The Source
Page 14
In the decades after the Colorado Compact, Reclamation built the Flaming Gorge Reservoir on the Green River, the Navajo Lake Reservoir on the San Juan River, the Glen Canyon Dam just upstream of Lee’s Ferry, and a string of other towering dams and sprawling reservoirs on almost every other river of the upper Colorado basin. In all, the dams and reservoirs of the Colorado River Storage Project (1956) in the upper basin could hold 34 MAF of water. This sequence of dams did not just rebalance the surpluses and deficits of spring and summer flow; it rebalanced the surpluses and deficits of the region’s naturally inconsistent and drought-prone climate by building up a reserve in wet years to be doled out in dry years. Such mega-dams were also essential for the upper basin states to satisfy the linchpin of the agreement, for the creators of the Colorado Compact believed the dams would ensure that the lower basin got its 75 MAF of water over any 10-year period.
By stabilizing flows and rerouting rivers into canals, Reclamation made possible a whole new hydrologic norm. No longer were rivers dangerously swollen with snowmelt in the spring, only to dry out in the summer. With mega-dams capable of storing more than an entire year’s runoff and carefully sequenced networks of dams peppering the upstream river network, rivers became steady, regulated, hydraulic machines.
As canals extended like spider webs originating at Reclamation reservoirs and then crossing state boundaries, the desert Southwest became hydrologically interconnected. Simple rivers flowed downhill to the ocean. But once Reclamation had done its work, rivers of the desert Southwest no longer depended on gravity. They were pumped hundreds or thousands of feet up and out of canyons, over mountain ranges, and along hundreds of miles of canals through the desert to waiting fields and cities.
Thanks to Reclamation, states could be assured of receiving the water over which the Colorado Compact had declared them sovereign. But from there it was up to the states, the irrigation districts, and the farmers to divvy up the water. This was the essential hydrological and political shift; from taking the water out of the river to putting it to use on a field. And this was also an ideological shift: from there the question revolved around property rather than sovereignty.
CHAPTER 6
A New Water Market
Vince Vasquez spends an inordinate amount of time crisscrossing the Southwest, spending weeks on end poring over maps, digging into details of land ownership, driving tens of thousands of miles through the desert, and engaging in hours of discussions with farmers about water rights. Vasquez manages projects in Arizona and New Mexico for Water Asset Management, a private equity and hedge fund that invests in water. The firm, known as WAM, is based in New York and was founded on the idea that water should be thought of as an entirely distinct asset class. WAM invests in all things related to water, from consulting firms that have technical expertise in water and companies that manufacture pipes and valves to public and private utilities that provide water to technology companies that make sensors for measuring pollutants in water. In the drought-ridden Southwest, Vasquez is the managing director for deals in New Mexico and particularly Arizona, where WAM invests in water rights along the Colorado River—or what is increasingly being thought of as a type of “water market.”
Water markets have operated in the United States since the water carriers in New York City and Chicago filled casks with water from clean sources and sold them along the city streets. A different sort of water market is possible in the western United States because of the system set up by gold rush miners in California. Because water is separable from land in the West, and is treated as property, it can be bought and sold like any other extractable aspect of land, from timber to bales of hay. In the western United States, water markets are really water rights markets: farmers with water rights can be paid to watch water go by their diversions and forgo their right to divert that water for their own fields, either short term—as a water lease—or permanently, as a sale. These farmers can and occasionally do sell or lease their water rights to other farmers; or, more lucratively, they sell or lease to cities or industries that often are willing to pay much more for water.
