Investing in California Agriculture: Water Diligence
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When investing in farmland in California, it’s key to understand the full picture of water supplies across the state and how it may present opportunities or challenges for investors.
California water access is a mosaic of water districts, sustainability agencies, and entitlements that can be difficult to understand. This makes each unique region different from the next; water availability can vary massively. It’s now more important than ever to invest in regions with higher water security in order to manage risk and increase upside potential.
This article outlines the complex landscape of water resources in California. Read on to learn how water availability is affecting agricultural production and farmland values, as well as how AcreTrader conducts due diligence on investment opportunities in the state.
- Intro to California Water
- How Do Water Resources Differ Across California?
- Where Does California’s Water Come From?
- How Do California’s Water Sources Vary From Year to Year?
- How Is Overuse of Groundwater Affecting California?
- What Is SGMA and Why Was it Passed?
- How Has SGMA Affected Land Values?
- Which Regions Have The Most Surface Water?
- Which Regions Use the Most Groundwater?
- Which Crops Are Most Dependent on Groundwater?
- Final Thoughts
Intro to California Water
California is the most agriculturally productive state in the country, producing over $50 billion annually in agricultural goods. This output composes a third of the country’s vegetables and three-quarters of the country’s fruit and nuts.
Underlying this production is a vast network of canals, rivers, and reservoirs that carry water from mountainous regions to highly productive farmland. The California Department of Water Resources reports that while 75% of the water that falls on California each year hits the northern third of the state, 80% of the demand for water comes from the bottom two thirds.
How Do Water Resources Differ Across California?
The California Department of Water Resources splits the state into 10 distinct hydrological regions, differentiated by their water sources. Each region is also distinct in the crops grown within it.
The Sacramento River, San Joaquin River, and Tulare Lake regions make up the Central Valley, the core of California’s farming country. The Sacramento River runs south from the Klamath Mountains in the north and supplies water into the delta, while the San Joaquin River runs from the south. Both rivers have many tributaries which flow in from the Sierra Nevada mountain range to the east and help irrigate their respective regions.
Water is carried south into the Tulare Lake region on federal and state canals and aqueducts; water also flows into this region from major rivers just as the Tule, Kaweah, and Kern.
The Colorado River, which also forms California’s southeastern border, supports agriculture in the southern tip of the state. The Coachella, Imperial, and Palo Verde Valleys all have senior rights on the river and grow a wide variety of crops, including specialty vegetables.
Outside of these regions, there is a heavier reliance on groundwater and/or precipitation, as well as local rivers and creeks in some cases. The North Coast, San Francisco Bay, and Central Coast regions grow premium wine grapes, which are known to thrive in relatively cooler temperatures and have lower water demands.
In the Central Coast, irrigated valleys such as the Salinas Valley and Santa Maria Valley rely on an underground aquifer being replenished by runoff from the surrounding mountains. In the South Coast, citrus is grown using flows of the Santa Clara River and local groundwater.
Where Does California’s Water Come From?
In each of these regions, water is provided by different sources. The single greatest of these sources is groundwater, which makes up 42% of all water used for California agriculture.
This water is both long-term supply built up over thousands of years and short-term banking of water for use in the future. In fact, California’s farmers have increasingly taken advantage of the state’s aquifers to hold water from year to year. Recharge basins have been constructed across the state to pump water into the ground in wet years for use in drier years.
Surface water, groundwater’s opposite, is water delivered by natural rivers and streams as well as human-built channels. Surface water supplies are managed at both the state and federal level. The State Water Project (SWP) is operated by the state of California, while the Central Valley Project (CVP) is a federal project. Together, they carry a total of 9.43 million acre-feet of water annually, enough to cover the whole state in an inch of water. This goes to agricultural, municipal, and environmental uses.
As mentioned previously, the Colorado River provides water to irrigated valleys in the south, and local supplies such as rights to creeks and streams are also used. Lastly, some areas reuse water from other sources, such as the oil and gas industry.
How Do California’s Water Sources Vary From Year to Year?
In any given year, the amount of groundwater versus surface water used can vary greatly. Below you can see that in wetter years, when the State and Federal Projects are able to supply more water, groundwater use is reduced. The reverse is true in dry years.
