California's Complex Water Market Faces New Challenges

Explore Topics and Trends impacting today's markets

California has an intricate and multifaceted system of water management. The state’s $1.1 billion water market allocates a concentrated supply to the areas that need it most. From farming to landscaping and personal consumption, there is a constant tension in the state’s supply and demand of this life-sustaining resource. 

Rivers, Lakes and Aquifers

In addition to stored supply, water in California is obtained through several avenues. Precipitation supplies approximately 75 million acre feet of usable water to California each year, mostly from December to March. Additionally, snowpack in the Sierra Nevada mountains can account for up to 30% of California’s water supply– as temperatures warm in the spring, snow from the mountain range thaws and trickles down, collecting in reservoirs and basins. Lastly, the Colorado River is a large supply source for California water, especially for southern California. All three of these sources are potentially compromised by a changing climate.

There are two immediate sources of water in California – surface water, which is water found in things like rivers, lakes, and reservoirs, and groundwater like that found in aquifers. Water that comes from snow melt and precipitation can become surface water or groundwater, and groundwater can be naturally distributed to surface water when groundwater levels are high. Drawing water out of groundwater basins also changes the relationship between surface water and groundwater, as low supply in groundwater can alter how surface water flows or is “imported” in the state, and vice versa. 

Surface water, which accounts for 60-70% of the state’s supply, is not geographically dispersed – the majority of it is found in the northern part of the state, whereas groundwater is more evenly distributed throughout California. Hundreds of miles of water storage and delivery systems of reservoirs, aqueducts, and pumping plants stretching almost the entire length of the state convey water from its origin in the north to demand in the south.

Pumped from underground aquifers, groundwater has a contentious history of use, especially in the state’s thriving agricultural production industry. This led California to pass the Sustainable Groundwater Management Act (SMGA) in 2014, a first-of-its-kind law aimed making groundwater resources sustainable by 2040.

Where Water is Used

The available water in California is used by three avenues – environmental, agricultural, and urban. Though use by sector can vary dramatically within the state and can change each year, approximately half the water goes to environmental uses, 40% goes to the agricultural segment, and 10% is urban use. There is constant interplay between these three, as they have competing interests over a commodity with limited supply. Let’s look at all three.

Environmental

Environmental use includes natural water sources like rivers being protected by federal and state laws, water that supports existing habitats both within streams and creeks as well as within wetlands and wildlife preserves, and water that is needed to maintain water quality for other uses like agricultural and human consumption. 

Agricultural

Agricultural use supports the largest agricultural producing U.S. state in terms of cash receipts. There are approximately 9 million acres of irrigated farmland in California, and that acreage required 24.5 million acre feet of water in 2018. Most agricultural water use occurs from June through September. Though agricultural production has increased with less intensive water inputs over the last few decades, California has seen growth in tree and vine crops which need to be watered each year. The reliance on these types of agricultural products makes California farms more vulnerable to any water shortages. Additionally, as populations increase both locally and globally, there is more demand for crops grown in California. 

Urban

Approximately half of urban water use is dedicated to landscape watering and half is used for human consumption. California’s water resources need to support about 40 million inhabitants – a number expected to grow over the coming years. The strongest urban water demand is seen, like with the agricultural sector, in summer months. A recent focus on water shortages and development of water-saving technologies has resulted in a decline in per capita urban water usage. In 1990, per capita water use was 231 gallons per day, which decreased to 146 gallons per day by 2015. However, an expected increase in population clearly means more demand for water.

The Climate Change Threat

The supply and demand of California water are geographically and seasonally disconnected. However, climate change threatens to upset supply, change demand, and alter the connection between the two even further.

The precipitation patterns in California have become more variable over time. Scientists with the California Natural Resources Agency have suggested that there will be more dry days in the coming years, with short instances of significant downpours. This will exacerbate the geographic supply disparity within the state, with northern California getting even more water and the more arid southern areas receiving less rain through the year.

Rising temperatures also mean less snowpack will be available once spring arrives. Estimates suggest that the Sierra Nevada snowpack can experience as much as a 48-65% loss over the remainder of this century. The change in temperature also means that the timing of the snowpack melt will be impacted, and more water will run off earlier in the year. This alters the balance of storage and use currently employed in California, and months with the highest water demand could be even drier.

Severe weather events like droughts, heavy rains and wildfires have already become more common. . Estimates from NOAA, using the Palmer Drought Severity Index, suggest that droughts will be more severe in the coming years, leading to both periods of extremely limited supply and periods of intense flooding.

These intense storms can add pressure to existing reservoirs and aging infrastructure, leading to potential flooding in certain geographies while making it more difficult to move water to areas of high demand. As sea levels rise, more salt water is introduced into the surface water systems, leading to higher costs for water purification and threatening supply numbers.

In addition to climate change impacting the supply of water in California, warmer, drier days will increase demand. Crops will need more water input over a longer season, and human consumption for landscaping and personal use will rise. Ultimately, climate change makes it more difficult to manage the priorities of the California water system – storing water for droughts without being oversupplied in certain areas, managing the risks of flooding, satisfying total demand, and protecting the surrounding environment.

At the heart of these challenges lies a unique market for water with disparate participants. The ability to manage the pricing risks ahead may ultimately determine where and how this precious resource is used. 


OpenMarkets is an online magazine and blog focused on global markets and economic trends. It combines feature articles, news briefs and videos with contributions from leaders in business, finance, economics and politics in an interactive forum designed to foster conversation around the issues and ideas shaping our industry.

©2020 CME Group Inc. All rights reserved