The Future of Smart Markets for Water Resources
Water stress is expected to reach unprecedented levels over the next decade in many parts of the world. According to the U.N. Environment Programme, “almost half of the world’s population will suffer severe water stress by 2030.”
Although related to water scarcity, water stress is a much broader term that refers to the inability of water resources to meet demand in a particular region. In some cases, this may be due to a lack of infrastructure or inefficiencies in water allocation, rather than simply a reduction in the volume of water available.
In addition, regulations meant to address the issue have added a degree of uncertainty to water markets, especially in the agricultural sector. All players in ag – lenders, investors, growers, etc. – have their role to play in understanding and evolving our water markets to help ensure long term resilience.
In this post, we’ll take a close look at what’s wrong with existing water markets, and how using smart market technology to assess and allocate water resources can be a wise move.
Bound By 19th Century Policies
Water markets allow surplus water resources to be sold to buyers in the form of water rights. These rights may be traded through temporary leases or permanent sales, and in some cases, are based on land use policies dating back to the 1800s.
For example, in California, water rights are based on a combination of English common law and pueblo rights, which are derived from Spanish and Mexican law. These include both riparian rights (which govern free-flowing water that passes through a property) and appropriative law (which governs water diversion and storage). The latter is essentially a “finders-keepers” approach that grants water rights to whoever claimed them first.
The end result is that today, many farmers are incentivized to use more water than they actually need, so as not to lose their allocation in the future.
As explained in our ebook, “Enabling Smart Water Markets,”
“This system encourages users to pump their full water allocation each year no matter what, or they could lose their place in line, causing billions of gallons to be wasted every year.”
Why Today’s Water Markets Are Broken
These antiquated laws are just one reason why today’s water markets are broken. Only 4% of the water used each year by California’s farms and cities is traded on the market, and this number hasn’t budged since the early 2000s, suggesting that there are major inefficiencies in the buying and selling process.
Contributing to the problem is a complex and fragmented transfer approval process, and administrative reviews that can take years – all of which are major challenges to farmers who want to focus on their crops, not on water risk analysis and paperwork.
Although there are several public agencies, ranging from the U.S. Geological Survey to NASA, collecting data on groundwater and surface water resources, this information is often hard to access and presented in incompatible spreadsheets and PDF formats.
Plus, since agency budgets vary widely, it can be hard to know when the data you want will arrive and if it will even still be relevant when it does.
Why Moving to Smart Markets for Water Resources Is So Important
It isn’t all bad news. With the passage of the Open and Transparent Data Act (AB 1755) in 2016, the state of California has at least acknowledged the importance of eliminating data silos and collecting relevant resources in a single, accessible location.
These coming changes will encourage greater transparency in all aspects of the water market, pulling information from public records, satellite data, regulatory reporting, and more. Together, this data can provide better insights and analytics, and even support automated transactions and improved portfolio management.
Smart water markets will make it easier to identify water rights holders, as well as for property owners to discover water rights that they didn’t even know they had.
These coming changes point toward a more water-resilient future that makes the most of 21st-century technology. In the meantime, it falls on lenders and ag investors to do their own due diligence in assessing the water risk of potential borrowers.
Why SGMA In California Is Pushing The Need for Smart Water Markets
There’s one more challenge coming to the agricultural industry, and that’s the unknown impact of SGMA, or the Sustainable Groundwater Management Act. Passed in 2014, SGMA empowers local Groundwater Sustainability Agencies (GSAs) to develop and implement Groundwater Sustainability Plans (GSPs) in their region.
This means that most users of groundwater will have to report their water use – even if they’ve grown used to pumping freely from their own wells for decades. While SGMA aims to improve California’s water resiliency in the long run, its short term impact is likely to be significant. Some farmers will be allocated less water than they need to maintain existing crops, and some fields will have to go fallow.
Since each GSA will develop its own plan based on the condition of its basin, not every region will be affected equally. Land values will change based on the availability of water resources on the property, and brokers and appraisers will have to take a closer look at water rights when assessing property values.
Lenders too will have to familiarize themselves with a hodgepodge of regulations that could impact the water risk of a borrower – unless they pay a local consultant with an in-depth understanding of the region to gather the information they need.
What the Future Looks Like In Smart Water Markets
The best way to prepare for and withstand the impact of SGMA is for all parties involved to take a proactive approach to water management. One proposed solution is to build a smart water market that allows transactions to happen in close to real-time. According to the Rand Corporation, a smart water market would be similar to the smart markets that the state currently uses to distribute electricity.
By anonymizing well data, digitizing publicly available documents, and using machine learning to analyze data sets, a smart water market would reduce transaction length and costs, and create a more realistic picture of available water resources.
Lenders can also use this information to help determine key insights about a borrower’s risk profile, including whether they’ll have access to sufficient water resources for their crops, and whether it will be cost-effective for them to purchase water on the market.
The Bottom Line
No database can help you fully predict the impact of SGMA regulations, environmental conditions, and other factors, but having access to reliable information is key to making good decisions in a changing agricultural landscape.
AQUAOSO’s water security platform provides an easy way to monitor water risk across regions, with over 1.4 million acres accounted for. Our Water Security Score™ will help you make quick and accurate decisions about water risk without having to chase down documents and analyze data yourself.