The use of reservoirs and groundwater can help with smoothing out this pattern, and areas with stronger water supplies and infrastructure can do this more effectively. Therefore, strong water infrastructure is an important aspect of an area’s water security and an important consideration in farmland investments.
Past performance does not guarantee future results and there is no guarantee this trend will continue.
How Is Overuse of Groundwater Affecting California?
In some parts of California, an over-dependence on and overuse of groundwater has resulted in the ground sinking, a phenomenon called subsidence. This has been most acute in the Tulare Lake region, in and around the city of Corcoran.
Areas experiencing subsidence have seen and will likely continue to see more regulations on groundwater usage, as subsidence damages infrastructure, and declining aquifers cause domestic wells to run dry.
What Is SGMA and Why Was it Passed?
As a result of these issues, as well as declines in aquifer levels in some groundwater basins, the state of California passed the Sustainable Groundwater Management Act in 2014. This bill looks to put a pause on the overuse of the state’s water resources, specifically ending the overdraft—i.e., using more water than is available—of aquifers by 2040.
The act classifies basins from Very Low to High priority, imposing stricter rules on higher priority basins. High- and medium-priority basins in California have been tasked with establishing Groundwater Sustainability Agencies (GSAs) which will form Groundwater Sustainability Plans (GSPs) outlining how they will bring their basins to sustainability.
When evaluating potential offerings, the AcreTrader investment team carefully reviews each relevant Groundwater Sustainability Plan to assess whether adequate groundwater is available for the crops grown on each property. Of particular importance is the Sustainable Yield, or how much water can be sustainably pumped from the aquifer, as well as any groundwater regulations proposed in the document.
How Has SGMA Affected Land Values?
The act led to a separation between areas with surface water and areas without, as groundwater can no longer be relied on as a farm’s only source of water.
This can be seen in the divergence in values between farms with groundwater only and farms with both, what we call dual-source water. According to the California ASFMRA Trends Report, as of 2022, land with surface water in Fresno County is selling for more than double the price of land without. AcreTrader focuses on offering investments in these areas of the San Joaquin Valley with dual-sourced water for crops that require this security.
Past performance does not guarantee future results and there is no guarantee this trend will continue.
Which Regions Have The Most Surface Water?
Surface water availability varies greatly between regions in California. In the Central Valley, surface water access increases the further north you go. This increase in water security can, however, come with lower temperatures, which entail fewer hot days and more freeze events, potentially leading to lower crop yields.
Even within regions there is variability, and strong water can be found throughout the valley. It is important to examine the specific rights held by a district, including the reliability of those rights and the quantity of water available under them. These details are carefully reviewed by AcreTrader’s investment team and included in the information that accompanies each offering on the platform.
Surface water availability is highest in the Colorado River region, receiving around 4.8 feet of water per acre of farmland, though the Colorado River faces its own unique potential supply challenges.
Which Regions Use the Most Groundwater?
The Tulare Lake region of California, with lower access to surface water supply and higher temperatures (and therefore greater water demand), uses the most groundwater per farmland acre. We see the reverse of the surface water trend in the Central Valley, with less groundwater being used further up the valley.
Which Crops Are Most Dependent on Groundwater?
Thousands of acres of crops in California are without access to surface water. This can vary crop to crop. Some crops, like olives, are produced mainly in higher-rainfall areas further north where less water needs to be manually applied and groundwater restrictions are less strict.
However, crops such as pistachios, almonds, and citrus are often grown in areas where groundwater will be less available under SGMA. We still see around 20% of these crops being grown without surface water access. These crops are likely to see reduced production in groundwater only areas, which can result in upside potential for farms with surface water access.
We see a great amount of variability in water across California, and it’s important to look at the specifics of each property and where it gets its water. Specifically, we evaluate the irrigation district, the Groundwater Sustainability Agency, and any water rights associated with the property. This helps us establish as complete a picture as possible of a property’s water security, both in real time and into the future.
AcreTrader believes that land values in regions of California with abundant water resources stand to benefit from reduced agricultural output in less water-secure regions. These are the opportunities our team aims to bring to the platform as investment offerings.
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. Investments are considered speculative, involve a high degree of risk, including complete loss of principal, and therefore are not suitable for all investors.
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