You are not some novice at this! I expect better from you! It is stories like yours that are perpetuating one of the contentious myths of CA water, which means that I’m going to have to hear this shit at cocktail parties with my laypeople friends. Worse, we just covered this! Last week!
The selling price in the Dudley Ridge deals — $5,200 per acre-foot for Sandridge Brothers and $5,850 per acre-foot for 3R and Jackson — is 10 times the water’s value to farmers. Farmers have little chance of competing for this allotment.
Look. If the Dudley Ridge farmers buy their water for $500/acrefoot each year, it must be worth at least that to them. Say that it is worth $510/acrefoot to them. This year it is worth $510/acrefoot to them. They’d buy it next year, and that would also be worth $509/acrefoot. It’d probably be worth a little less than $510, because it is farther out in the future, so there is more risk associated with it. This year and next year’s water has a value of $1019 to them. The future stream of water has a worth every year to them, and that adds up. That is what the Dudley Ridge farmers have sold. ALL THEIR FUTURE WATER. They sold an acre-foot of water right, and all the water that will come to that right in the future. I don’t know what that is worth. Depends on how reliable the supply is. But Tejon Ranch is willing to bet that each acre-foot of water right AND ALL THE FUTURE WATER IT CONTAINS is worth about $5K. The Dudley Ridge farmers are willing to part with a water right AND ALL THE FUTURE WATER IT CONTAINS for about $5k. If you wanted to buy one of this year’s acre-feet of water from a Dudley Ridge farmer, he would probably be willing to part with it for something reasonable, like $600.
I have zero love for Dudley Ridge, but you are libeling them when you say they’re selling their water for ten times what it is worth. Worse, you are making cocktail parties more boring for me when I have to keep explaining the difference between selling an acrefoot of water and selling an acrefoot of water right to some starry-eyed layperson. That layperson SHOULD NOT BE YOU, Mark Grossi. There are plenty of real complaints about Dudley Ridge. The way they’ve circumvented the democratic intentions of special districts. The unpriced environmental externalities of their water and drainage. The near-feudal system of poverty on the west side of the San Joaquin Valley. But there is no outrageous profit on this sale*. You should understand this if you are going to write about water. You should issue a correction.
I cannot wait to lavish praise on the first water reporter to get this right.
*The outrageous part is that the growers in Dudley Ridge have the ability to sell the right in the first place. We wanted them to have access to water to farm, and they got that. If farming is becoming more marginal, or if they cannot make a profit without a steady stream of water in the future (which they won’t be getting), they shouldn’t have to buy water from the state for $500. But then, the water should revert to the state, who should lease access to that water to the next person who wants it. The outrageous part is that huge corporations that have parted out Dudley Ridge are pocketing money for the State’s water, which they didn’t make and aren’t even conveying. The outrageous part is not that the value of all that future water is $5K, but that a rich private entity gets that money instead of the people of the State.
On the public record 
Before stock market singularities, we used to think that a price/earnings ratio of about 10 for a stock indicated a fair price. I guess that still applies in the world of water.
Man, you go to cocktail parties?! That’s really cool, I need to get a life. Sounds like your fellow drinkers are pretty uneducated though, that always lowers the entertainment value for me.
You have a point, but I think your $500+ is too high and it isn’t quite as bad as you say. If ag. water was really worth that much, a peripheral canal and dams would pencil out much better and I would view them more favorably.
Last year, the highest price for water transfers reported in the Water Strategist was $225 af between Westlands and the Exchange Contractors, and typical prices were $150 af even in a drought year. I have heard tales of isolated cases of $500af to keep a valuable orchard going for 1 year, but that would not be the value to use on an on-going basis. I generally hear $150 af as a typical “shadow” value of water. (bear in mind, I am not an ag. economist so there are better sources for this).
If the value were $150af per year and reliable in perpetuity, that is worth $5,000 at a 3% interest rate ($150/i); $3,000 at 5%, $1,500 at 10%, etc. It is hard to say exactly what the water is worth in ag. given the multiple uncertainties (not just water reliability, but future market conditions and more). It is safe to say it is more than $500 (as Grossi’s article suggests), but it also certainly less than $5,000+ the developers are paying.
My objection to the article are the suggestions that environmentalists are forcing them to sell out of agriculture. Environmental rules certainly tips the scales a little more in favor of selling to development, but those incentives are already strong and growing. It is used here as an excuse that helps deflect local criticism and bolster public opposition to environmental restrictions.
I think that you can safely use discount rates here. 10% gets you $500/af. 5% gets you $250/af.
Or, you can tell reporters that there’s a difference between the cost of OWNING a house ($/af of water rights) or renting one ($/af/year).
Or, you can tell them about Aussie water markets in permanent and temporary water.
Or, you can give up b/c Grossi did it on purpose.
The part about the water not being theirs to sell is considerably more nuanced. Although I am not intimately familiar with Dudley Ridge, I did own land in Lost Hills for many years, and suspect that the two districts operate in a similar manner. The land owners pay a very considerable amount each year to service the bonded indebtedness taken out to pay for delivery systems within the District, regardless of whether they receive any water or not. The water itself is provided at prices barely economic for agricultural use (which is why farmers want to sell it, or sell out, or both). If a landowner can’t make it, he stops paying his water bill and property taxes, the land reverts to the District, and the remaining owners share in the water previously allocated to their fallen fellow. The land reverts too, but it has a negative value, since it comes with cost and can not generate sufficient income to cover that cost. I suppose this goes on until Resnick or someone is the Last Man Standing.
The point I am making is that both the land owner and the State have some economic interest in the water, and both should share in any proceeds from sale. Just letting guys go BK will not free up any water, it will just re-distribute water within the District. It is also not good for the local economy.
$500+ is too high
Oh, I was taking that value from the article (although I guess I shouldn’t have, given that I’m complaining about the reporting). I know that ag water is sold for very different values in different places and locations.
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Or, you can give up b/c Grossi did it on purpose.
Just to watch me squawk about?
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Thanks for telling us these things, Mr. Kurtz. I would say that the land owner has an economic interest in their local conveyance system, and the waters still ought to go to the state. But you’re showing us how the current allocations of water get capitalized into land, which makes the growers’ situation more sympathetic.
It is the District that has the contract with the SWP, so the water can not escheat to the State if one grower throws in the towel. Unless the Directors were completely asleep at the switch, when Voinovitch came to them with his proposal for a sale (which he could not do without their permission), I suspect the District got a good slice of the proceeds, either money or in water. If the sale proceeds were $70 mil to Sandridge Partners, a little over 40% of that money goes to state and local taxing authorities, so it’s not as though the rest of us got stiffed on the deal. The transaction isn’t really costing the SWP any money; they are delivering the same water as before, just to different contractors. The buyers of the Sandridge water will continue to pay the SWP for deliveries, but presumably will be able to add more value to the water than Sandridge could.
The one thing I keep wondering every time I read about these deals is what the contract says about water transfers. Does anyone have a copy they can share of the SWP contract with the district and the district contract with the landowners/farmers?
I would assume there is a transfer option written into the contract as well as a transfer fee of sorts.