Tag - farm and ranch real estate

Water Markets - Wheel Line Irrigation Open Source Wiki Commons

Water Shortage and Economic Loss

Water certainty is important. Without water certainty, there are real declines in economic output and value added diminishes.

To illustrate the importance of certainty let’s focus on irrigation water shortages in a four-county region in Texas called the lower Rio Grande Valley. Before we get into the details of the case study let’s suppose for a minute you are a farmer growing a high-value specialty crop (i.e. vegetables, citrus or sugar cane in this study) that depends on the timing and availability of water use. As you plan for the current crop year, you and your neighbors are talking about the uncertainty of water supply and anticipated water shortages that will affect your ability to irrigate. How long would it take you to make a decision to change the type of crop you plan to grow if you have the option to switch to a different lesser valued crop, one that is less water intensive?

The answer always depends but is likely sooner rather than later because actions will be made based on the producer’s marginal cost curve, the cost to produce one more unit of a good at a given market price for that good. When water is in short supply the real cost of acquiring water goes up which impacts margins. For the larger economy, any uncertainty in the availability of water is significant because small changes can cause shifts in behavior (i.e. growing a lower value crop, water transfers) driven by anticipated water shortages. These farm-scale level decisions add up to a loss in economic productivity for much larger geographic areas.

Economic Loss in the Lower Rio Grande Valley

Most people don’t know may not know this fact, but the southern portion of the Rio Grande River is largely fed by rivers that originate in northern Mexico. Any shortage in the delivery of water impacts farming all through the southern border of Texas. A paper published by the Texas A&M AgriLife Extension estimated the economic impact of irrigation water shortages of Texas’ Lower Rio Grande Valley (LRGV), an area that relies heavily upon irrigated agriculture. The area suffered water shortages starting in 1992 when Rio Grande River treaty obligations were not met. The United States and Mexico have a long-standing treaty in place which governs available supply to both nations from the Rio Grande River waters. Surface water shortages began because Mexico started undersupplying the average minimum annual amount of 350,000 acre-feet (based on a 5-year cycle).

$395 Million Lost Economic Output

The Texas A&M analysis estimated the total economic loss of irrigated crop production lead to an estimated $394.9 million loss in economic output (2012 dollars). Likewise, the loss of irrigated crop production in the LRGV region generated a loss of $217.61 million in forgone value added. In terms of employment, the loss of irrigation results in an estimated loss of 4,840 jobs that depend on the production and sales of agricultural commodities for some portion of their income.

As large as these numbers are we should consider this is the loss for a small four-county region of the lone-star state. The analysis only includes the farm-level sale of crops, such as transportation, storage, processing, packaging, and marketing. The estimates based on the modeling used in this study are specific and limited to direct economic impact and do not consider losses external to farm production.  There are other economic costs wrapped up in water administration systems which are important to consider in the broader context of economic valuation.  For example, the opportunity cost of water abstraction, downstream or lower priority benefits lost to upstream demand. Similarly, secondary economic impacts of water transfers experienced by buyers or sellers.

Irrigation Dependent Farm Land

The Texas A&M study only focused on a small four-county spot in Texas. Why should you care if don’t live in the Lower Rio Grande Valley? Consider the economic impacts as you look at a map that shows how many western counties depend heavily upon irrigation (orange to red). All counties shown in red have a significant amount of cropland area all susceptible to the water uncertainty. Roughly one-third of the United States.


Water Markets - Map United States Acres of Irrigated Harvested Cropland


Public Policy Challenges

Also consider these western states are governed by institutional frameworks that were intended to address issues surrounding equitable apportionment—fair, reliable sharing of water within a specific historical context. The rules that govern water allocation vary location by location and tend to defer to historical evidence of production, not adaptive management. Diminishing snow packs, reduced streamflow and earlier spring-runoffs are further complicating the challenges of managing water.

How will regulating agencies and farmers address the issues of certainty?

Periodic severe droughts and population growth are not going away. Water scarcity issues such as irrigation water shortages will continue to get worse, not better in the arid and semi-arid part of this country. As water scarcity issues continue to become more common how will institutional frameworks respond to the economic losses associated with water shortages? At the farm-scale, what impact will the uncertainty of water have on cultural practices?  How will crop selection, the timing of planting and geographic distribution of where crops are grown shift over time in the context of available water supply?




Water Markets - landscape photo of Reno Nevada - open source picture

Water Developers Investing in Water through Real Estate

Case Study: PICO Holdings Inc. (“PICO”) and their subsidiary Vidler Water Company (“Vidler”)

PICO Holdings, Inc. (“PICO”) is a publicly traded holding company. Its subsidiary is Vidler Water Company (“Vidler”), a water resource developer.

