Food Grows Where Water Flows

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CFWC Blog

Water Futures: A Hedge Against Potential Price Increases or Betting the Farm?

March 15, 2021 in CFWC Blog

Much has been written lately about a new water futures contract market that provides a way for individuals to profit (or lose) off of fluctuating water prices in California. Based on the Nasdaq Veles Water Index (Index), buyers and sellers are able to speculate on the future price of water to either hedge against price changes if you’re a water user, or profit off of price changes if you’re a speculator who has no other interest than making money.

Adding to the confusion is the interchanged use of the terms “water futures,” “water market,” and “water transfers.”

“Water futures” are contracts that allow a buyer to try and outguess what the future price of water will be and turn a profit if they’re right. The participants in water futures contract trading understand that tangible water will not be delivered as part of the agreements.

“Water markets” are a collection of commercial activities where actual water is bought and sold and is, by and large, regulated by the State Water Board.

“Water transfers,” also regulated by the State Water Board, provide a mechanism to balance water needs within a region or between regions, and have helped increase the flexibility of California’s water system.

Water Transfers vs Water Markets vs Water Futures Trading: On-Farm

There is a clear distinction between water transfers between willing sellers and willing buyers and water markets. Water markets, similar to water futures contracts, are often associated with third parties’ (which could be in other states or even countries) speculation on water pricing without actively engaging in the management/movement of water.

Farmers are often cited as potential beneficiaries of water futures trading because rising water prices can affect the bottom line when they’re irrigating a crop. But are farmers actually going to use this tool to help manage water costs? That remains uncertain.

The Water Futures Index

The Nasdaq Veles Water Index is based on the prices of actual historical water trades in California that include, essentially, State Water Project (SWP) and Central Valley Project (CVP) transactions, as well as sales within four Southern California adjudicated water basins: the Central Basin, the Chino Basin, the Main San Gabriel Basin, and the Mojave Basin Alto Subarea.

Contracts are sold in 10-acre-foot blocks. The index price as of March 9, 2021 for water contracts ending in June of 2021 was $597 per acre-foot. The June 2022 index price was $603, a difference of just $6 per acre-foot, however that could change significantly if water supply conditions change down the road, like if we enter another period of extended drought.

Source: Nasdaq Veles Global Indexes

For example, from March 2020 to June 2020 the index price increased from a little over $200 per acre-foot to roughly $700/ af. It has since fallen back to the sub $600 range, and again, is based on prior actual water sales for both agricultural and urban supplies.

Contracts are available for up to two years in length and are typically settled quarterly on the third Wednesday of the month.

Terms usually end in March, June, September, or December and while they have a set period, contracts can be traded at any time throughout their term.

Someone buying into the water futures market is not buying actual water. Instead, they are attempting to guess where water prices will be in the future. If you buy a June 2022 water futures contract at today’s price of $603, you’re hoping that the index price when the contract is sold is higher than $603. If the price declines, you’ll sell the contract at a loss.

In the practical sense, how would a water futures contract benefit a farmer? Most of the published examples go something like this:

A farmer buys five contracts (50 acre-feet total) at $600 per acre foot for a cost of $30,000. Under the assumption that the index price of water rises to $800, the farmer is set to make $200 per acre-foot X 50 acre-feet for a total profit of $10,000. That profit could then be used to buy water at the actual price when it is needed for the irrigation season.

The reality is, during a shortage, local agricultural water prices could easily be $400 an acre-foot. When the farmer actually needs water, the $10,000 profit from the index transaction, at $400 per acre-foot, would buy 25 acre-feet of water, enough to irrigate about 10 acres of tomatoes or roughly 7 acres of almonds. The same amount of water could be enough to supplement 25 existing acres of production with an extra one acre-foot per acre. Thinking bigger, under this same scenario, water futures contracts intended to supplement 250 acres of farmland would cost $300,000 up front and there is no guarantee of a profitable return.