Water use in the West has always been dominated by agriculture. Even though most of the population growth in the western United States—which has more than quadrupled in the past century from 70 million in 1900 to over 320 million in 2014—has primarily been in cities, irrigation still makes up more than 80 percent of water use. This is due to the appropriation doctrine: because agriculture arrived first, the most senior water rights are invariably held by farmers, who often sold or passed them down to their children along with the land. The result is that farmers own most of the hydrologic property in the West.1
As urban population grew and municipal demand for water increased, cities have had to get in line for water with everyone else, behind a long list of senior agricultural water users. But cities and big corporations in industries such as mining are typically willing to pay a premium to cut in line. The low supply and high demand sparked the development of water rights markets as early as around 1890, when the City of Colorado Springs went to court over one of the state’s earliest sales of water from irrigator to municipality. Although it had a water right and pipeline intake on a tributary to Fountain Creek, Colorado Springs needed more water for planned growth and purchased additional water rights from an upstream irrigator. When this sale of water rights was challenged in court because it would involve changing the use of water from irrigation to municipal purposes, the Colorado Supreme Court said the sale was legal because a water right is “the subject of property and may be transferred accordingly.” With this case in Colorado, and similar treatment of water in cases in other western states, water rights officially, legally became a tradeable commodity.2
We buy and sell bread by the loaf; we buy and sell oil by the barrel. Water is bought and sold by the acre-foot, and at the turn of the twentieth century the market for water began growing rapidly. By 2015 about 1.8 million acre-feet (MAF) of water was traded each year, and the total value of those trades reached just under $800 million. While most of the market activity was in California, Idaho and Arizona were hubs of water swapping as well; not to be outdone in anything, the water market in Texas was growing rapidly. Most of the sales in the West are from agriculture to municipalities, at prices anywhere from under a hundred dollars up to a few thousand dollars per acre-foot of water. But specific transactions can reveal just how valuable water can be to specific buyers under specific conditions. In 2014 one of the world’s largest mining companies, Freeport-McMoRan, spent $1.3 million for 90 acre-feet of water—a shade under $14,000 per acre-foot—for operations at a copper mine in eastern Arizona. This would be a prohibitively exorbitant price for agriculture, but it is just a necessary cost of doing business for a profitable international mining operation dependent on water.3
Vince Vasquez’s work for WAM is finding opportunities to buy water rights—and often the associated land—with an eye toward selling them at a profit sometime in the future. One of WAM’s earliest ventures into the western water world was in Arizona in the late 1990s, before Vasquez joined the firm. The founder of WAM had his eye on water from the recently completed Central Arizona Project (CAP), which had just started delivering water to the Harquahala Valley Irrigation District. In Harquahala, the land itself was not particularly valuable for many crops. At the time, cotton was selling at 39 cents per pound, but it cost 42 cents to grow with irrigation. However, Harquahala sat just outside the western fringe of Phoenix’s suburban sprawl, where water was in high demand. Land that initially sold for $400–600 per acre went up to $1,000 per acre once the CAP water arrived. When WAM bought the land and associated water rights, it used some of the water to irrigate agriculture, but sold much of it for more valuable—or at least more profitable—use in cities and industries.
Vasquez is looking for similar deals, but with an eye toward the value of the farm as well as the water. Vasquez’s job is to find farms at a reasonable price, improve those far
ms with updated infrastructure, and then either continue farming with increased productivity or separate the water from the farm for sale. A primary driver of the land value, and water, is the seniority of water rights. But farmers with senior water rights are not all looking to sell their land or their water. Just like any other investor looking for willing sellers, Vasquez has to know where to look—and, as important, when to look.
The perfect deal for Vasquez is to find a farmer looking to sell out completely. This situation gives Vasquez maximum flexibility for both the land use and the water use; he could sell the water outright, or he could update the farm to allow for growing higher-value crops with the available water. More often, farmers want to keep farming but need an infusion of cash for maintenance or new equipment; or they need a nest egg for retirement while continuing to farm for a few more years. Farmers may not be able to switch to higher-value crops simply because it takes a lot of up-front cash that they may not have. Or, as Vasquez captures it while driving through the western Arizona desert, “Farmers are water rich, but cash poor, whereas we have a checkbook and an appetite for risk.” For farmers who want to keep the land but need cash, Vasquez structures deals to buy the land but then lease it back for a period of time to allow the previous owner to continue farming.
