SGMA Impacts to Agricultural Lending

Questions on how water factors into agricultural lending decisions are bubbling to the top as water scarcity takes center stage in the agricultural economy. Increasing uncertainty in the near-future is the Sustainable Groundwater Management Act (SGMA). SGMA allows newly formed local government agencies, known as Ground Water Sustainability Agencies, to regulate groundwater pumping. The uncertainty lies in the fact that regulation on this scale is untested in California, and the Groundwater Sustainability Plans (GSPs) are still under development. High priority basin GSPs are expected to be complete in 2020 and others in 2022. The groundwater management paradigm shift that SGMA represents means understanding both surface and groundwater are essential to avoid missed opportunities and unwanted risks.

Uncertain water security leads financial institutions to refuse loans to agricultural operations, or at least limits investment to operational loans. That potentially leaves money on the table in one transaction only to watch money burn in another transaction. When a portfolio of investments sits in a higher water risk situation unknown to lending and financial institutions, those resources are at risk. If the risk is known, lender action can move assets and resources to a less risky area. The path to risk assessment and management is data and knowledge.

Understanding water risk on a given parcel or over a portfolio, and possession of the actionable data to implement that knowledge can mitigate risk by reducing uncertainties. Such insight can unlock investment to fuel agricultural growth and help ensure critical water supplies in arid states like California and regions including the Southwestern United States are well managed.

The Groundwater Safety Blanket Has an SGMA-Sized Hole

For decades, surface water supplies and weather conditions in California lacked predictability. More recently, the snowpack in Sierra Nevada mountain range exhibits a boom and bust pattern. The one constant historically relied upon by agricultural operations and those financing them was groundwater as a supplemental supply. Entire operations may have relied 100 percent on groundwater, and that practice was not attributed to a high-risk endeavor. As subsidence and water quality issues reared their ugly heads, the state decided to take action; enter SGMA. Dreams of unlimited pumping or ignoring the detrimental impacts of such activity are over. Change is never easy – unless you are prepared.

Sustainable Yield

SGMA redefines groundwater management through the idea of a “sustainable yield,” which is the maximum amount of groundwater that may be withdrawn from a basin without causing an “undesirable result.” There are six undesirable results:

  • Chronic lowering of groundwater levels.
  • Significant and unreasonable reductions in groundwater storage.
  • Significant and unreasonable seawater intrusion.
  • Significant and unreasonable degradation of water quality.
  • Significant and unreasonable land subsidence.
  • Surface water depletions that have significant and unreasonable adverse impacts on beneficial uses.

There is a gray area in defining the sustainable yield for each groundwater basin. What is chronic, significant, or reasonable will mainly be up to the GSAs. The GSPs will reveal how the GSAs handle sustainable yield in the near-future.

Preparation is Key

SGMA required GSPs in place for high priority groundwater basins by January 31, 2020. Currently, data and community engagement are GSA priorities as they craft draft GSPs for a litany of challenge and revision. Despite a lack of clarity on how each GSA will achieve sustainable yields, understanding the availability of surface water supplies, ability to transfer water to a property, and whether the soil conditions lend themselves to prime groundwater storage can combat the unknowns surrounding groundwater pumping. At AQUAOSO, we developed a research platform that gather pertinent data to assist lenders in making tough decisions that unravel the water mystery by illuminating the strengths and weaknesses of a water portfolio.

By reading the above options, you already have the knowledge needed to ask the right questions and raise awareness surrounding water risk and SGMA. Be prepared. Take action with your new-found knowledge by forming the plans and partnerships needed before SGMA takes full effect.