I just completed a project in a water market that ignores the traditional wisdom behind supply and demand. In this market, total water rights supply exceeds demand by 3.2 million acre-feet. Yet, buyers continue to purchase water in excess of $4,000 an acre-foot, when similar volumes, for other uses, are awarded for free.
Why?
Timing, location, and margin.
Although excess supply exists, the buyers need large amounts of water, in select locations, for short durations of time. Furthermore, the buyer’s industry holds excess margins to the extent that $4,000 an acre-foot is a minimal cost of input. Waiting for the inefficient regulatory process to reallocate the excess legal water rights supply is not an option. The recognition of this non-traditional water market surprised me, but in a weird way, I also enjoyed the new lesson in economics.
I now realize it’s not plain ‘ole supply and demand. It’s the TYPE of supply and the TYPE of demand that matters most. This observation, also, reiterated the importance of the regulatory component in the world of water.
