California’s Water Bank – A Bank With Nothing to Lend?

by |March 27, 2009

California is in some serious trouble as a result of continued drought conditions and is looking to bail itself out through the creation of a water banking system. In California, this would mean buying water from owners in the northern part of the state and transferring it to water-starved areas in the south. This makes physical sense, as 75% of the runoff in the state occurs north of Sacramento, while 75% of demand is south of the state capitol.

Source: http://www.lao.ca.gov/2008/rsrc/water_primer/water_primer_102208.aspx

Source: http://www.lao.ca.gov/2008/rsrc/water_primer/water_primer_102208.aspx

Yet, from a policy perspective there are many issues related to actual implementation of a water banking system that are not so simple. For example, the fundamental assumption of a water bank is that there are enough buyers and sellers to facilitate sufficient transfer to alleviate shortages. In California, the state has made arrangements for 500,000 acre-feet of water to be transferred through the Drought Water Bank.

Yet, in reality, the actual transfer is likely to be much less.  Thad Bettner, manager of the largest water district in Northern California, speculated that transfers in the state would be unlikely to reach even 100,00 acre-feet this year, due to a shortage of sellers.

This is despite the fact that the price for an acre-foot (or 325,851 gallons) of water has jumped from $125 in 2005 to about $275 per acre-foot this year. So, you might ask, why aren’t farmers selling?

There are several compounding issues that are making selling water a complicated decision. For example, there are three ways a farmer can make additional water available for southern portions of the state. These include not planting at all, planting less water-intensive crops, pumping groundwater so that surface water can be sold, or selling stored water. The financial viability of each option is likely to vary from year to year.

Additionally, fluctuations in the price of crops can make an impact on a farmer’s decision to sell his water. With the spike in food prices witnessed during the past year and continuing high rice prices for rice, selling water may become a much less attractive option. On top of this, the deadline for the decision for growers to sell their water is April 21 – a date that is later than most farmers would have already begun planting for the next season.

With such uncertainty, it is no wonder that farmers are having such a hard time committing to the plan. Yet, with less than a month to go before farmers must decide whether to sell or not, tensions are high among those counting on the success of the Drought Water Bank to get them through what may be another tough year.

(This is the second in a multi-piece story regarding measures to cope with the ongoing drought in California.)

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Dan Stellar
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Another interesting article on this topic. As you indicate, one important issue is how $275 per acre-foot of water compares with other uses of that water. If the farmer kept that water and used it to irrigate his own land, and food prices spiked, would he make more than $275? I would imagine so, but I’m not sure. To really get this to work, the price of selling water would have to be high enough to make it definitely worthwhile for the seller. This in turn could drive the buyer’s costs of inputs prohibitively high. Finding the “sweet spot” price… Read more »