The Index also provides a mechanism for purchases on a 10% margin, meaning the up-front investment could be considerably less, $30,000 in the prior example. However, the risk is considerably more if cash reserves aren’t available when the contract matures and prices have declined. That kind of risk led to a few people jumping from buildings after “margin calls” during the stock market crash in 1929.

It is hard to imagine water futures operating at a scale that actually works for agriculture. Perhaps protecting a high-value crop with supplemental water (if it’s available) is worth the high price of purchasing one or more water futures contracts. But farmers are risk-aware by nature. Is it reasonable to think they’re likely going to gamble a lot of up-front capital under the assumption that water prices will rise?

The Magic 8 Ball would likely say, “Don’t count on it.”

Delta smelt remain on the brink of extinction – We can change that

January 12, 2021 in CFWC Blog, Endangered Species, Endangered Species, Invasive Species

Recent fish surveys confirm what many biologists, ecologists, and water experts have known for some time – Delta smelt remain on the brink of extinction. Zero Delta smelt were found in the California Department of Fish and Wildlife’s recent Fall Midwater Trawl Survey. Even the Enhanced Delta Smelt Monitoring Program, which is specifically designed to capture the tiny fish, only successfully caught two Delta smelt from September 8 to December 11, 2020.

Improving the health of native species like Delta smelt is an imperative, as it is critical to the health of our environment and the reliability of our water supplies. As an indicator species, the Delta smelt’s absence tells a grim story about the health of the Delta ecosystem, making these recent findings all the more concerning.

These results are not surprising, when California has made slow progress on actions like habitat restoration that are essential to restoring native fish populations.

Photo: US Fish and Wildlife Service

For many years flows, meaning pumping from the Delta, have been blamed as the primary cause for the decline in Delta smelt. As a result, restrictions on pumping from the Delta have been the default approach to protecting these fish.

The fact that Delta smelt populations are still desperately low – despite years of restricted pumping – confirms that a flows-only approach isn’t effectively protecting Delta smelt populations.

Equally concerning is the fact that a flows only approach has at the same time had a detrimental impact on the agriculture industry and the communities that rely on surface water, not only in the Central Valley but for anyone who buys and eats food grown there.

In fact, there are a multitude of stressors on native fish populations – including invasive and predatory non-native species, loss of habitat, contaminants, and changes in food availability and quality – and restoring the health of Delta smelt requires a broad-based approach that includes targeted actions to effectively address all these factors.

Let’s use another analogy: Responding to the near-extinction of Delta smelt by relying on pumping restrictions alone is as effective in restoring their overall health as responding to the COVID-19 pandemic by relying on bar and restaurant restrictions alone. Can some data-based restrictions be a lever for change? Absolutely. But aggressive, austere restrictions that are not supported by the science cannot be relied upon to solve the entirety of the crisis – particularly when there are severe economic consequences associated with the restrictions, too.

Ultimately, we must pursue a combination of functional flow and non-flow measures, including habitat restoration and adaptive management, to meet the needs of native fish and wildlife species. Without a more holistic approach, the Delta smelt will go from endangered to extinct.

A New Year Will Bring Opportunities for Continued Progress

November 30, 2020 in CFWC Blog

Much has been written in the last few weeks about the impact an incoming Biden administration will have on the war of lawsuits between California and the Trump administration. Unfortunately, because conflict is often more interesting to write about than cooperative progress towards joint goals, these articles miss a lot of the positive work underway in our state.

California and its leaders understand that we all need water – cities, towns, farms and the environment. It is also clear that uncertainty does not benefit any water users and that working together to meet the needs of all is the best path forward.

1. Helping struggling fish populations

Dutch Slough, Sacramento-San Joaquin Delta (DWR)

Keeping the ecosystem healthy is important for a secure water future and the latest science shows that in order to reach that goal, we must pursue a more holistic approach than in the past. That’s why farmers, scientists, conservationists, and government agencies have teamed up to address the multiple issues impacting fish.

