Surface water supplies and weather conditions in California lack predictability. Over time the snowpack in the Sierra Nevada mountain range has shown a boom and bust pattern. The one constant historically relied upon by agricultural operations, and those financing them, was groundwater, either as a primary or supplemental supply. Entire operations may have depended on 100 percent groundwater, and that method was not considered high-risk.
As many aquifers, especially within the San Joaquin Valley and some coastal areas continued to be over drafted due in large part to regulatory constraints in the Sacramento-San Joaquin Delta and other key watersheds, subsidence, water quality issues and other issues arose again. It was to resolve these issues (among other reasons) that the Federal and State surface water projects were developed decades ago.
However, after many years of lack of political consensus and with environmental concerns strongly influencing actions in the Delta and elsewhere, the state decided to act; enter Sustainable Groundwater Management Act (SGMA). The practice of unrestricted pumping of groundwater or ignoring the potential impacts of such activity are over.
Questions on how water availability and quality influences agricultural lending decisions are becoming ever more important as likely water shortage becomes forefront in lenders minds. Uncertainty surrounding water supplies lead lenders to refuse loans, or at least limit financing to those borrowers who can provide well thought out and supported water plans.
Water risk comes down to whether there is enough serviceable water for a crop’s needs and will there be enough water for those needs in the future. There are multiple perspectives lenders look at when analyzing water risk and all must be evaluated to provide the complete water risk picture.
Evaluating water supplies is one piece of the water risk analysis puzzle. An understanding of current and historical water supply and its volatility due to climate and regulatory impacts for a water district offers awareness into the amount of potential water available. In addition, most water districts (either on their own or in collaboration with neighboring districts) have submitted Groundwater Sustainability Plans (“GSPs”) under SGMA, which are intended to serve as a roadmap to achieve sustainable groundwater use by 2040.
For example, in drought conditions, the surface water supply for many properties is reduced significantly requiring access to alternative, sometimes costly and not always available, supplies of groundwater or imported surface water. Low historical surface water supply may indicate that an area relies more heavily on groundwater or imported surface water. The less water available means a higher risk to operations within that water district unless that operation has access to alternative of water sources – for example, water banking or recharge facilities – or can reduce its demand without reducing viability of an operation. The implementation of SGMA is widely expected to exacerbate the volatility of water supply and water cost.
Lenders will want to know an applicant’s method of sourcing water, the timing relative to the needs of the crop(s), and the cost. In today’s world generally one source of water, being a well or surface water only, will not be enough as new surface water and SGMA regulations will limit the reliability of water available in some years. Your lender will need to know several key items as it relates to water risk and it is in the borrower’s best interest to be proactive about supplying this information in a readily understandable form:
- Are you located in a water district? Any property located within a white area? Historical allocation?
- Can you purchase supplemental water? What has been the cost historically for this water?
- How many wells are there on the property? What is the yield for each of these wells? What is the groundwater depth, drawdown and recharge rate?
- Is your groundwater quality acceptable for your crop type without having to blend groundwater with surface water that may not always be available?
- What does the soil look like?
- Is the ground able to recharge very well?
- What crops do you have planted? What is the crop water demands and the required quality?
- What does your GSP currently say about groundwater pumping restrictions and allocations of groundwater credits? If these issues are not yet covered in your GSP what is the current expectation of where SGMA compliance is headed in your sub basin?
- Do you have independent water assets (long term contracts, water banking interests, water recharge facilities, etc.) where you could ‘self-help’ if you have a water deficit due to a dry year?
To sum up, lenders rely on the loan applicant to present both near-term and longer-term water plans and strategies. The long-term strategies must include reasonable assumptions about the impact SGMA will have on the operation. Identify your water risk early, seek solutions to mitigate that risk, and take advantage of the strategic opportunities to position yourself for the future.
While SGMA attempts to balance the needs of industries, consumers and agriculture, the potential impact on agriculture can be great, especially in the most over-drafted areas. Within this scenario it’s important to understand that not all operations are the same and each borrower is analyzed on an individual basis.
Conterra Ag Capital is an agricultural lender with extensive understanding of specific issues significant to California. If you’re ready to refinance or make your next land purchase and have questions, start the process by contacting a Conterra Ag Capital lending specialist today.