Land values in California are becoming more unpredictable as the Sustainable Groundwater Management Act (SGMA) is threatening groundwater pumping in the coming years. As we are embracing another year of exceptional drought in most areas of California and there will be little to no allocation of surface water in many areas, farmers and ranchers are reminded just how important water is.
As noted in a previous article, surface water supply will often vary depending on climate and indirectly show additional water risks. Low historical surface water supply may force an area to rely more heavily on groundwater or imported water. Less water available means higher risk to operations within that water district unless that operation has access to alternative sources of water or can reduce its demand, which may have cash flow consequences.
Land values are increasing the further you move up the state, as more water is available. A recent water update provided from the California Chapter of the American Society of Farm Managers and Rural Appraisers (CA-ASFMRA) shared areas in the San Joaquin, Stanislaus and Merced counties are seeing almonds on East Side Irrigation Districts increase from $40M/ac. to $42M/ac., with listings ranging from $50M/ac. to $60M/ac.
Federal water districts are seeing an increase in certain irrigation district areas and a decrease in other irrigation district areas. A recent 4th leaf almond orchard listing in Escalon, CA asking $60M/ac. An offer at $47M/ac. was turned down. Additionally, a 7th leaf walnut orchard listing was asking $60M/ac, and an offer at $37.6M/ac. was turned down. These offers would have likely sold for $35M/ac. to $45M/ac a year or two ago, but being that we entering, yet again, an exceptional drought; water is king and driving up price.
Eastside water districts include South San Joaquin Irrigation District, Oakdale Irrigation District, Modesto Irrigation District, and Turlock Irrigation District. The Eastside districts, per CA-ASFMRA, have seen a 30-60% increase between December 2020 and May 2021. Reasons for the increase is related to strong water rights, coupled with the below average precipitation over the past rainy season.
Contrary to the water districts located on the Eastside, water districts located south, in Kern County’s water districts, have all seen values decrease. Kern River Water Districts have seen little to no change in value, where the open farmland in state water districts have seen a 7% to 16% decrease in value annually since 2014. Areas not served by district water, known as ‘White Land’ areas, have seen values decrease 9% to 16% annually since 2015.
Elsewhere in the State, land values are becoming increasingly tied to projected long-term groundwater availability and the access to reliable surface water supplies. The Sacramento Valley, because of its wetter climate and closer access to the Sacramento area rivers, is one area in the state to enjoy more reliable water.
It is becoming clearer that land with a single groundwater source is likely to have a harder time as SGMA restrictions come into play. We are seeing landowners sell their properties located in areas outside major irrigation districts purchase additional ground in better water districts when available.
As mentioned earlier, to purchase ground within these more sought-after water districts, landowners will have to pay a higher price. With real estate values increasing in more attractive irrigation water locations, the burden of maintaining a positive cash flow rises with a likely increase in debt to help fund the purchase. Without considerable cash equity or existing profitable operations to help support the purchase, profitability may not be possible for these high value parcels in the near future.
Jerred Davis, Conterra AVP Relationship Manager, is located in California’s Central Valley and works with borrowers in the Western U.S. Jerred is familiar with how water issues can impact farm loans. If you have questions about Conterra ag financing, Conterra Jerred or find the relationship manager in your region. Conterraag.com