Millions of dollars are being spent on projects throughout the state to improve habitat, food source and predator control for fish. A large project just completed by the Department of Water Resources and Westlands Water District in the Sacramento-San Joaquin Delta as a part of California’s EcoRestore initiative restored and enhanced approximately 2,100 acres of cattle pastures into tidal marsh and habitat that will provide new sources of food and shelter for native fish, including smelt and salmon.

However, that is just one of the many projects underway that will depend on continuing cooperation among stakeholders to be successfully completed and provide benefits to all California water users.

2. Supporting multi-benefit projects

The goal of various stakeholders coming together is furthered when projects have multiple benefits that achieve a variety of goals. One example of such a project is the proposed raising of Shasta Dam.

The completion of this project will increase water storage, enlarge the cold-water pool and improve water temperatures for fish, reduce flood risk in the region, provide additional hydropower with an existing renewable and carbon-free resource, and improve water supply reliability for farms, families and the environment.

3. Replenishing depleted groundwater reserves

Flooded vineyard (Terranova Ranch)

California’s 2014 groundwater legislation, the Sustainable Groundwater Management Act (SGMA), charts a course to protect the state’s largest water storage source, underground aquifers. Farmers again have partnered with scientists, and conservationists to experiment with flooding fields in winter, building recharge ponds on their farms, and restoring and expanding floodplains. These measures not only help recharge groundwater, they offer flood protection and wildlife habitat.

It’s important to note that this groundbreaking legislation is based on the concept that local stakeholders from each region must work together to find solutions that make sense for their area. The law’s passage not only recognized the importance of preserving groundwater, it also recognized that the era of one-size-fits-all, mandatory top-down solutions are not the best path forward.

4. Moving ahead with the Voluntary Agreements

Furthering the idea of local cooperation embraced by SGMA, the Voluntary Agreements on water are the next logical step in that progression.

These agreements represent the best hope for California’s environmental future. They could end the cycle of lawsuits, bring reliability to water users, utilize new science as well as provide annual funding for environmental projects.

5. A secure water future for all Californians depends on cooperation

Sacramento-San Joaquin Delta (USFWS)

A change in administration does not need to be a source of conflict. As California has shown, working together produces results that benefit the entire state. President-elect Biden ran on the pledge to reunite the country. Picking winners and losers is not the path to achieving that goal. As he said in his commentary earlier this year, we’re hopeful that Governor Newsom will move to complete the Voluntary Agreements and that the incoming Biden administration will embrace the spirit of cooperation that is moving all water interests forward.

Correcting the Record

October 14, 2020 in CFWC Blog, Farm Water in the News

LA Times columnist Michael Hiltzik recently published a column that contained an outrageous statement related to California’s water supply that is completely out-of-touch with the reality that California farmers live every day.

He stated, “Central Valley growers often talk as though only their water needs should count in California. . .” He’s either been living in a cave or is so wrapped up in his own bias he’s not able to factor in the truth.

California farmers have been leading the charge on water conservation as well as connecting updated science to water policy and protection of the environment.

As noted by the Public Policy Institute of California (PPIC) agricultural water use in California is down 15 percent since 1980 while production is up more than 60%. That’s an incredibly efficient water use by any measure. And, as Californian’s concern for safe, locally grown food increases during the pandemic, it’s also of critical importance.

In addition, California farmers have contributed to more than $800 million on studies over the last decade, working to identify science-based water policy that works for farms, people and the environment.

These studies build on investments in science-based projects that are helping heal the California environment. The Butte Creek Salmon Recovery Project turned a population of about 100 Chinook salmon returning each year to Butte Creek into 10,000 over the course of about 20 years. And the science at the heart of this project continues to be used today to implement additional projects in various parts of the state.

Other projects are in place to restore floodplains which not only provide critical water storage, they benefit struggling fish populations as well. The largest public-private floodplain restoration project in the state is at Dos Rios Ranch in Stanislaus County. River Partners, a non-profit that manages the project says, “Our floodplain reforestation projects are biodiversity hotspots and climate-protection powerhouses.”