PICO’s Fish Springs Ranch project is one example of water driving investment in Farm & Ranch Real Estate. Fish Springs Ranch was purchased by Vidler to build a water production system for Commercial and Residential projects in Reno, Nevada. Creative financing structures are used to satisfy the requirements of local stakeholders. Water Developer business model is impacted by Commercial and Residential Real Estate development timelines.

Full Disclosure

Water Markets LLC has no relationship with PICO or Vidler.

Project Background

In 2007, PICO announced the completed construction of a water development project where 8,000 acre feet per year is sourced from Fish Springs Ranch and supplied to new developments north of Reno, Nevada. It’s a typical example of a public-private (P3) groundwater infrastructure project. In this case the private-sector secures water rights, finances and builds the new infrastructure. Ultimately the project assets are deeded to the public-sector to operate and maintain as part of their existing water delivery system.

Water-Real Estate Nexus Investment Strategy

Vidler purchased Fish Springs Ranch, a 7,360 acre ranch with 12,984 acre-feet of permitted water rights in the Honey Lake Valley north of Reno, Nevada. The security of the permitted rights combined with the anticipated productivity of the water supply made Fish Springs Ranch an attractive investment for Vidler.

PICO 2007 Press Release:

Significant population growth is expected to continue in the Southwest. Long-term, this will drive the demand for new housing…exacerbated by demands for new supplies of water, which may not be available for all developable properties.

As such, we are also seeking to acquire well-located property that is prime for development in selected markets … We are particularly interested in opportunities where we can create additional value by utilizing Vidler’s expertise in developing new supplies of water.


Notice the Strategy is to Invest in Water through Real Estate

Significant population growth, strong housing demand, and low inventory are driving this investor’s interest in water markets. Notice the strategy is to invest in water by purchasing Farm and Ranch property nearby new growth and development. These kinds of water development projects are attractive investments and have the potential to bring in hundreds of millions of dollars to the investors over the long-term. In the short-term Vidler is responsible for the upfront costs and assumes all the risk until the project perfects, when the wet water begins to be delivered.

According to Gate City Capital Management, a shareholder in PICO, in a 2016 report to their investors:

Vidler owns a 51% stake in the Fish Springs Ranch and also has a preferred return entitling Vidler to collect the first $165 million in proceeds from water sales. In the mid-2000’s Vidler financed the construction of a 35-mile pipeline to transport the water at Fish Springs Ranch to the North Valleys, a set of communities about 10 minutes northwest of downtown Reno.


Creative Financing

All politics are local and so is the negotiation of a water supply contract. A unique part of the Fish Springs Ranch project appears to make it the responsibility of the private-sector to sell water credits to developers, who will in turn dedicate the water to the local water utility presumably in exchange for a building permit. The rights are held in trust by the public-sector until commercial developers purchase the credits.

This type of project financing structure works well for all involved as long as the real estate market is strong. The utility is provided a schedule to ramp up volume payments only when it needs it and not before. For PICO Fish Springs Ranch water supply project, the sales will increase only as commercial and residential development projects ramp up.

This must have caused PICO some mid-term hurt considering the housing market crash happened only a few months after completion. Bad timing!

Water developers hit hard by the 2008 downturn

By 2011 the Fish Springs Ranch project was years behind schedule and PICO’s shareholders needed to be told that it was going to take time to realize perfection. The tone of the official guidance is bleak which shows the depressed mood of the stalled project which was caught in limbo. Buyer contracts were completed, financing secured, construction complete, and the water development project was stalling because the water was not actually being delivered yet.

According to SEC filings:

A prolonged continuation of the significant and sustained downturn that the homebuilding industry has experienced will materially adversely affect our business and results of operations.

We may not be able to realize the anticipated value of our real estate and water assets in our projected timeframe, if at all.

The fair values of our real estate and water assets are linked to growth factors concerning the local markets in which our assets are concentrated and may be impacted by broader economic issues.


Finally Crossing the Finish Line

The 2008 market crisis appears to have slowed the perfection of the Reno project by ten years. Now in 2018 they are very well positioned to provide water, nearly without any competition, to a fast growing area to the North Valleys of Reno, Nevada.

After a sharp downturn in construction activity following the Great Recession, the Reno area is undergoing a rapid economic expansion, as companies such as Tesla, Switch, eBay, and Amazon have all opened facilities. Following the construction of the pipeline, the Fish Springs Ranch now has a near-monopoly on the water supply to the North Valleys.

At the Company’s 2016 annual meeting, Vidler professionals noted they expect the current pace of residential and commercial construction to result in the sale of over 8,000 acre-feet of water rights in the North Valleys by the middle of 2018.