Windfall

by McKenzie Funk

  “In the United States,” he began, “we have two systems with water rights.” In the eastern United States, as in most parts of the former British Empire, the courts followed riparian law, part of traditional English common law. “If you have ten hectares of land, you get x liters from the Thames,” he said. “If you have a hundred hectares, you get ten times x from the Thames.” In states like Indiana, Ohio, Michigan, and Maine, water could not be stripped from the land and sold as a separate commodity.

  The West was different. The Homestead Acts let pioneers win deeds to federal land if they lived on it for a period and made improvements. “Wagon trains would leave Missouri, headed toward Oregon,” Dickerson said. “They would see a valley, stop, and say, ‘This looks good.’ They all settled along water.” In dry years, common law could not stop farmers living upstream from using up all the water before it reached the others, for none of the settlers yet owned the land they worked. “People living at the lower end of the valleys would go blow up dams,” he said. “The government had to start sending federal marshals out.” Water courts formed to sort out the mess, and as the deeds came, they came in pairs: one for land, one for water. The basic water law of the West became first come, first served. “First in time,” said Dickerson, “first in right.” This was why the All-American Canal was so important for California. So long as they had been exercised and thus kept valid—the water was put to “beneficial use,” not hoarded—the oldest rights were the most valuable, and they could be freely traded.

  “Any water title sold to San Diego or Denver today was first bought off a farmer or rancher way back then,” Dickerson told me. He abruptly stood up, walked to the back of the room, and returned with a diagram that he slapped down on his desk. It was a hydrologist’s straight-line graph of Colorado’s South Platte River, a depiction of tributaries and water rights. “This is just to give you some sense of the complexity involved.” It showed a disorderly network of dozens of colored lines—reds, blues, and greens—that converged at odd angles across the page. “Those things are reservoirs,” he said, pointing. “Those are ditches. Just look at this stuff. You almost have to have a magnifying glass. See, here’s a water right: year 1910, thirty-two thousand acre-feet, so-and-so cubic feet a second. Everything has a date on it. It’s incredibly complex.” But once you understood the rules, he said, you were a big step ahead of the guys buying utility stocks. “A lot of people say to me, ‘John, water is a regulated business. What are you saying here, that water’s a free-market good?’ And I say, ‘Well, no, water is not a regulated business. Water utilities are a regulated business.’”

  Dickerson planned to eventually take the Summit Water Development Group, his “wet water” fund, public—meaning a way for mom and pop in Peoria to finally speculate on water, plus a big payout for early fund investors who had put up the minimum $5 million buy in. In the meantime, he was playing what he called an “aggregation game.” Across the American West, up and down the Colorado River system, Summit took stakes in private reservoirs, in ditches dug 150 years ago by pioneering ranchers—spending $500,000 here, $1 million there—with the goal of accumulating enough water to sell as a package to suburban boomtowns within the basin. Once resold, the ditches’ water would be left in the river to be taken up by city pipes.

  After the new millennium and the onset of the worst Colorado River drought in memory, the rural-to-urban flow of water—already the bulk of water trades since tracking began in 1987—had doubled in volume. In the Rockies, snow fell as rain. Sometimes, rain did not fall at all. It was a preview of the future, scientists said: Climate models projected a northward shift of the Hadley cell, a planetwide atmospheric system that circulates warm air from the tropics and cooler air from the subtropics, driving trade winds, jet streams, and, crucially, desertification. For the Southwest, eighteen of the nineteen major models predicted permanent drought by 2050, with an average surface-moisture decline of 15 percent—the size of the decline that precipitated the dust bowl in the 1930s. Now as then, there had been a rural exodus. The population followed the water to the cities or perhaps vice versa. There were now more people to eat food, and there were fewer people to grow it.

