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WATER EXPORT NEWS Part Two: Buy-and-Bank with a Royalty

By John Mattingly

There is a way for the San Luis Valley to supply water to the Front Range without turning the Valley into another Gobi Desert, or even another Owens Valley in California. If a group, such as Renewable Water Resources (RWR), approached the various “Powers That Be” in the Valley with a proposal that prioritized restoring Valley aquifers to sustainability before installing the infrastructure of a trans-mountain water diversion, attitudes toward such a project might become more favorable.

Previous trans-mountain water diversion plans – from AWDI and Stockman’s Water Company – emphasized economic benefits that, upon scrutiny, were primarily distributed to a small group of participants, leaving the Valley with the old buy-and-dry, wherein most citizens would be left to eat dust until their sweat turned brown.

RWR’s proposal to grant $50 million to Saguache County is a variation on the old theme, and perhaps a step in the right direction, but still leaves vulnerable the underlying issue of aquifer sustainability. Money can’t be turned into water.

A water export plan that began with a buy-and-bank plan – for as long as it took to bring Valley aquifers to sustainability – would better align the long term interests of both the Valley and the Front Range, as both need a sustainable supply.

Too, any export proposal would get more positive votes if the purchase of Valley water was made with both a lump sum payment to the seller and a perpetual royalty tied to the land from which the water was removed. The legal formats for royalties are well established in publishing, entertainment, inventing and oil extraction.

Linking the royalty payment to the land from which the water was removed would insure a mechanism of long-term investment in the Valley that would continue through generations rather than making a few investors wealthy. How the royalty income was used on the land would be an open-option proposition that might include small, value-added operations, or a variety of local-based businesses.

A royalty structure is especially relevant in this case because the water of a trans-mountain diversion from the Valley would have a re-use multiplier value on the Front Range where the water could be re-used five to eight, and in some cases ten times. Because the water on the other side of the mountain is being reused, the seller of the water has a reasonable claim to participate in that multiplication of value.

The sooner we all start to think of novel ways to approach this issue, the better. Here’s why:

Irrigated farming in the Valley has, over the last sixty years or so, over-pumped the aquifers, exporting water in crops that helped keep the national cheap food policy healthy. As a business, irrigated farming is top-heavy on capital formation while inconsistently profitable. Even with essentially free water over the last many decades, most farming operations in the Valley show their best profit when the farm and water rights are sold.

Many farming operations in the Valley are owned by the investor class, who are closet water speculators. There are notable exceptions of multi-generation family farms that with thrift, skill, and a little more luck than average, have survived as viable operations. Until, that is, the water started to disappear, and thus had to be paid for.

When I came to the Valley in 1988, it was possible to buy a quarter section of land with a good well and a center pivot for about $50,000-100,000 depending on the quality of the ground and the irrigation equipment. The water right attached to that land raised the value of the farm from next-to-nothing to that $50-100,000 range. Today, that range is more like $500,000-700,000 depending, primarily, on the quality and priority of the water rights.

It is easy to see why the banking and investor class were drawn to this opportunity during the thirty year period of irrigated farm value inflation from $50,000 to $700,000. It wasn’t the great economic opportunities available from growing alfalfa or spuds or small grains or oilseeds that attracted the capital – though many investors have romantic appetites for life on the farm – it was the potential value of the water that attracted the capital, and the value of that water today is greatest (with a very few exceptions such as cannabis and hemp production) in a trans-mountain diversion, not in a center pivot.

It angers me, as a retired farmer, that I sold wheat for more dollars per bushel in 1973 than that same wheat sells for today, and that there is more cost in the box containing Wheaties than in the wheat. The same is true for oats, barley, spuds, alfalfa and oilseeds. Irrigated farming in the San Luis Valley is financially irrational unless you figure that, when the day comes, you can sell the farm or the water.

Now that the water is disappearing and must be paid for, it means there are substantial groups of large investor-owned farms in the Valley with good water rights that are approaching the zenith of opportunity available when the water was free. As long as the water was free, and the water rights kept appreciating, while everything involved in the farming operation could be depreciated on the investors’ Schedule F tax form, the speculative fever rose on, because once the tax benefits were fully harvested, the farm could be sold to the next investor who started over from an elevated basis. That basis has now reached the point of exhaustion, unless the water can be sold in the high value market of municipal and industrial users.

Of course, these are broad generalizations, vulnerable to multiple and worthy exceptions, but the fact is that irrigated farming today in the San Luis Valley is more of a capital speculation in land and water than in financially rational food production.

Bottom line: those who argue that we must preserve Valley’s agricultural way of life are not actually living it, and it is time we all: “Stop children, what’s that sound, everybody look what’s goin’ down ….”