Water Trends

Drought Risk in the United States and State-Specific Overviews

Almost no state in the U.S. is a stranger to drought. While some regions are more likely to be impacted than others, a full 45% of land in the continental U.S. is now in drought, according to a 2020 report, making the “most widespread drought” since 2013.

During the week of September 30 to October 6, 2020, the National Integrated Drought Information System (NIDIS) reported that over 69 million Americans were experiencing moderate to exceptional drought conditions.

Drought is measured on a scale from D0 (Abnormally Dry) to D4 (Exceptional Drought), based on factors such as recent temperature, precipitation, and snowpack.

The most up-to-date information on current drought conditions is in the U.S. using the NIDIS Drought Monitor, which is updated weekly.

Drought Risk vs. Vulnerability

While drought risk plays a key role in understanding water risk trends and water costs, it isn’t the only metric that matters. The National Oceanic and Atmospheric Administration (NOAA) uses additional factors, such as sensitivity, exposure, and ability to adapt to determine a state’s overall drought vulnerability.

These assessments can help question expectations of which states are most at risk of drought. For example, despite California’s reputation for extremely dry summers, it’s actually considered less vulnerable overall than one might expect due to its high level of preparedness.

The states that were found to be most vulnerable were Oklahoma, Montana, and Iowa, due to the limited water infrastructure amidst high levels of ranching and farming.

View more detailed information about drought vulnerability here.

State-by-State Drought Risk

In a close look at state-by-state drought risk based on averages over a 20-year period, as ranked by Stacker.com the five most drought-prone states in the U.S. and the percent of the state currently in drought are as follows:

The Impacts of Climate Change on Agriculture Water Risk

Climate change is a macro risk factor set to hit water risk in the American West hard. Because water risk translates so directly to business risk, a threat to the water supply can pose a serious problem for ag finance institutions with a stake in affected farmland.

Agricultural impacts of climate-induced water risk originate from four key event categories:

• Water Stress
• Wildfires
• Drought
• Floods

Climate change threatens to act as a wild card, elevating the uncertainty of weather patterns in many parts of the U.S. and harming crops as a result. Ag professionals can expect more severe droughts and floods, as well as less consistent transitions between wet and dry periods that have historically allowed for aquifers to recharge between dry spells.

Not only will climate change increase existing risks, but it will also create new risks and increase the likelihood that water risk will be found in a portfolio. The key is to identify, understand, monitor, and mitigate these risks.

The impacts of climate change on agriculture are many, but ultimately, being prepared for what’s to come is essential for ensuring a productive and profitable future.

Water Scarcity and Agriculture for 2021

Water scarcity refers to a situation in which the water supply in a region outpaces demand. It may be caused by environmental factors, such as drought or reduced rainfall, or by an increase in consumption due to population growth or expanded industrial use.

The U.S. Forest Service predicts that within 50 years, “nearly half of the 204 freshwater basins in the United States may not be able to meet the monthly water demand.”

Because agriculture is responsible for more water consumption than any other industry, there will be increasing pressure on the agricultural sector to reduce water use. Studies suggest that “reducing water use for irrigation by just 2% could prevent shortages in a third of these basins,” while others would require a 30% drop in water use.

The Praia Commitment

In 2019, the International Forum on Water Scarcity in Agriculture put forward 17 policy commitments to address the challenges of securing water for food production. These include strategies such as:

• Getting “more nutrition per drop”
• Adapting to farming in salinized soils
• Improving access to data on water resources

AQUAOSO aims to play a role in supporting these commitments by providing real-time access to water trends and water risk data with the Water Security Platform.

Watershed Agreements and Smart Water Markets

Another trend to expect in 2021 and beyond is the renegotiation of the “interstate compacts” that govern water allocation between states.

For example, the water levels in the Colorado River Basin are “expected to decrease significantly in the 21st century, with predicted reductions of as much as 45 percent by 2050.” Since 95 percent of freshwater resources are shared across state lines, these agreements will have to be updated to address modern water scarcity concerns.

In the private sector, there will also be an increased interest in water trading, which already accounts for up to $800 million in sales during high drought years in California.

