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California Farmers Finding New Ways to Navigate Water Risk

CME Group

CME Group
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Commodities Markets Writer

At A Glance

  • Another drought year is putting added demands on California’s agricultural producers who must adapt to scarce water resources.
  • Some producers say publishing the price of water in a futures contract increases transparency in what is now an opaque market.

California is in the grips of another devastating drought, brought on by hot temperatures, reduced water levels from the Colorado River and less mountain snowpack.

It was only two years ago that the Golden State exited a five-year drought that sharply curtailed water use, and now farmers are facing another water shortage. In March, U.S. Department of Agriculture Secretary Tom Vilsack designated most of California as a primary disaster area, and in May, Governor Gavin Newsom declared a drought emergency in 41 of the state’s 58 counties, including many agricultural producers.

The Drought Monitor shows widespread drought across California, with northern areas of the state, including counties such as the San Joaquin valley and Napa and Sonoma in exceptional drought, and southern areas including Los Angeles and Orange County in severe to extreme drought. 

June 15, 2021 Drought Monitor shows dozens of California counties under extreme drought conditions.

The June 15, 2021 Drought Monitor shows dozens of California counties under extreme drought conditions. Source: U.S. Drought Monitor

That’s caused water restrictions throughout the state for all water users to some degree: agricultural, commercial and residential.

But drought-like conditions aren’t the only challenges California ag producers and other users face. Increasing demand on existing water supplies, climate change and regulations have had their own impacts. Necessity, though, spurs innovation and improved technology has made water users much more efficient, and a new water futures contract may help improve price transparency to the region.

“Sensitive to the risk of drought”

California is a top producer of vegetables, fruit, nuts and dairy products. In a complex system, California farmers are allocated water from the state based on seniority and need, but many producers are still seeing access restricted to state water allocations, a few ag producers say.

Alan Boyce, co-founder of Materra, who has several farms in California and Arizona, says in fall 2020 they turned down some contracts with tomato canners, concerned about the availability of water from state allocations in the spring and the price of water, which was unknown. “In the fall we were very sensitive to the risk of drought,” he says.

Farmers normally negotiate prices with buyers during the growing season, but “we made the determination that in the water-short San Joaquin Valley, we need to know in advance what the price of water is, otherwise we’ll leave it in the ground. Right now, in hindsight, that looked pretty smart,” he says, adding, “You have to know in advance what price you’re selling your water resource, whether it’s surface water or groundwater.”

Shawn Dewane vice president of the board of directors for Mesa Water District, which serves the city of Costa Mesa, part of Newport Beach and parts of Orange County, says by law, the first half of California’s water supply returns to the ocean, 40% is reserved for agriculture and 10% for urban and industrial use.

State government has also passed several pieces of legislation to conserve water, such as a 2008 court case limiting the export of water from Northern California to Central and Southern California as a way to protect endangered fish, and 2014’s Sustainable Groundwater Management Act. The first limits surface water pumping and the second limits groundwater pumping, says Kevin Assemi, a farmer in Fresno and partner in Water & Land Solutions, an agricultural water and land use consulting firm. The 2014 act could mean one-third of the total water supply for all Central and Southern California users, including human consumption, will be reduced. He says it’s estimated up to one million acres of farmland will come out of production.

Water Efficiency Improved Using Technology

Dewane says when most people think about the water business, they imagine digging ditches. “But I’d say it’s really as a science, technology and finance business because we are applying at the highest level science and technology to not only the supply side, but the demand side,” he says.

Chase Hurley, managing member of Water and Land Solutions, says in the past dozen years or so, California ag producers and water districts that deliver water have made “huge changes” to become more water efficient. Some examples include subsurface drip irrigation, where drip lines are buried six to 12 inches below the root zone and above ground drip and micro sprinklers for tree crops to maximize efficiency and avoid evaporation, and new pressurized pipelines of the canal system lose less water. Pipes are also monitored closely for leaks.

Regional and municipal water districts are also at the forefront of innovation. The Orange County Water District is home to the world’s largest water recycling project, Dewane says, which recycles all the interior water used for the urban population of about 3.2 million people. The project runs water through a solid plast membrane molecular-level membrane and reinjects the filtered water into the groundwater basin as part of conservation.

Dewane adds that a desalination plant under consideration at Huntington Beach would produce 50 million gallons daily of fresh drinking water, and would be the largest ocean desalination plant in the Western Hemisphere.

Once online, he estimates the cost of that water would be about $2,000 an acre foot. While that’s significantly more than the $500 an acre foot that groundwater costs and about double the cost of water imported from the Sacramento River Delta or Colorado River, it could provide some price stability by putting a ceiling on the price of water, he adds.

How Water Futures May Help

California’s water market is opaque, Assemi says, despite having a robust water infrastructure system.The state is divided into hundreds of water districts, all of which have their own local environmental and municipal approval process, and may also have to deal with federal regulations.

Assemi says he is a “big advocate” of having a futures market because it could bring more attention to issues that affect water supply.

Dewane says the discrepancy in groundwater and imported water costs throughout California shows the inefficiency in water pricing, and by publishing the price of water in a futures contract would increase transparency. Seeing that price would help people understand the value of water.

“Water is incorporated into every good, service and product that we use in the activities of daily living. When the cost of water rises, the cost of all those goods and services rise, too,” he says.

Originally Posted on June 30, 2021 – California Farmers Finding New Ways to Navigate Water Risk

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