“Water
law in California began in earnest in the early part of the 20th century,”
Rick recently wrote for the Bonner Family Office, “when interests in Los
Angeles bought up most of the available water rights in Owens Valley of Eastern
California.
“This
took the rights from ranchers – who had enjoyed them for free – and allowed the
new owners to ship that water to Los Angeles, where it fueled the growth of the
city.”
But
agricultural interests, the dominant political force at the time, were
unsettled by these events.
“Farmers
disliked fair markets for water,” says Rick. “They wanted to protect their
water from being bought up by urban interests who could afford to pay more for
it. So they changed the rules for water distribution.
“Water
that flowed through agricultural land was reserved for agricultural use unless
an exemption was provided for urban use. Farmers who wanted to sell their water
to urban users were prohibited from doing so.”
A
hundred years later, that system is still in place.
Because
agricultural water is protected from being bought up for urban use,
agricultural water has remained relatively cheap and water for human consumption
has skyrocketed.
The
gap between the two is immense…
In
San Diego County, untreated water now costs upwards of $1,000 per acre-foot1 (about
326,000 gallons, or enough to supply three households for a year2). Water used
for growing almonds in the San Joachin Valley, meanwhile, only costs around $40
per acre-foot.3
Today,
a lot of farmers would make more from selling their water than from growing
crops. But the law says they have to use it to farm or give it up.
As
a result, agriculture uses 85% of the water that is not reserved for
environmental purposes4, whereas farming only represents 0.4 percent of gross
total regional product.5
But
with population booming and water supplies dwindling because of the drought, we
could see necessity force authorities to loosen the rules that bind water use
in California.
If
affluent coastal communities in Los Angeles, San Francisco, or San Diego begin
to feel the effects of water shortages, will it matter to them that farmers
should have a ‘right’ to grow their water-intensive rice paddies or other crops
in the arid Central or Imperial Valleys?
We
could see California follow the example of southeastern Australia. After a decade of drought, the
authorities allowed a kind of market for water rights to occur. As a
consequence, agricultural usage became much more efficient – switching
water-intensive rice paddies for higher-value crops like citrus fruits and wine
grapes.
If
agricultural water could be bought and sold more freely, this might allow the
$40 water to be sold to people in San Diego, for instance, who are willing to
pay 25 times more for the same water. Rick believes some investors could gain
from participating in this substantial water price arbitrage.
In
particular, he explains, we should look for ways to own those water rights
still trapped by the old rules — and wait until circumstances allow us to sell
those rights to a higher bidder.
Rick Rule has devoted over 35 years to
natural resource investing. His involvement in the sector is as broad as
it is long; his background includes mineral exploration, oil & gas
exploration and production, water, agriculture, and hydro-electric and geothermal
energy. Mr. Rule is a sought-after speaker at industry conferences, and a
frequent contributor to numerous media outlets including CNBC, Fox Business
News, and BNN. He founded Global Resource Investments in 1993 and is now a
Director of Sprott, Inc., a Toronto-based investment manager with over $7
billion in assets under management, and CEO and President of Sprott US
Holdings, Inc., where he leads a team of skilled earth science and finance
professionals who enjoy a worldwide reputation for resource investing.
1 http://www.sdcwa.org/san-diego-county-water-authority-adopts-rates-and-charges-2013
2 http://www.epa.gov/WaterSense/pubs/indoor.html
3 University of California Cooperative Extension, 2011.Sample Costs
to Establish an Orchard and Produce Almonds
4 http://www.californiawater.org/cwi/docs/CIT_AWU_REPORT_v2.pdf
5 http://aic.ucdavis.edu/publications/socal.pdf
This information is for
information purposes only and is not intended to be an offer or solicitation
for the sale of any financial product or service or a recommendation or
determination by Sprott Global Resource Investments Ltd. that any investment
strategy is suitable for a specific investor. Investors should seek financial
advice regarding the suitability of any investment strategy based on the
objectives of the investor, financial situation, investment horizon, and their
particular needs. This information is not intended to provide financial, tax,
legal, accounting or other professional advice since such advice always
requires consideration of individual circumstances. The products discussed
herein are not insured by the FDIC or any other governmental agency, are
subject to risks, including a possible loss of the principal amount invested.
Generally, natural resources
investments are more volatile on a daily basis and have higher headline risk
than other sectors as they tend to be more sensitive to economic data,
political and regulatory events as well as underlying commodity prices. Natural
resource investments are influenced by the price of underlying commodities like
oil, gas, metals, coal, etc.; several of which trade on various exchanges and
have price fluctuations based on short-term dynamics partly driven by
demand/supply and nowadays also by investment flows. Natural resource
investments tend to react more sensitively to global events and economic data
than other sectors, whether it is a natural disaster like an earthquake,
political upheaval in the Middle East or release of employment data in the U.S.
Low priced securities can be very risky and may result in the loss of part or
all of your investment. Because of significant volatility, large
dealer spreads and very limited market liquidity, typically you will not
be able to sell a low priced security immediately back to the dealer at the
same price it sold the stock to you. In some cases, the stock may fall quickly
in value. Investing in foreign markets may entail greater risks than those
normally associated with domestic markets, such as political,
currency, economic and market risks. You should carefully consider whether
trading in low priced and international securities is suitable for you in light
of your circumstances and financial resources. Past performance is no guarantee
of future returns. Sprott Global, entities that it controls, family, friends,
employees, associates, and others may hold positions in the securities it
recommends to clients, and may sell the same at any time.
Sprott
Group offers a wide range of investment products and services to U.S.,
Canadian, and International investors: www.sprottgroup.com/?ref=smallcappower
Disclaimer: This
article was posted with the permission of a third-party contributor
and the opinions contained therein do not necessarily reflect
those of Smallcappower. Smallcappower does not endorse any investment
advice provided by these third-party contributors. Please consult
your investment advisor before making any investment decisions.
Ubika Corporation and
its divisions Smallcappower, Ubika Communication and Ubika Research are not
registered with any financial or securities regulatory authority in
Ontario or Canada, and do not provide nor claims to provide investment advice
or recommendations to any visitor of this site or readers of any content
on this site. – See more at: http://www.smallcappower.com/posts/small-cap-power-disclosure#.UoJQkZEq_vw