Water Cost Trends in Agriculture for 2021

With so much emphasis on water scarcity in the coming decades, it is easy to expect that the cost of water would rise accordingly. However, the reality is not that simple, and in the absence of smart water markets in many parts of the world, researchers are finding it difficult to put an accurate price on water.

Researchers from U.C. Berkeley estimated that the global mean water values (based on the “increased value of crop production”) for five major crops are:

• Wheat $0.05/m3
• Maize $0.16/m3
• Rice $0.16/m3
• Soybean $0.10/m3
• Potatoes $0.67/m3

This tracks with what Colorado farmers paid in 2012 in regional water markets (between $0.02/m3 to $0.08/m3). However, competition from oil companies drove water prices up in Texas, where prices jumped from $0.05/m3 to $2.50/m3 in times of water scarcity.

Water market trends by state

We can also use the latest data from several U.S. states to see where water trends are heading in the near future. While sales still account for only a small percentage of total water used (4% in Arizona and 2% in California), they still represent a significant sum, especially when factoring in the higher prices of permanent sales.

A comparison of average annual water sales by state between 2009 and 2018:

For example, California averaged $100 million in permanent sales per year, accounting for a total of 29,000 acre-feet, as well as $295 million in short-term leases, representing a total of 1,065,000 acre-feet. Prices varied widely in times of water scarcity, with sales reaching as high as $800 million during the 2015 drought.

Trends and water cost patterns are important to keep up with. Water risk mitigation can follow due diligence.

What Agriculture Financial Business Risk Intelligence Should Include in 2021

Utilizing modern business risk intelligence tools and GIS technology to unlock advanced risk analytics, ag lenders and investors can enhance their existing datasets and leverage new sources of information.

Agriculture financial business intelligence must situate portfolio and bank data into the context of water and climate risk. These risks come in many forms. Certain parcels may be more susceptible to production risk due to crop failure or adverse weather events while others face greater market risks due to falling commodity prices or higher input costs. Climate change is introducing more uncertainty into the equation, ag finance professionals must respond accordingly.

With business risk intelligence tools, ag lenders and investors can centralize their data – both third-party and proprietary – and use it to build resilience in the face of a changing regulatory and environmental landscape.

California Agricultural Water Prices by Water District

Water prices play a key role in determining a farming operation’s long-term viability. With California ag producing many water-intensive crops, it may not make sense to continue with a farming operation if prices get too high. 

Conversely, when prices are too low water transfers are less valuable on the open market – adding another consideration for ag operations. Given these factors, ag professionals should take California agricultural water prices into account before making any decisions about agricultural investments.

Often spiking in times of water scarcity, water prices can vary widely. Currently, water district prices are still below $200 per acre-foot in most regions, although some areas exceed $500.

The southern end of the Central Valley has the highest prices, between $200 – $500, while water rates in the northern part of the state are below $50 per acre-foot and under $1.00 per acre-foot in some districts:

Current California water district rates are broken down by acre-foot and displayed on a handy map making it easy to compare rates across water districts. Ag professionals can use this map and other cloud-based GIS tools to streamline the research process.

Updates on the California Drought Status for Ag Professionals

Of all the areas at risk of drought in the American West, California is noteworthy due to its prominence for the nation’s food supply and its frequent exposure to drought. Indeed, California experienced a multi-year drought between 2012 and 2016 that led to annual losses of up to $1.84 billion and 10,000 jobs. While California’s opportunities for ag finance are great, so too are the risks.

In order to minimize the impacts of drought, ag professionals should learn from drought history, recognize the necessary solutions that are available, and be proactive about identifying the financial risk that comes from drought.

Amid its daunting exposure to drought, California is a veteran of dealing with dry climate events and ought to look toward the coming years of megadrought with both determination and enthusiasm for proactivity.

There are already signs that another exceptionally dry period is likely, and agricultural professionals must remain informed of the latest updates.