California farmers have always taken care of their neighbors – and that includes the wildlife with which we share the land. Much of California’s most important wildlife areas exist alongside some of the state’s most productive farmland and farmers are a key part preserving this valuable habitat.

Mr. Hiltzik likely celebrates Earth Day every April and probably misses the fact that on the farm, every day is Earth Day.

Conflict to Collaboration

August 6, 2020 in Central Valley Project, CFWC Blog, Endangered Species, Endangered Species, Environment, Salmon, Water Supply

Conflict to Collaboration

A regulatory approach has dominated water management in California over the past three decades. This was a significant shift from the development phase of California’s water system, as described by water policy expert Tim Quinn, former executive director of the Association of California Water Agencies. Many believe that policy-makers and water users are making another transition, this time from conflict to collaboration.

A near empty San Luis Reservoir during the 2012-2016 drought

Significant changes like this, where new or increasing demands lead to policy changes that increase resource scarcity, often generate resistance among the negatively impacted parties. In California, this resulted in warring factions fighting over water supplies, often in a zero-sum game of winner take all, or, more accurately, winner take most. The detrimental effect of the regulatory approach to water management on farms, farm jobs, rural communities, and California’s economy is squarely rooted in dwindling water supply reliability.

It’s important to note that not all water supply shortages are caused by regulatory restrictions. California’s variable hydrology also plays a role; however, the ultimate impact is intensified by the restrictions imposed by State and federal regulatory actions affecting the delivery of water to millions of people and millions of acres of farms throughout California.

Local Cooperation Increases Water Deliveries to Farms and Wildlife Refuges

At the local level, farmers on the west side of California’s San Joaquin Valley saw the reliability of their water supply contracts fall from about 90 percent in 1989 to roughly 30 percent in the last five years. These water supply restrictions were based mostly on environmental regulations intended to improve populations of Chinook salmon and Delta smelt, however numbers of the listed species continued to decline, despite the imposition of regulations that, over time, have redirected vast amounts of water from agricultural uses to environmental uses.

In an effort to respond to these policies and improve the reliability of their dwindling water supplies, local water agency members within the San Luis & Delta-Mendota Water Authority chose a different path, one of collaboration.

Starting locally, senior and junior water rights holders, along with wildlife refuges, began working together on multi-benefit projects that increased water conservation or modified the timing of water deliveries, providing additional water supplies for farms and flexible water management for the refuges. This collaborative effort helps deliver more water for irrigation in the summer, while increasing the ability to deliver supplies to refuges in the fall when it is needed most for waterfowl habitat.

The benefits of local cooperation are improved by recent policy decisions at the federal level to increase opportunities to deliver water to farms when its available, while at the same time, enhancing protections for endangered fish.

Federal Response Enhances Regulatory Structure to Improve Water Supply Reliability

USFWS Director Aurelia Skipwith with SLDMWA Executive Director Federico Barajas along with agency staff

U.S. Fish and Wildlife Director Aurelia Skipwith came to California recently to participate in a tour of California’s federal water infrastructure, the federal San Luis National Wildlife Refuge, and local farms near Los Banos. She brought with her a message of cooperation, unity, and a desire to continue to enhance the regulatory structure to improve the reliability of water supplies and improve protections provided for threatened and endangered species.

Director Skipwith comes from a background in the agricultural industry, has a law degree, and co-founded AVC Global, a company designed to reduce inefficiencies “…in buying and moving agricultural products from the farm to the final use,” according to the AVC Global web site.

Her primary responsibility is administering federal laws, such as the Endangered Species Act, which means her real-world experience developing partnerships, problem solving, and achieving goals while taking into account the people on the front lines where federal laws are implemented is a real asset. It’s clear that she brings a real-world perspective to her role as the head of the Fish and Wildlife Service.

