Navigating Aquifer Risks: Investment Opportunities Amidst Global Groundwater Depletion

Last summer, I spent several days in Nebraska. Everywhere I looked, it was endlessly green. Massive plots of corn and soy stretched to the horizons, facilitated by nearly 29 inches (~737mm) of annual rainfall (see Figure 1A) and groundwater pumping from the Ogalalla High Plains aquifer—North Americas’ largest freshwater aquifer and home to 30% of US crop and animal production.[1] Visiting from a region that averages 11 inches (~279mm) of annual rainfall, water appeared abundant, if not overly so. However, according to farmers and residents I spoke with, abundance was in the eye of the beholder. People talked of drought, groundwater wells hitting their limits, desiccated reservoirs, and speculation about the impacts on crop yields, commodity prices, drinking water and the future of generationally held farms.

What’s happening in Nebraska is a global phenomenon. Global fresh water aquifers are dropping precipitously. Since 2000, many key food production regions in the world—California’s Central Valley, China’s North China Plain, India and Pakistan’s North Indus Plain—experienced annual groundwater declines exceeding a meter (~ 3ft).[2] Mono-crop agriculture, urbanization, and climate change are key contributors to the declines.?

The economic impact of these declines is hard to quantify on a global scale—I’ll discuss some of the scenario analysis in a future article. However, new research from economists focusing just on returns on land use values (so, purely returns on agriculture land) in the Ogallala High Plains aquifer estimates annual losses of US$126 million per year in 2050 and over US$266 million in 2100.[3] Two-thirds of those losses will come from reductions in irrigated lands (read: farmers reduce and/or stop planting), with the other one-third coming from reductions in irrigated land rental returns (read: leasing land and water).?

Risks for investors

The numbers may seem small when compared to the estimated US$20 billion annual agriculture economy in the Ogallala High Plains region.[4] But, they don’t account for two important factors, especially for investors: secondary impacts and risk modeling.?

First, land value losses will create ripple effects leading to secondary economic impacts on investable assets. Easy to connect secondary impacts will likely include diminished returns or losses associated with: dropping crop yields and resulting commodity prices volatility; agriculture loans; mortgage backed (MBS); commercial mortgage backed securities (CMBS); municipal bonds; equities in the consumer staples, industrials, materials, and energy sectors; farmland REITS; etc.

Second, the study utilizes an average groundwater depletion (10ft / 1m) across the entire aquifer to build the model. In reality, the aquifer is dropping at different rates. Therefore risk will not be equally spread across the aquifer, both in geography or time scale—making risk modeling and pricing difficult for investors. To better understand the risk factor, see Figure 1B, which illustrates parts of the aquifer already hit exhaustion, especially the further south one goes.[5] So, some of the risk may (“may” is the key word) already be priced into current valuations. Going forward, it becomes less clear, especially if you factor in average annual perception, shown in Figure 1A, as parts of the region may be able to supplement groundwater loss with some rainwater. On the other hand, rainfall is increasingly impacted, and becoming less predictable, due to climate change. And, it’s important to note that studies have show that rainwater alone is not sufficient to maintain the current mix of water intensive crops grown in the region.[6] Therefore, agriculture in the green and grey areas of Figure 1B (e.g., where the “b” in Nebraska sits, which has ~200 years of groundwater remaining according to the estimate) cannot survive on rainfall alone without major changes to current cropping decisions and agricultural practices.?

Figure 1: Exhausting the Ogallala High Plains Aquifer

Source: Rhodes et. al. 2023. The Declining Ogallala Aquifer and the Future Role of Rangeland Science on the North American High Plains. Rangeland Ecology & Management (v. 87).? A,?Long-term average annual rainfall (mm) (PRISM 2014).?B,?estimated date of groundwater depletion (derived from?Haacker et?al. 2016) of the Ogallala Aquifer region. C, Percent increase in land area planted to corn by county from 2002-2012, following the US ethanol mandate of 2005. Data from USDA Census of Agriculture.

Opportunities for investors

In my opinion, the real opportunity for investors requires looking at this challenge through a different lens, and trading short term gains for long term asset value. Meaning: we must invest in preserving what’s left of the aquifer so its long term value grows, not continues to diminish. How do we do that??