This business model does not translate into the deal known as “buy and dry”—buying the land, selling the water, and abandoning the farming operation in the process. Rather, Vasquez buys the land and makes the farms operational. He spends his days doing the nitty-gritty work of updating farms that he owns. On a typical day, he negotiates a deal for clearing brush from a few hundred newly acquired acres, then drives a mile away to plan a series of new irrigation works on another property, then heads into town to buy a power pole to get power across a rural backroad for another property. All the while, at an adjacent property Vasquez recently bought, enormous tractors are leveling several hundred acres to laser-precise flatness in preparation for a series of new irrigation infrastructures there. This day-to-day work is done to make the farms that WAM has bought fully operational and as hydrologically efficient as possible.
All of this work raises a question: Why pour so many resources into making farming in the Arizona desert more efficient if you’re in the business of selling water? First, these particular water rights are connected, by the Colorado River and the Central Arizona Project, to the ever-sprawling suburbia of Phoenix. This means that every acre-foot of water Vasquez saves on the farm is transferrable—sellable—in Phoenix, hundreds of miles away. But perhaps more important, the farm Vasquez is updating is along the Colorado River, and it has been irrigated with Colorado River water since before 1922; before the Colorado Compact. The water rights from this farm are referred to as “present, perfect rights”—the most senior, inalienable water rights of the Colorado River system. Because Arizona had to move to the back of the water line behind California to get CAP funded, the water flowing through CAP is always in danger of being cut off during a drought. But the water rights that Vasquez is developing, and potentially selling in the future, are equal to some of California’s most senior rights and thus are inordinately valuable in Arizona.
Why all the time, money, and effort on clearing brush and building canals when the intention is, presumably, to sell the water anyway? Because Vasquez needs to demonstrate that he is putting the water to beneficial use and thus secure his rights before he can sell them. And the amount of work he puts into upgrading the water infrastructure and basic farming equipment removes all doubt that he’s putting the water to use. Additionally, water buyers like Vasquez view highly reliable water rights as undervalued to date and are betting that the longer they hold the rights, the higher their value will become. Because the risk in these water deals is quite large, buyers may not be able to sell the water or may not be offered a good price. Vasquez says, “We may have a farm for a very long time.” But WAM and other water buyers have capital that other farmers do not. Even without selling the water, they can get the farming operation up and running and providing high economic returns to offset the cost of the purchase on its own. And what’s more, Vasquez can constantly pursue other water deals in the area while running the farm. Rather than selling all the water rights, he just lets a portion of the farm lie fallow. This plan generates water savings that Vasquez can then lease or sell.
From a bluff overlooking the Colorado River valley, Vasquez’s renovated farms are bright, emerald-green square patches amid the dusty wasteland of the surrounding desert. All the fields are planted with alfalfa hay. Vasquez’s farms grow hundreds and hundreds of acres of alfalfa, but they account for only a small portion of the thousands and thousands of acres of alfalfa grown here, in one of the most arid regions on earth. Each acre of alfalfa requires 5 acre-feet of water, the equivalent of 60 inches of rain—in a region that typically gets only 5 inches per year. Aside from cotton, which remains marginally profitable, alfalfa is the primary crop in this region. Its production is steadily increasing to meet a seemingly inexhaustible demand.
In 1993 California passed Wisconsin as the leading milk-producing state; in 2014 California produced 5 billion gallons of milk, almost doubling the amount produced in “America’s Dairyland,” Wisconsin. Today California alone produces over a fifth of the nation’s milk. And the alfalfa being grown in arid Arizona enables California to be a dairy powerhouse. Alfalfa grown in the spring to be a farm’s first cutting is high in protein—ideal for dairies. The second cutting, later in the summer, is less valuable to dairies but can be exported internationally to feed livestock. The proximity of Vasquez’s farm, and the others around him, to international ports via interstate highways allows them to easily export their summer crops to the global markets. Container ships coming from China with manufactured goods don’t have to return empty; instead, they return loaded with hay. Farmers irrigate hay in the Arizona desert at great hydrologic expense so that milk can be cheap in Los Angeles or beef can be affordable in Beijing.