  Developers had been on a water-buying spree until the housing market peaked in 2007, Dickerson told me. “Water went from $3,000 an acre-foot to $30,000 in some locales,” he said. Next came the crash—his moment. (“Three or four times,” he said, “we have bought water from bankruptcy courts.”) Now, with a fracking boom and an equally water-intensive hunt for other unconventional oils, petroleum interests were on a buying spree. In late 2008 in the upper Colorado basin, one of the biggest players, Royal Dutch Shell, filed for the first major water right on the Yampa River, requesting 375 cubic feet per second, or 8 percent of the river’s peak springtime flow. (It later withdrew the request after locals protested.) According to one study, energy companies controlled more than a quarter of the upper basin’s flow, more than half of its water storage. Farther south, in Texas, the onset of fracking corresponded to the driest year in state history, and ranchers and cities alike were priced out of the water market. To frack a single well can take as many as six million gallons. In 2011, petroleum companies drilled twice as many new water wells—2,232 across the Lone Star State—as they did oil and gas wells. For the Summit Water Development Group, all this was very good news.

  In Australia, the catastrophic drought in the Murray-Darling basin, the continent’s overstretched twin to the Colorado, was also good news for Summit. But it was not the only reason Summit was buying here, too. The other reason, Dickerson explained, was that Australia had copied the American West’s system of tradable water rights in the early 1980s. Then Australia further liberalized its system, creating what has become the planet’s freest and most bustling water market. The Colorado’s twin in drought was also its twin in free enterprise. In the Murray-Darling, Summit had secured what outsiders estimated to be at least 10,000 megaliters, or 2.6 billion gallons. It cultivated a diversified portfolio, Dickerson said, as with stocks, buying water in various Australian states that flowed to various crops: wine grapes, citrus, cotton, or almonds. He planned to become something other than a short-term speculator: a long-term rentier. Once Summit purchased Australian farmers’ water, he said, the firm banked it and leased it right back to them and their neighbors. Returns were already a safe 5 to 6 percent a year. “There’s no risk,” Dickerson said. “If some guy doesn’t pay, we still own the water. It’s like you turn off a tap.”

  In an era of increasing scarcity, many economists argued, the best way to cut our profligate waste of water was to have active water markets. Championed in Australia by the University of Adelaide professor Mike Young, in America by the Hoover Institution fellow Terry Anderson, founder of Montana’s “free market environmentalist” Property and Environment Research Center, the idea was that trading means incentives to conserve and use water efficiently, that markets allowed a scarce resource to flow to the highest-value activities. “One of the things governments can start doing,” Dickerson told me, “is to allow water to be priced at what it’s worth, then create a mechanism by which the rice farmer can sell his water to the wine producer.” That Australia’s water trading helped one of the planet’s great exporters of rice and wheat through its drought was undeniable. On a macro level, the economy survived remarkably unhurt. Also undeniable were the distortions: By 2008, near the end of the decade of drought and historic evisceration of the $35 billion farming sector, Australia’s rice production had dropped to 1 percent of normal, its wheat production to 59 percent. That year, what aid agencies dubbed the “global food crisis” led to protests in Egypt, Senegal, Bangladesh, and dozens of other countries. Adelaide’s wine industry, on the other hand, was still thriving.

  As I headed out the door into the San Diego sun, Dickerson graciously loaded my arms with books and reports, apologizing that he couldn’t give me his only copy of Unquenchable. At the top of the stack was Wate
r for Sale: How Business and the Market Can Resolve the World’s Water Crisis, a book published in 2005 by the libertarian Cato Institute, another Koch-brothers-funded think tank. “Some people don’t like it,” Dickerson said, “but this is what’s coming.”

  • • •

  TO TRULY UNDERSTAND what was coming, I had to make another trip, to the continent where the future already seemed to be here. In Australia, Summit Global ran its wet-water operations out of Adelaide, a swiftly growing city of 1.2 million people near the end of the Murray River that had near-brackish tap water and a reputation for bizarre murders. At the height of the decade-long drought that locals call the Big Dry—the worst drought to yet hit the industrialized world—I drove there from Sydney, dropping south to the Snowy Mountains before traversing the continent westward along the dwindling Murray. It rained when I was in the Snowies, and then it didn’t rain again, and the land became ever more orange and empty. On the banks of the Murray, river red gums cast their shadows on flats of cracked mud, and on the sides of the highways every other farmhouse seemed to have a “For Sale” sign. The river was so low that its iconic riverboats could not get through the locks. “The whole rural thing is just going to go belly-up,” a captain told me in Echuca. “Everyone’s going to move to the city, and there’s going to be nothing out here. It’s going to be like some sort of Mad Max movie.”

