River Water

Extreme drought is tearing apart communities in a massive river basin along the U.S. states of Oregon-California border. Farmers, tribes and wildlife face a bleak future together. At the same time, water futures market is also failing the California farmers.

A Guardian report – “Running out of water: how climate change fuels a crisis in the US west” – said on July 1:

Except for a brief stint in the military, Paul Crawford has spent his entire life farming in southern Oregon. First, as a boy, chasing his dad through hayfields and now, growing alfalfa on his own farm with his wife and two kids, who want to grow up to be farmers.

“I would not trade a day of farming with my wife and my kids for anything. It’s an amazing life,” Crawford said. “It just may end if we do not figure something out on this water issue.”

The American west is drying out as the region faces an unprecedented drought. Few places are as devastated as the Klamath Basin, where Crawford’s farm sits. Straddling the border between California and Oregon, the watershed spans 12,000sq miles – from agricultural lands fed by Upper Klamath Lake to tribal communities surrounding the Klamath River.

The report said:

Water has long been a source of contention in the basin, pitting farmers against others who rely on the resource, including fish sacred to local Native American tribes. In a typical year, maintaining the balance between these competing interests is a difficult feat. Now, as climate change fuels ever-worsening drought, it’s becoming impossible.

“There is not enough water to go around, and that is going to be the case for the indefinite future,” said Jeff Mount, senior fellow at the Public Policy Institute of California Water Policy Center.

In May, the U.S. Bureau of Reclamation – the federal agency that manages water in the region – shut off the primary canal that diverts irrigation water above the Klamath River, leaving farmers without a water supply for the first time since irrigation began in 1907.

“We are going to try to stay alive and keep this farm afloat for another year. And hope rain comes and snow comes this fall,” Crawford said. “We would not know until the season is over, but it could very well end in bankruptcy.”

From Wetlands to Farmland

The report said:

Today’s water crisis stems from decisions made over a century ago. In 1906, the Bureau of Reclamation drained wetlands to create farmland, disrupting the careful balance of water needed to sustain others in the basin. Among those affected are federally endangered, long-living sucker fish in Upper Klamath Lake that were a major source of food for Native American tribes in the area until fish populations plummeted, the wetlands where migratory birds make their home, and the salmon that the tribes further downriver depend on.

As drought dwindles water supplies in the region, each of these populations faces a crisis.

Low water levels in Upper Klamath Lake – where the Klamath Tribes, make their home – leave sucker fish exposed to predators and create low-oxygen conditions in the water.

A Creation Story

The Guardian report said:

Two endangered sucker species are central to the Tribes’ creation story. “We would not be here without those fish,” said Don Gentry, chairman of the Klamath Tribal Council. “They were so important to our subsistence.”

Gentry, however, said he hasn’t eaten a sucker fish in years. In 1986, prior to their endangered status, the Klamath tribes voluntarily stopped hunting suckers in an attempt to shore up their numbers.

“I would not be surprised if, this summer, we do not see a major die-off in suckers as well,” Mount said.

Endangered Ecosystem

In recent years, lake levels have dipped below federally mandated levels and further endangered the ecosystem. This April, a federal judge denied a motion filed by the Klamath tribes to prevent the bureau from sending water downstream, which would have left more water in the areas where the sucker fish are in danger of dying out. The judge said the agency “is not responsible for the unprecedented drought this year”.

“The decision that was just made makes us feel even more marginalized in our own homeland,’ Gentry said. “How can we be the people our creator intended us to be if we’re not able to catch, eat and share those fish?”

Identity and Culture

The report added:

Downriver, the salmon population – essential to other tribes’ identities and culture – is just 10% of what it was historically.

“We would catch more fish in one day back when I was a child than we do in the whole season now,” said Ron Reed, cultural biologist for the Karuk tribe. “When I was growing up, you could practically walk across the river on salmon.”

Median Income and Feeding Family

The report said:

Frankie Myers, vice chairman of the Yurok tribe, said their allocation of salmon this year will come out to fewer than one fish per person. That is a significant blow to a tribe where the median income is $11,000 a year and people rely on salmon to feed their families. Salmon are so central to their way of life, he said, that in their native language, the word for salmon, “nepuy,” translates to “what we eat”.

“The protein that we get from salmon harvest is extremely important to our overall physical health, mental health and spiritual health,” Myers said. “Without salmon, we don’t exist.”

Klamath Basin salmon contend with poor water quality, high water temperatures and slow-moving water, a confluence of factors that can lead to disease outbreaks.

A sample of juvenile salmon captured in early May found that 97% were infected with C shasta, a parasite known to kill salmon en masse. In the first two weeks of that month, the Yurok reported that 70% of the salmon found in their traps were dead.

Birds

It said:

Water shortfalls are also proving deadly for the birds that live in the Lower Klamath and Tule Lake National Wildlife Refuges. When farmers see water shortfalls, so do the wetlands.

“When a bad year comes along, it is a bad year for the farmers. It is a bad year for fish. It is a bad year for birds,” Mount said. “This is one of the most important areas for the Pacific flyways.”

Amid water shortfalls in 2020, the warm, stagnant water in the marshes fostered the growth of the bacteria which produces avian botulism. The disease killed more than 60,000 ducks and shorebirds, according to one estimate. This year, a devastating drought has once again left birds at risk of an outbreak.

