In arid California, water has always been a precious commodity. Thanks to a sophisticated water infrastructure, it has nevertheless succeeded in becoming an economic superpower that exports big tech as well as big grapes. However, climate change is exacerbating the water crisis and putting pressure on agriculture. Billions of U.S. dollars of investment are needed to secure water supplies in the future. A debate has erupted over the means to be used to achieve this goal.
California is a prime example of how human ingenuity harnesses nature and pushes boundaries. In 1840, an American officer wrote that the arid land was not fit to support many people. Today, nearly 40 million residents live in California, powering the most powerful economic engine in the United States. We read a lot about the tech high-flyers from Silicon Valley. Less well known is the fact that California's agriculture is of immense importance nationwide. The state generates about $50 billion in sales from its food products, contributing 13.5 percent of the U.S. total. Dairy products, grapes and almonds are among the most popular foods from the Golden State. The heart of agriculture is the Central Valley. A long valley that stretches for 600 kilometers and is about 80 kilometers wide.
Rise thanks to water infrastructure. Is the fall coming?
Only with the help of geoengineering was it possible to achieve the rapid increase in the quality of life and the population explosion. Over generations, a complex network of reservoirs and dams, aqueducts, tunnels and canals, pumping stations and wastewater treatment plants was built. They serve the extraction, storage and supply of water. The crucial water supplier "Sierra Nevada", Spanish for snowy mountain, holds a large part of the blue gold. It is transported via hundreds of kilometers of aqueducts to the major coastal cities of San Francisco and Los Angeles and agricultural areas of the Central Valley.
However, this success story has flaws. Conditions like the Wild West still prevail when it comes to groundwater. There is little regulation of its use. Some farmers pump out thousands of liters a day. As a result, some regions have already sunk several meters. In addition, some dams are in a critical condition and need to be repaied. It is also undisputed that the population explosion has exacerbated the water shortage. Between 2010 and 2020 alone, the population grew by 10 percent. Demand from industry and agriculture has also grown. 80 percent of the total available water is used by the more than 80 000 farmers.
Use water to grow rice or sell the water?
Dry summer months are the norm in California. However, the situation has worsened in recent years due to climate change, with longer periods and temperatures above 50 degrees. On October 19, 2021, Governor Newsom declared a drought emergency for the entire state of California. On November 18, 2021, in response to the extreme drought, San Jose Water Company imposed water rationing for over one million customers with severe fines for violations.
Drought severity and coverage index
The rising value of water is taking strange turns, according to the New York Times. In normal times, winter rains and spring snowmelt in the Sierra Nevada mountains swell the Sacramento River. The river feeds the country's main rice belt, where sushi rice is also grown. About 40 percent is even exported to Asia. Less snow fell in 2021, and reservoirs and rivers also carried less water, ultimately irrigating fields and providing drinking water to 39 million Californians.
The crisis presents rice farmers in the Sacramento Valley, which forms the northern part of the Central Valley, with a difficult decision: Growing rice with the water or saving themselves the trouble and sell the water instead? Some rice farmers have opted to sell almost all of their water.
Heated debate over More Water Initiative
California is in the midst of a water supply crisis that will get worse. Everyone agrees on that. Opinions differ on how to get it under control. The committee behind the "More Water Initiative" is calling for huge state investments. The California government should invest two percent of its budget each year in renewing and modernizing the water infrastructure. That would be about $50 billion over the next 10 years. Sharp in opposition has been journalist Michael Hiltzik in the L.A. Times. The Pulitzer Prize winner accuses the initiators of doing permanent damage to the state budget. It would force taxpayers to pay for ecologically destructive and completely inefficient dams, reservoirs and desalination plants. Hiltzik proposes an alternative, claiming based on a study that one could reduce agricultural water use by 22 percent by increasing efficiency.
Proponents of the initiative put forward the solution
Initiative leaders counter that time has already caught up with the eight-year-old study cited by Hiltzik. California's farmers are already using some of the most water-efficient techniques around, they say. They project how they plan to finance the 5 million acre-feet of water (1 acre-foot provides the annual water needs of 1 to 2 households) through new water projects. On the one hand, they want to reduce water consumption with new conservation projects. They hope this will save 1 million acre-feet of water. How to recover the remaining 4 million acre-feet of water per year? "You can't squeeze the water out of the rocks," Hiltzig commented sarcastically. The proposed solution: to recover two million acre-feet of water by investing in wastewater recycling. New reservoirs, desalination plants and underground aquifers are planned to reach the goal. Additional water could be stored by off-stream reservoirs located near rivers and connected by pipeline. It would be drawn off when the river threatens to flood during heavy rain, for example.
Investments worth billions in the USA
One million signatures must be collected before the More Water Initiative is considered by lawmakers. Whether this will materialize is unclear, but one thing is certain: investment in water technologies and water infrastructure will increase in California and the other 49 states. The Senate gave its green light last year, approving $55 billion US dollars. That's a first step in the appropriate direction. Estimates are that $50 billion. US dollars per year will be needed over the next 20 years to renew and expand the water infrastructure. Demand will also increase for products and services from numerous companies that contribute to a secure water supply. Vontobel Volt investors have the opportunity to participate in these companies, which cover a range of areas from wastewater recycling solutions and water irrigation systems to smart meters that monitor and control water consumption.
Risks of investing in financial markets
Investments in specific issues on the international financial markets are associated with risks. The price, value and return of an investment, especially in a special topic and across borders, depend, among other things, on the economic development, the global attention of the topic on the international financial markets and the price of the underlying securities.
