Getting Great Water in California

June 07, 2021
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This article was edited to meet broker-dealer compliance guidelines in April of 2023.

AcreTrader has active investments across over a dozen states in the country's most active farming communities, like the Midwest, the Southeast, and along the West Coast—including California. California has made headlines in recent months regarding drought issues, but it’s also the state that produces nearly 80% of the world's almonds, grows the majority of our organic vegetables, and leads the U.S. in agricultural revenues. The state boasts a unique climate, fertile soils, and highly sophisticated farmers, but without water it is difficult for anything to grow. We want to address a question that should be asked of any farm investment and has become increasingly top of mind in California: What is the water situation?

With any investment in California, our team creates a water “budget” that considers all of the potential sources and quantities of water required for healthy crop production. We are proud to report that every California farm that AcreTrader has hosted on its platform will receive all of its allocated water within budget this year.

Our team continues to approach California diligence with a "water first" mentality; as an example, one of our most recent offerings is a high-returning California almond farm where investments in drainage are being made to get water off of the farm due to an abundance of groundwater.

Many farmers do not have the luxury of choosing, and our thoughts are with those who are having a difficult season. The water districts with limited or no distribution this year can be offset somewhat via crop insurance programs, but it will impact livelihoods and can make for very difficult times. The state is addressing this with the Sustainable Groundwater Management Act (SGMA) to change the way groundwater is managed and to help protect it for the long term. These changes will limit water use and ag production in some areas that lack sufficient recharge, and the regulations inform what our team looks for when considering an investment offering in the state.

So what do we look for?

There are three primary methods to access water in order to irrigate a farm. Groundwater is pulled from aquifers beneath the surface with wells. Riparian water is collected from waterways adjacent to the property. Surface water is delivered via aqueducts pulling water from distant reservoirs. We look for farms with resilient water supplies that can be available in wet and dry years alike.

Resilient water supplies can be contemplated as either de facto (“by fact”) or de jure (“by law”), indicating either a natural abundance of water (such as farms located in the water-rich Sacramento-San Joaquin Delta region) or a legally-enshrined right to water supplies (such as farms in the Imperial Valley that have priority rights to Colorado River water). In drier parts of the state, we always look for farms with “dual-source” water; these have the ability to draw on auxiliary water sources as needed.

It is important to note that water is a highly regulated resource in California. A complex network of Groundwater Sustainability Agencies, Reclamation Districts, and Irrigation Districts all monitor and approve the use of water within their purview. Each of these agencies is unique in their methods of managing water, levels of management expertise, and access to water supplies to provide to their constituents. While our team has experience in many of these districts and years of accumulated data, we also work with local water experts to determine the water viability of any farm that we are considering as an AcreTrader offering. It is this intense focus on diligence that has allowed for the positive outcomes on our platform.

Some might draw the conclusion to avoid the state altogether. Our perspective is that while new regulations and water limitations could pull some farms out of production in future years, a state with $50B in agricultural revenues is not going away. In California an investment is not just an investment in a farm, but an investment in water. If investors have exposure to high-quality farms with a great water situation, it can present an opportunity for incremental appreciation.

Learn more about how you can diversify your portfolio with farmland in our Complete Guide to Investing in Farmland.

The above content is not intended to be a comparison between products, but is intended for general, educational and informational purposes only. Any performance noted is historical and there is no guarantee any trends will continue. All investing involves risks, including the complete loss of principal. Diversification does not guarantee a profit or protect against loss in a declining market. It is important for each investor to review their investment objectives, risk tolerance, tax liability and liquidity needs before investing. Investment vehicles have differences in fee structure, risk factors and objectives. Investments are considered speculative, involve a high degree of risk and therefore are not suitable for all investors.

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