The influence of this globalized alfalfa market is evidenced by the modern desert landscape around a river, from the lower Colorado River valley of Arizona to the Yakima River valley in central Washington. Almost any western river valley is a patchwork of irrigated alfalfa hayfields punctuated by building-sized towers of hay bales averaging over three stories tall, 20 feet wide, and almost 200 feet long. Cryptic numbers and arrows painted on the sides of the towers of hay indicate which hay has been contracted for pickup and will be shipped somewhere across the Pacific Ocean. The view from a bluff above the Colorado River reveals towers of hay, scattered across the landscape up to the horizon, resembling tall grain elevators in the Midwest.
There’s another reason alfalfa is a popular crop here in Arizona and in much of the West: its particularities make it nearly perfect for water deals. Alfalfa production is optimal when planted on a 3-year rotation—in other words, it does best if the field lies fallow one out of every three years. For Vince Vasquez, this means that in any given year, a third of the WAM properties growing alfalfa necessarily are out of production. This makes at least 5 acre-feet of water per acre of fallow land available for lease to the highest bidder. On a square mile—640 acres—of land, fallowing one-third would free up just under 350 million gallons of water per year—enough water to supply about 10,000 suburbanites in Los Angeles or Phoenix. Alfalfa yields profits for western farmers, and it gives them enormous hydrologic flexibility from year to year. This is something that fixed crops like almond and apple trees or vineyards, all of which require irrigation every year, don’t provide.
Water markets often come under fire from opponents because of their potential for deals leading to buy-and-dry situations, when firms sell all the water and abandon the land to a dusty, useless future. But the approaches that WAM and Vasquez are using—keeping farms operational and practicing rotational fallowing to make some water available for sale or lease—can generate multiple benefits. Thanks to these more innovative approaches, cities can meet a
t least some of their growing water demand, and farm communities can stay in business and enjoy continued productivity.
In other regions, like the trout streams of western Colorado and the salmon-rich streams of the Columbia River basin, similar approaches have been used to release water from agriculture and keep it in the streams for environmental purposes. Nonprofit environmental groups increasingly use water markets as a way to accomplish their conservation goals. This is an underappreciated aspect of treating water as property. Despite criticism, the water market has proved to be a mechanism for realizing water conservation benefits—as long as environmental groups are willing and able to pay as much for water as other farmers, cities, or water traders like Vasquez. Markets allow water to be reallocated to where it is most valued, and some basins yield enough water to be bought and sold to meet the needs of different interests. However, it is becoming apparent that the system of water distribution used for the Colorado River, and the systems used for other rivers, are not nearly as viable as initially thought. The result is shortages that were not foreseen almost a century ago.
Dendrochronologist Erika Wise, at the University of North Carolina, has an unusual lab: a very high-end carpentry shop filled with power sanders, band saws, stumps, and sawdust. Her latest piece of equipment is a new sander. Her new graduate student was a catch—partly because he’s wickedly smart and partly because his dad is a woodworker, and this student knows his way around wood. This skill is essential—wood is what dendrochronologists spend their days studying.
Many of us have counted the rings of a tree stump to figure out how old the tree is. Dendrochronology—the science of tree rings—takes this simple method many, many steps further. Trees grow rings differently in response to different conditions. Diseases and forest fires leave telltale marks. Dendrochronologists can observe variations in tree rings throughout a region and estimate when these types of events occurred, how severe they were, and how widely the fire or disease spread. Tree rings also reflect water availability, which is what interests Erika Wise.