tim Murphy estimates that the base value of land in the foothills of western Montana is about $1,000 per acre and the base value of land in central Montana is around $560 per acre, but flood irrigation can increase that base value by 50%. He notes that pivot irrigation is less labor intensive than flood irrigation and provides greater flexibility in crop choices, which can more than triple the worth of the land.

Mike Swan has observed the effect of water rights on production and property value over the years and pointed out an interesting recent dynamic. He explains, “Many land buyers are seeking senior water rights to maintain high production on a farm or ranch. Properties with those senior water rights have seen a steady appreciation in part due to an influx of producers who are trying to escape the effects of drought in downstream areas. These producers are looking to move closer to river headwaters or to areas less prone and vulnerable to drought.” Drought conditions over the last few years have indeed affected prices of crops and cattle, and placed a premium on the value of high quality water rights. Confirming and protecting these water rights can pay off for generations.

Water Is Beautiful, Too.
Anyone who has ever jumped into a swimming hole, waded in a cool river, or relaxed on the bank of a creek can tell you that the aesthetic and recreational value of water cannot be overlooked. This doesn’t necessarily have to apply to massive ranches, either. Mike Swan says that, “land with a stream or river running through it is the gold standard. It is the primary amenity responsible for consistent increase in the value of the land.” The one caveat you might add is that this gold standard is dependent upon reliable water, and in many cases, that means strong, senior rights. For that reason, it behooves anyone who values the water running past them in a stream to know how much of the water they see can be diverted upstream from them relative to how much will remain in the river.

Abundant streams, ponds and wetlands also provide sought after opportunities for fishing, hunting, and conservation, which in turn adds to land value.  Tim Murphy told me, “Spring creeks or ponds are the most sought-after amenity because they provide a consistently cool water resource that is rich in nutrients and consequently have high biomass. Given that, they produce lots of trout. In addition to being in short supply, they are generally very private being ‘non-navigable’ waters as opposed to the larger rivers.” All of these water features should have an associated water right or they risk being claimed or challenged.

Whether you are farming, fishing, or admiring verdant pastures and a meandering creek, water adds value to land.  As Tim Murphy said, “They aren’t making any more land or water, so the value and price of farm and ranch land with water is further increased by growing scarcity.”

I’ve seen people learn the hard way how important it is to investigate and protect their water rights. A small investment into learning what you have, what your neighbors have, and what is going on in your basin or district can help ensure your land value and enjoyment of your property for many, many years.