A Comparison of Implicit Values and Explicit Prices of Water

Abstract

This paper reviews the historic relationship between the explicit market price of water entitlements and the implicit value of water when attached to land. Hedonic functions are applied to 246 farm sales during 2001–02 in the Greater Shepparton, Campaspe and Moira areas of northern Victoria in order to establish the implicit value of water. These implicit values are then compared to explicit prices paid for water entitlements during the same period. A longitudinal analysis of this relationship is then conducted based on a similar analysis from the same region during the 1991–93 and 1994–96 periods.It was found that during the early to mid 1990’s, the explicit price of water entitlements lagged implicit values as farmers sold unused water which would not compromise the productive capacity of their farms. In 1997, events occurred to push the explicit price above the implicit value during the 1994–96 period. From mid 2002, following a prolonged and increasingly intense drought, the explicit price of water entitlements significantly exceeded the implicit value of water. This caused an increase in the number of land transactions, with many purchasers subsequently selling the attached water entitlements in order to profit from the emerging price gap.