A previous post about the Duarte Nursery lawsuit is an example where government regulation has created uncertainty for farmers and farmland investors. Government regulation isn’t all bad. One example where regulation is extremely beneficial is in the oversight of water wells.
We are not talking about the regulation of water, which may clearly be mismanaged by a state or jurisdiction. For example in some places it is illegal to even collect rainwater under some circumstances. The interested reader is directed to a report by the Water Systems Council to see how convoluted water rights are depending on where a farm is located. However, the regulation of wells is an example of government oversight that aids farmers and farmland investors.
Well regulation is important not only to ensure the proper installation, location and maintenance of a well, but also the Well Drillers Report is a great help when buying and selling farmland. Wells are regulated either at the state or local level in all major farming areas that we are aware of. The person or company drilling the well needs to be licensed and must obtain a permit and file a Well Drillers Report with the county.
Although many wells can last decades, they can often develop problems or need maintenance. The Well Drillers Report contains a variety of helpful facts about the well when it was first installed, example include:
- Date of installation
- Lab report about the water
- Water flow rate out of the well when the well was first installed
- Depth of the water and the well
- Diameter of the pipe
Despite any costs incurred to enact the regulation of wells, it is an example of a government regulation that not only increases the welfare of all parties, but also increases the price of farmland. The theory behind this claim is attributed to an academic paper published in 1970 called “The Market For ‘Lemons’: Quality Uncertainty and the Market Mechanism”, by George A. Akerlof. The argument is that when there is information asymmetry in a transaction, in this case the seller of the farmland knows more about the property than the buyer, then the sellers are more likely to market poor quality goods (like Farmland with poor quality wells) and hang onto high quality assets. This in turn makes the buyer more suspect of the farmland for sale and is less willing to pay a high price.
There is already a good deal of information asymmetry in the sale of farmland, where the buyer may not know the land nearly as well as the seller. For this reason, many who invest in farmland prefer to buy farmland with a prenegotiated lease agreement with the farmer who is already farming the parcel. This is a way for the investor to know that they aren’t buying a ‘lemon’.