First, regenerative agriculture has to be part of the equation. Which, requires not only capital, but policy change. The Energy Policy Act of 2005, catalyzed a massive ramp up of water- , energy-, and landuse intensive ethanol corn production, and is a major driver of the Ogallala’s rapid 21st century decline. Parts of the aquifer saw 100–125% increases in corn production, as seen in Figure 1C; not coincidentally, those same areas are experiencing the highest and fastest groundwater exhaustion rates.[7] Retiring bad policy and switching to less water intensive crops, with investments in regenerative agriculture could slow down depletion of the aquifer. These investments will come from both private and public markets, but will also require innovation in investment instruments.?

Second, investments in infrastructure and natural capital are critical. The study featured in Nature (see footnote #2) also discussed aquifers reversing depletion trends and experiencing major recoveries. I happen to live in one of those aquifers, the Upper Santa Cruz basin, and worked on some of the natural capital solutions making the reversal possible. In the Santa Cruz, traditional infrastructure investments coupled with muni bonds, funded groundwater recharge basins after the aquifer hit critically low levels in the 1970s. Natural capital investments in watershed restoration and innovative use of effluent are also key drivers. These investment could scale quicker with more access to capital markets (read: innovative capital markets)—much of this work was funded with tax dollars and through NGOs seeking grant, foundation, and individual donor funding. In my opinion, the best place for this innovation is through impact investing solutions that mix private and public markets. Retiring farming all together, and the capital required to support communities through that transition has to be part of the discussion as much of the region is not suitable for dryland farming (remember the Dust Bowl?). This funding could be via green bonds or impact investments that focus on developing carbon sinks/banks, with credits paid to communities.

Third, and finally, asset risk models need to evolve. Short term profits at the cost of stranded assets, and in many cases long term asset destruction, is going to eventually catch up with portfolios. In my opinion, this is especially critical for institutional investors with long investment horizons and liabilities. The Ogallala High Plains aquifer, and many of the worlds major aquifers, are non-renewable resources. It took around 20 million years for the aquifer to form and over 15 thousand years to fill. We’ve drained over half of it, and in some cases all of it, in less than 150 years. This is not a problem that is going to be solved by the often prescribed panacea of “on-farm water efficiency technology upgrades”. Therefore, risk models need to start pricing in the potential that a large portion of the aquifer will not be accessible in the next few decades and whether investor’s capital is better allocated today to solutions that extend the life of the aquifer and transition the economies of the region to less water intensive industries. Asset and portfolio managers who figure this out now, will be better positioned to price in these risks and develop solutions for clients.

#WaterSecurity #AgricultureInvestment #GroundwaterDepletion #SustainableInvesting #RegenerativeAgriculture #ClimateChangeImpacts #ImpactInvesting #AquiferPreservation #InvestingForChange #GlobalWaterCrisis

Disclaimer: All opinions are my own, and should not be taken as financial advice or a recommendation. The content is intended for informational purposes only, and users should seek professional advice before acting on it.

Endnotes:

1. ?Rhodes et. al. 2023. The Declining Ogallala Aquifer and the Future Role of Rangeland Science on the North American High Plains. Rangeland Ecology & Management (v. 87). https://doi.org/10.1016/j.rama.2022.12.002
2. ?Jasechko, S., Seybold, H., Perrone, D.?et al.?Rapid groundwater decline and some cases of recovery in aquifers globally.?Nature?625, 715–721 (2024). https://doi.org/10.1038/s41586-023-06879-8
3. ?Perez-Quesada, G., Hendricks N.,?and?Steward D. 2024. The Economic Cost of Groundwater Depletion in the High Plains Aquifer. Journal of the Association of Environmental and Resource Economists (v.11, n.2). https://doi.org/10.1086/726156
4. ?Buchanan, R., Buddemeier, R. W., & Wilson, B. B. 2001.?The high plains aquifer. Lawrence, KS: Kansas Geological Survey. https://www.kgs.ku.edu/Publications/pic18/PIC18R2.pdf
5. ?Much of the depletion in New Mexico, Texas and Southern Oklahoma is the result of intensive energy development, and mainly hydro fracking.?
6. ?Sukcharoen, K., Golden, B., Vestal, M., Guerrero, B. 2020. Do crop price expectations matter? An analysis of groundwater pumping decisions in Western Kansas. Agricultural Water Management (v.231). https://doi.org/10.1016/j.agwat.2020.106021.
7. ?Rhodes et. al. 2023. The Declining Ogallala Aquifer and the Future Role of Rangeland Science on the North American High Plains. Rangeland Ecology & Management (v. 87). https://doi.org/10.1016/j.rama.2022.12.002