Profiting From California's Epic Drought
Last summer, in the second year of California’s latest dry spell, Michael Perez, a farmer in the state’s Central Valley, paid $250 an acre-foot for water to irrigate his almonds, cherries, tomatoes, and cotton. (An acre-foot is enough to cover an acre with a foot of water.) This year, with the drought hitting crisis levels, Perez was in for a shock: Water is now going for as much as $2,200 an acre-foot, an increase of more than 800 percent. “It’s an outrage,” he says.
For him, yes. But not for the farmers on the other end of the deal who have water to sell. They’re among the lucky owners of so-called senior water rights, which date back to the Gold Rush era, when settlers staked their claims along California’s rivers. Today, those claims still determine who gets the water that flows from the Cascades and the Sierra Nevada into the Central Valley, one of the world’s most productive agricultural regions. In times of drought, the system creates winners—the heirs of the miners and ranchers who built the state—and losers, including farmers without rights, who find their place in the state’s $44.7 billion agricultural industry threatened by deals for natural resources cut more than 100 years ago.
The California Department of Water Resources, which manages water in the state’s rivers, says it expects to deliver only 5 percent of the almost 4 million acre-feet requested this year by public water agencies. The federal Bureau of Reclamation, citing critically dry reservoirs, announced that senior rights holders would still get 65 percent to 75 percent of the water they requested.
Everyone else got nothing, for the first time in decades. That’s left them with three options: Let their fields lie fallow, drill for increasingly scarce groundwater, or buy what they need from senior rights holders, who are entitled to sell as much as 20 percent of their annual water allocations for whatever they want to charge.
The system has its roots in the 1850s, when claims to water were recognized by California’s new government according to a principle known as “first in time, first in right.” As the state grew, landowners, municipal water authorities, and hydroelectric utilities such as Pacific Gas & Electric all acquired rights. In 1914, when California established its first statewide water commission, these rights were enshrined in law. Today, 2,049 corporations, local water districts, and other entities hold water rights that predate the 1914 law, according to state records.
California’s water market didn’t take off until the early 1990s, when a five-year drought prompted regulatory changes that made it easier to sell water. In 2009, at the peak of the last drought, senior water rights holders sold $95 million worth of water. The value of water sold this year is projected to be as much as $208 million, a record, according to WestWater Research, a water marketing and consulting firm in Boise, Idaho. “It clearly is a seller’s market,” says Gayle Holman, a spokeswoman for the Fresno-based Westlands Water District.
Prices spiked this winter. Among the first to benefit were about 300 landowners in the Buena Vista Water Storage District, which was created in 1924 to manage Kern River water rights originally claimed in the 1870s by Miller & Lux, a Central Valley ranching empire. In February it sold 12,000 acre-feet of stored water for $1,140 an acre-foot in a sealed-bid auction. “I was surprised,” says Maurice Etchechury, the district’s engineering manager. The next month, the Madera Irrigation District, a public agency that holds senior water rights on the Fresno River and other smaller waterways, fetched record bids of $2,000 to $2,200 per acre-foot, netting a total of $6.69 million for the district. The money will be used to pay for capital projects, operations, and maintenance, says Thomas Greci, the district’s general manager.
Federal and state authorities have the right to review proposed water sales for environmental reasons. Only 19 deals were completed in 2013. So far this year the authorities have received notices of more than 30 planned sales by senior water rights holders to farmers and municipalities that need water.
That includes the May sale of as much as 15,225 acre-feet by about 25 rice farmers in the Biggs-West Gridley Water District, north of Sacramento, to farmers without water rights in the Westlands district, at an average of $500 per acre-foot—more than three times the price last year. Individual farmers say they see the windfall as a way to make up for their own losses, rather than a path to riches. Fritz Durst, a farmer in Woodland, northwest of Sacramento, got 75 percent of his usual water allocation and sold some at $425 an acre-foot to the San Luis & Delta-Mendota Water Authority. “I’m using that money to backfill the money that I’ve lost through this drought,” says Durst, who grows rice, oats, barley, corn, asparagus, and wine grapes.
Some rights holders say they have no plans to part with their water. Hearst, the media company, holds senior water rights attached to Wyntoon, a forest retreat built by founder William Randolph Hearst on the McCloud River in the far northern part of the state. “We don’t sell our water to other users,” wrote Hearst spokesman Paul Luthringer in an e-mail. “We use it for ourselves.”