Water will be one of the most important agricultural inputs to watch over the next few decades, as water scarcity leads to increased competition for water resources around the world. At the same time, better water conservation technologies and smart water markets will make it easier to track water use and water costs in agriculture. Staying up-to-date on the latest water trends is a cornerstone for making good decisions around water.
According to the World Bank, irrigated land is twice as productive as land that relies on rainfall, making it a key component in ensuring food security:
“Irrigated agriculture represents 20 percent of the total cultivated land and contributes 40 percent of the total food produced worldwide.”
Agricultural water use in the U.S. has remained relatively stable, as productivity gains make up for increased demand due to population growth. But the World Bank predicts that global production will have to grow by 70% by 2050 in order to feed over 10 billion people – while also adapting to the effects of urbanization and climate change.
Additionally, more water will have to be reallocated to non-agricultural sectors, requiring the development of more infrastructure – both physical and virtual – to move water.
All of these factors make it difficult to know how to price water risk into land deals, or even how to estimate the current market price for water. One recent study found that 77% of the companies they researched “specifically mention water as a risk factor in their financial filings,” but still fall short on effective water risk management.
Often, the resources that lenders, investors, and other stakeholders need are difficult to locate or aren’t available in an easy-to-digest format.
This guide to water trends in agriculture provides up-to-date information and is meant to spark conversations about water risk.
Some of the topics included in this guide are:
- Water cost trends
- Water scarcity trends
- Drought risk in the U.S.
- And more
Check back here for updated and added information, or browse our resources page for comprehensive guides on additional topics.
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:
|D0 – Abnormally Dry||0.0%||0.6%||0.0%||0.0%||17.1%|
|D1 – Moderate Drought||5%||19.7%||15.8%||6.8%||31.9%|
|D2 – Severe Drought||17.3%||21.5%||30.6%||5.9%||22.9%|
|D3 – Extreme Drought||70.8%||52.4%||46.8%||71.5%||12.7%|
|D4 – Exceptional Drought||6.9%||5.8%||6.8%||15.8%||0.0%|
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 $2.50/m3 in times of water scarcity.
Water market trends by state
We can also use the latest data from several U.S. states to see where water trends are heading in the near future. While sales still account for only a small percentage of total water used (4% in Arizona and 2% in California), they still represent a significant sum, especially when factoring in the higher prices of permanent sales.
A comparison of average annual water sales by state between 2009 and 2018:
|Sales ($)||Leases ($)||Sales (AF)||Leases (AF)|
|Arizona||$12 million||$39 million||14,000||288,000|
|California||$100 million||$295 million||29,000||1,065,000|
|Colorado||$89 million||$8 million||15,000||45,000|
|Texas||$34 million||$26 million||30,000||178,000|
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.
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.
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.