“President Trump’s (October 2018) Executive Order on water brought together agricultural, municipal, and environmental stakeholders to finish the update of the biological opinions,” she said.

That update had begun during the Obama Administration.

“Under a short timeframe, the parties had to work together to make it happen, she said. “President Trump, (Interior) Secretary Bernhardt and the Fish and Wildlife Service helped broker what was an amicable process.”

New Biological Opinions Improve Conditions for Water Users and Listed Species

The end result is a new set of biological opinions that have helped deliver more water to farms and provide better, more science-based solutions to species protections. Instead of the former calendar-based approach to species management, new science generated from 10 years of research into California’s Bay-Delta has improved protections for fish and helped deliver more water to the people who need it.

CFWC Executive Director Mike Wade with USFWS Director Aurelia Skipwith

Director Skipwith also mentioned the Great American Outdoors Act, recently passed by Congress, to help end the
maintenance backlog at the country’s National Parks and National Wildlife Refuges.

“There is a $1.3 billion backlog of projects like this and $1 billion of it is in refuges. Refuges are public lands that need to be in good shape for the species that depend on them and they also need to be welcoming and accessible for the people who visit to enjoy the wildlife and open space. It’s a blessing to have bipartisan support for it,” she said.

She praised the efforts of local water agencies, including the members of the San Luis & Delta-Mendota Water Authority and the San Joaquin River Exchange Contractors Water Authority for their efforts to forge agreements that include the Fish and Wildlife Service. Those agreements help local water users and the federal government operate more efficiently while delivering water to grow the nation’s food and to protect vitally important neighboring wildlife refuges.

Support for Farmers During Covid 19 Should be Mirrored with Support for Reliable Water

July 15, 2020 in CFWC Blog

Support for Farmers During Covid 19 Should be Mirrored with Support for Reliable Water

Californians are resourceful by nature and a prime example of that creativity is support for farmers during COVID 19 mirrored with support for reliable water.

A July 9, 2020 article in the Washington Post highlighted a few of those efforts. (Farm to Parking Lot to Table: The Pandemic is Inspiring Creative Efforts to Get Locally Sourced Food)

Food supply chain disrupted by pandemic

With all the supply chain disruptions that have come with the pandemic, many farmers are having trouble getting the food they grow through the system and into consumers’ hands. As this article points out, groups of neighbors are banding together to buy from farmers and set up ad hoc distribution networks of their own.

Drive-through produce pick-up supports local farmers

Volunteers load produce from nearby farms into customers’ trunks. (Heather Kelly/The Washington Post)

An operation in Silicon Valley, named Giving Fruits by its creator, makes bulk fruit and produce available for drive-through pickup every Friday. In addition to the ingenuity of the process, what shines through is the support for farmers and an understanding of how important it is to have food grown locally.

One customer, Allyson Rosen, said, “. . .now knowing that the farmers are in trouble, I really want to support this. . .when it comes to fruit like this, it’s worth every penny, and to support the farmers.”

All California families are struggling with the effects of this pandemic, so California farmers genuinely appreciate all the public support.

Food production depends on reliable water supplies

But it’s important to point out that reliable water supplies are needed to be able to continue growing the fresh produce that comes from California farms.

Farmers work hard to use water efficiently, conserve wherever possible, and recycle. According to the Public Policy Institute of California (PPIC), agricultural water use in California is down 15 percent since 1980 and production is up more than 60 percent. But the bottom line is, it still requires water to grow our food.

Together, we must push for more smart storage projects, both large and small and designed to enhance ecosystem benefits as well as water supply. The right projects are a sensible way to increase our ability to capture water during wet years for use in drier times. We need government support for expanded recycling as well as overdue infrastructure fixes that help save the water we already capture. And we need all stakeholders to cooperate at the local level on how best to manage the water we do have for people, farms and the environment. If we do these things, not only will farmers be able to continue growing the healthy food we all love, Californians will have a more reliable water supply.