  The sellers in the burgeoning water markets, I learned, were family farmers. Small-time ranchers sold to corporate farms or citrus growers or the government; water flowed uphill to cities and vineyards. The biggest purchaser was the federal government, on a $3.1 billion run of buybacks for what it called “environmental flows.” Until the drought broke in late 2010—dramatic floods inundated 250 homes—the river did not readily reach the sea, and government warned that this would be the new normal unless there were fewer demands on the overstretched Murray-Darling basin: By 2030, climate change was expected to decrease local rainfall by 3 percent, decrease surface water flows by 9 percent, and increase evaporation by up to 15 percent. Lining up behind the government were Summit and a growing cast of other funds: Australia’s own Causeway Water Fund and Blue Sky Water Partners, Singapore’s Olam International, Britain’s Ecofin fund, and a company called Tandou Limited, which was owned by a New Zealand corporate raider, the American hedge fund Water Asset Management, and Ecofin.

  In Adelaide, a young PR manager led me past a row of brokers sitting in velvet chairs and staring at flat-screen Dell monitors, scanning satellite images on Google Maps: the headquarters of Waterfind, the country’s largest water brokerage, which had developed its own software platform for trades up and down the Murray-Darling and touted its plan to become a true stock market—the Nasdaq of water. There were exchange rates for different parts of the river system, he explained—owing to evaporation and local regulations, a liter in the Murrumbidgee Valley might not be worth quite the same as a liter in Murray Bridge—and there were volume caps to navigate; some states were still protectionist about their water, though it was getting better. These were paper trades, conducted by phone and Internet. Buyer and seller could be hundreds of miles apart. One would turn off his pumps, and the other would turn his on. The water market in 2008, near the peak of the drought, was worth $1.3 billion, and it had been growing by 20 percent a year. Bulk water in Australia is measured by the megaliter, equivalent to 264,000 gallons. The price of a megaliter fluctuated wildly. “In the temporary markets last season,” he said, “the low was right around $200. The high was right around $1,200.” In general, though, during the drought, the price went up.

  Another day, I drove into the hinterlands of Adelaide with a former undercover narcotics detective now assigned to the new crime of water theft. We cruised near the Murray, looking for action, and he told me about the tools he had: night-vision goggles for stakeouts, aerial surveillance to detect overly green fields. We stopped at a marina to see all the houseboats stuck in the mud, and he told me about the tools the criminals had: makeshift dams, surreptitious pumps, hoses snaking over to neighbors’ spigots, and frozen carp. The carp were for the wooden waterwheels meant to measure each farmer’s water allotment. Jam a frozen fish into one of them, and it would stop spinning. By coincidence, this was known as “spragging the wheel.” If an inspector came, the carp, now thawed, indistinguishable from a wild fish, got the blame. That water theft was being taken so seriously helped make sense of what else I was seeing in the world’s most liberated water market. The idea that water could be stolen, like the idea that it could be bought and sold, was predicated on the increasingly accepted idea that it was something that could be owned in the first place.

  “I’m not so much interested in the cause of the climate change,” Senator Bill Heffernan told me when we met at the Parliament House in Canberra, Australia’s hill-ringed capital. “I’m interested in what we’re going to do about it.” It was the sentiment of the new age, the free marketeer’s emerging mantra in two hemispheres—only Heffernan, the right-hand man to the former prime minister John Howard, a wheat farmer, and a kind of futurist for Australia’s conservative party, the Liberals, was beginning to doubt that strong property rights and liberalized markets could really save the day.