The Growing Prevalence of Flood Damage in Agriculture

Due to climate change, floods are set to become more frequent and unpredictable, resulting in billions of dollars in losses to crops and farmland. While some areas face more flash flooding, others may experience excess runoff and soil depletion from sudden shifts between wet and dry weather. Moreover, floods can both make a field unsuitable for planting and ruin crops already harvested. 

As floods grow more common in many parts of the country due to climate change, ag professionals will have to find ways to mitigate the risk of flood damage to their farmland investments.

By understanding the specific risks associated with flood damage in a particular region, ag finance institutions can take steps to mitigate these risks and improve the long-term viability of the farms in their portfolios.

By letting data drive their lending and investment decisions, ag professionals can be proactive about mitigating flood risk. GIS tools can make this process easier by presenting data in an accessible geospatial format.

Risk Data Management in Agriculture Is Changing Quickly

Risk data management in agriculture is changing fast. The most important factor is the sheer volume of useful data that can now be unsiloed, collected, and integrated. Analyzing risk data, therefore, has never been easier, nor more important.

Given the growing impacts of climate change and a shifting financial landscape, ag professions need to be able to continually re-assess the risk levels of farming operations. The same tools of real-time analysis can likewise be used to determine long-term viability.

There are three key aspects to risk data management:

1. accelerating digitalization
2. speed as a business currency
3. the depth, granularity of data.

Together these factors produce untapped potential with a high ROI.

Sustainable Water Use in 2020 – Celebrating the Water Wins

2020 was a challenging year. The issue of water scarcity, stress, and quality was no exception. Still, it is important to celebrate the wins and use them to both find and spread some inspiration going into 2021; use the good news as a spur toward a water-resilient future.

AQUAOSO put together this list of positive news relating to sustainable water use in 2020 including technology, policy, corporate initiatives, and more, to do just that. 

“Water risk mitigation and water resilience are possible AND they can be financially beneficial to the stakeholders involved. As these mutually beneficial scenarios are uncovered, the ceiling of potential business, social, and environmental benefits rises. If these scenarios are incentivized and acted upon, the ceiling breaks – and then there is nothing but blue skies.”

-Mark Jackson, AQUAOSO

Water Stress Trends and Potential Outcomes

Water stress is an issue that financially affects a broad range of industries and businesses, particularly agriculture.

Water stress is an equation that has two main parts: water demand and water supply. Both of these parts are influenced by other variables that contribute to the equation as levers that can both increase and decrease the supply and demand of usable freshwater.

The equation is simple:

Water Demand > Usable Water Supply = Water Stress

Where there is water stress, there is water risk. This risk directly correlates with business and financial risk. Click below to read about the variables that humans can control as well as steps that can be taken to mitigate the risk that comes from water stress.

What A Water Market Can Do – Water Markets & Water Futures

While water markets and water futures are hot topics in current news, it is important to step back and recognize them for what they are, as well as the difference between the two.

Physical water markets – where actual water is bought and sold – are powerful tools to aid the agriculture economy in curtailing the effects of drought and water stress. The caveat, however, is whether or not they are properly designed. Moving water to where it is needed most is a great way to maximize water’s utility.

Water futures are about financial betting rather than actual water trading. The Nasdaq Water Index can be used to track the current “spot rate price” of water in the five most active California markets. This information can be useful for identifying changes in water’s projected monetary value.

The Bottom Line

The wide variation in water prices and water scarcity between regions goes to show that decisions cannot be based on only one set of water trends independent of any others. Climate, population, watershed agreements, and more will all determine the availability and cost of water in 2021 and well into the future.

With incomplete data, it’s impossible to understand the difference between drought risk and drought vulnerability, or between shadow prices and mean water values.

AQUAOSO is focused on making water risk data as transparent and accessible as possible. With the Water Security Platform, lenders, investors, and other stakeholders in the agricultural sector have access to up-to-date research and mapping tools to assess and monitor water risk. This data can be used to make better investments, land deals, and more.

Read our detailed resources on regulations like SGMA, as well as guides to smart water markets and how to conserve water in agriculture.

Learn more about the regions we serve or contact us directly to schedule a free demo and start a conversation about the water trends that matter to you!