Farmland values hinge on future water availability

Issue Date: July 8, 2020
By Ching Lee
Describing efforts to balance water supply and demand as “daunting,” a water district manager told an agricultural business conference farmers need to manage water as they manage money.
Photo/Tomas Ovalle

Availability of water and the impact of the Sustainable Groundwater Management Act continue to be a main focus when California agricultural appraisers determine land values, particularly in water-short regions.

During a business conference held virtually last week, the California Chapter of the American Society of Farm Managers and Rural Appraisers also touched on other issues affecting land values, including supply-and-demand dynamics for various crops and market conditions, especially under COVID-19.

But water continues to dominate discussion of how land values are assessed as SGMA is implemented.

David Orth of New Current Water and Land LLC, a water consulting firm in Fresno, stressed that future groundwater use may be limited and restricted. What remains uncertain, he added, is "when, where and how long are we going to transition through this" as water managers and users tackle tough questions and try to develop solutions.

"I think it's clear that the days of appraising land value based on well capacity are behind us," he said. "We can no longer assess the value of property based on how big the pump is and assume that that water will always be there."

Local agencies overseeing critically overdrafted water basins submitted plans to the state earlier this year for how they would balance water supply with demand. Orth described groundwater sustainability plans, or GSPs, filed to date as "complex, difficult to interpret and uncertain." Though the plans contain "interesting concepts" of sustainable yield, pumping ramp-downs and other management actions, Orth said some of the plans depend on water supply that may not exist. Developing these plans may prove "extremely expensive or impossible from a regulatory-approvals process," he added.

In Kern County, which has an average annual water-supply deficit of 350,000 acre-feet, balancing water supply and demand is a "daunting task," said Eric Averett, general manager of the Rosedale-Rio Bravo Water Storage District in Bakersfield.

Lowering the water deficit in the area, Averett said, will need to rely mostly on reduced demand, "which most of us find unacceptable." In addition, regulatory decisions continue to nip at the amount and timing of water exported from the delta. With ongoing litigation, "it will be years before these issues are settled," he added.

To help meet demand, Averett said, some water will need to come from partnerships with areas that have surplus supplies, with water markets and trading likely to be part of the solution. Though there's "some angst with the idea," he said he believes it will be "one of the more important tools for water management" in the future.

"There can be no doubt that fallowing will be part of our strategy to balance the supply and demand," he said. "We need regional fallowing programs that aggregate fallowed acres, to minimize a patchwork of idle land and maximize economic opportunities for those lands."

Agricultural landowners need to manage water the way they manage money, he added, and that means they need to review their GSPs, which he equated to financial statements.

"We really need landowners to get involved and start asking those tough questions, because those GSPs described something that in the real world will be very difficult to deliver," Averett said.

Longer term, as in 20 to 30 years out, University of California, Davis, agricultural economist Dan Sumner said he believes the state will "evolve into more secure ownership of water," including for groundwater, and end up with more flexibility and more markets.

"I think the markets that will be coming to agriculture will unleash incentives that we haven't seen before for California water," Sumner said.

Looking at how markets will affect land values for several of the state's top crops, Kaushal Khanna of Olam Farming in Fresno, which grows and processes nuts, and Mike Ming, an agricultural appraiser and broker for Alliance Ag Services in Bakersfield, both pointed to this year's estimated 3 billion pound almond crop as a challenge for marketers, leading to lower prices for farmers. Though new product innovations have helped to create demand and new markets for almonds, strained U.S.-China relations and impacts from COVID-19 have hurt exports, they said.

For winegrapes, one "huge bright spot" from the pandemic is the 30% rise in retail sales for wine, much of it through e-commerce, said Karl Lehman, manager of Central Valley operations for Allied Grape Growers. The trend is expected to continue, he said, citing a new report from Rabobank that indicated millennials and Generation Z wine drinkers "are more than likely to continue and increase their online spending versus going back into the storefront."

Though increased online sales have helped to offset some lost business due to the shutdown of tasting rooms, Lehman said restaurant closures have hindered wine sales, particularly for wineries on the North Coast that produce higher-end wines. Wineries that derive much of their revenue as venues for entertainment, weddings and other events also have struggled amid the pandemic, he added.

On the supply side, Lehman said the state hit its peak bearing acreage of 590,000 the last two years, and that "manifested itself in some undesirable ways." To bring supply and demand into balance, some 50,000 to 55,000 acres of vineyards need to be pulled, he said, noting farmers are forecast to remove about 35,000 acres this year.

In the citrus business, farmers continue to face escalating production costs, the risk of the deadly citrus greening disease, rising competition from imported fruit, and tariffs and phytosanitary requirements in key export markets such as Korea, China, Japan and Australia, said Zak Laffite, president of Delano-based Wonderful Citrus. But he noted the COVID-19 impact on citrus consumption has been largely positive. Though food-service consumption has plummeted, with lemons being the most affected, retail consumption of all citrus categories has increased, particularly for oranges.

(Ching Lee is an assistant editor of Ag Alert. She may be contacted at clee@cfbf.com.)

Permission for use is granted, however, credit must be made to the California Farm Bureau Federation when reprinting this item.




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