  When the Liberals were last in power, Heffernan had chaired the Northern Australia Land and Water Taskforce, which investigated whether the country’s status as an agricultural power could be saved if production and population moved from the Murray-Darling to its underpopulated, water- and land-rich north. He had great hopes for the Cape York Peninsula, a Kansas-size tropical wilderness populated by a few thousand indigenous islanders and aboriginals, some of whom were pushing to turn these ancestral lands into a UNESCO World Heritage site.

  “Climate scientists are saying that over the next forty to fifty years, 50 percent of the world’s population will become water-poor,” he told me. “They are saying that in the region of Asia, our immediate neighbors, there will be a 30 percent reduction of productive land over the next forty to fifty years. The food task will double in that time, and 1.6 billion people could possibly be displaced. Now, if that science is only 10 percent right, we’ve got a serious problem. One of the problems with this changing planet is, how are we going to manage world order? I mean, the chief commissioner of the Australian Federal Police said last year that the greatest threat to Australia’s sovereignty is actually climate change.” The north was dangerously close to overcrowded Asia.

  Heffernan knew that foreign hedge funds were circling, and he saw their arrival in Australia’s water markets in the same protectionist light. “I don’t think we can afford for water to become just a speculative commodity,” he said. But I was surprised to learn that water speculation wasn’t his main concern. As the drought abated, Arabs, Chinese, and other foreign investors were scouring Australia and the rest of the planet for something else: farmland. Like naturalists the world over, Heffernan was alarmed. As he told one reporter, “We are actually redefining sovereignty.”

  SEVEN

  FARMLAND GRAB

  WALL STREET GOES TO SOUTH SUDAN

  The day we flew to Juba in an old DC-9, the sun was out and the clouds were distant puffs, and all we could see was green: the dirty green of the Nile, the dark green of the mango trees, the radiant green of the uncultivated savanna. The land was flat and muddy and empty, and it stretched forever. “Just look at that shit,” Phil Heilberg said. “You could grow anything there.”

  We went to see the general immediately after landing, Heilberg taking the passenger seat in an aging Land Cruiser pickup driven by his business partner—the general’s eldest son, Gabriel—and me sitting in between them. We rumbled down one of South Sudan’s only paved roads, passing Equatorian boys on motorbikes, Kenyans tending makeshift kiosks, the cluster of permanent structures constituting downtown, and the fortified offices of the UN Development Programme, then turned into a neighboring compound. It was surrounded by machine-gun emplacements and thatched-r
oof huts known as tukuls, which were homes for guards and wives. The monkey was gone, Heilberg noticed. The guards used to have a monkey. “Where’s your monkey?” he yelled as we drove in.

  General Paulino Matip, the deputy commander of the Sudan People’s Liberation Army (SPLA), was waiting for us in a dirt courtyard shaded by mango trees. He wore a tracksuit and was slouching in a plastic chair in front of a plastic table with a doily on it, flanked by a dozen elders from his Nuer tribe. His face was expressionless. “Ah, Philippe,” he said, and he slowly stood to hug him. Gabriel translated the rest: “The only white man who is good.”

  In the flurry of news accounts and think-tank reports about what activists had begun calling the global farmland grab, Heilberg and Matip were recurring characters: the Wall Street guy and the warlord, the former AIG trader and the most feared man in South Sudan, twin symbols of what would happen the more populations boomed, temperatures rose, rivers ran dry, and food prices—and thus the value of farmland—shot through the roof. In the previous decade, especially after the 2008 “food crisis” that preceded the financial crisis, rich countries and corporations had acquired an estimated 200 million acres in poorer countries—the equivalent of the combined cropland of Britain, France, Germany, and Italy, or almost 40 percent of arable Africa, or every inch of Texas. It was a territorial shift unseen since the colonial days, and it was happening quietly and bloodlessly, behind closed doors. I’d come here because Sudan, along with Ethiopia, Ukraine, Brazil, and Madagascar, was one of the major target countries—and because Heilberg, convinced he was doing the right thing, was unafraid of the attention.