Threat of Armed Insurrection

The report said:

These overlapping crises are stirring up conflict in the Klamath Basin, one that reflects the rise of far-right extremism in America.

In May, irrigators belonging to the People’s Rights Oregon, Dan Nielsen and Grant Knoll, bought land next to the headgates of the Klamath Project’s primary canal. People have planted protest signs, hosted conspiracy theorists and flown Trump 2024 flags. Asked if they were planning a repeat of 2001 – a year that saw federal marshal intervention and threats of armed insurrection, Nielsen told Jefferson Public Radio, “We are gonna do what we gotta do.”

Despite the looming threat of violence, conflict is not inevitable.

Water scarcity is becoming the new normal in the west, with multiple watersheds coping with extreme drought this year and chronically dry conditions for decades.

The key to managing that scarcity, in Mount’s view, is expecting it and planning for it. “What is lacking [in the Klamath Basin] is a good and durable plan that everyone has signed onto, even if they have signed onto it reluctantly,” Mount said. “And that is still elusive in that basin.”

Dam Removal

The report added:

What that plan should entail is another point of contention and proposed solutions spark varying levels of controversy. Most agree about the need to restore salmon habitat along tributaries to the Klamath River. Fish populations will likely get a boost from removal of four dams along the Klamath River, which is expected to be completed by 2024. And then, there are the more fundamental – and controversial – proposals, like overhauling the Bureau of Reclamation and taking agricultural land out of production.

Mount believes the solution will inevitably include some combination of these ideas and will require stakeholders in the conflict to find common ground.

“There are too many people in the water business whose goal is to defeat someone else, and that is viewed as progress, if they have stopped something bad from happening,” he said. “It is not progress until you get something good to happen.”

Water futures

A Reuters report said on June 29, 2021:

Former bond trader Alan Boyce is just the type of California farmer expected to dive into the world’s first water futures contract.

Boyce is comfortable navigating financial tools, and he grows irrigated pistachios, tomatoes, alfalfa and other crops in California’s drought-prone Central Valley. But he says the water contract is still too illiquid to benefit him.

Financial exchange operator CME Group launched the contract late last year to help big California water users such as farmers and utilities hedge rising drought risk and give investors a sense of how scarce water is at any given time. The exchange and a UN report said this is the first water futures contract in the world.

The contract is based on an index that tracks prices for water rights leases and sales in California. But trades settle in money, not water, meaning water users cannot use the contract to solve real-world shortages.

Farmers said without more participants, they cannot enter or exit positions without adversely impacting prices. The contracts are also not very useful if there is no physical water to buy in the spot market when government-managed water allocations are tapped out.

California controls how much water can be drawn from sources like reservoirs and aquifers, with allocations to individual users tightened or suspended during droughts.

“I definitely see a reason why I would use it, basically to hedge out my water cost when I sign a contract to, say, grow cannery tomatoes next spring. But that requires a liquid market on a forward basis and that hasn’t happened yet,” Boyce said.

The slow start for the contract illustrates how difficult it is to commodify water as oil and gold have been. Moving and storing meaningful amounts of water are costly and inefficient.

CME Group is hosting seminars to entice specialty crop farmers who have not traditionally used markets to hedge risk as their corn- and soy-growing counterparts in the Midwest do.

The exchange operator views the contract’s launch as a success for creating a previously unavailable forward curve for water prices, Tim McCourt, CME’s global head of equity index and alternative investment products, said in an interview. Over time, farmers should be able to gauge how their local water price compares to the index, which can help with planting plans and make the contract more useful as a hedge, he said.

“Even though we are not necessarily seeing volume grow … people are now able to make more informed decisions,” McCourt said. “It still is relatively early days.”

California’s water problems have been building for decades as the state’s population swelled and the agriculture sector grew. Climate change increased the severity and frequency of droughts.

When the California water futures contract launched in December, three-quarters of the top U.S. agricultural state by revenue was already under severe drought, and spot water prices were on a gradual climb.

By April, the drought had deepened and cash prices for water in California’s Central Valley farming hub had nearly doubled. But the futures contract failed to attract much interest. Trading volumes and open interest have since only eroded further, CME data shows.

The vast majority of trading occurred in the front-month contract, and a record 52 contracts traded on Feb. 10. But volume dwindled from an average of nearly 13 contracts a day in February to fewer than three in June, exchange data show.

One issue is that CME’s Nasdaq Veles California Water Index futures are a cash-settled contract, meaning that money not actual water is delivered upon contract expiration or exercise. The market tracks its namesake index, created in 2018 based on water rights leases and sales across California’s most actively traded water regions.

“The problem at this moment and why farmers themselves haven’t participated is because it’s not trading actual water,” said Sarah Woolf, president of Fresno, California-based consultancy Water Wise.

“People would pay virtually anything to get it, but if it’s not there, then you can’t do anything about it.”

On December 6, 2020, a Bloomberg report – “California Water Futures Begin Trading Amid Fear of Scarcity” – said:

Water joined gold, oil and other commodities traded on Wall Street, highlighting worries that the life-sustaining natural resource may become scarce across more of the world.

Farmers, hedge funds and municipalities alike are now able to hedge against — or bet on — future water availability in California, the biggest U.S. agriculture market and world’s fifth-largest economy. CME Group Inc.’s January 2021 contract, linked to California’s $1.1 billion spot water market, last traded Monday at 496 index points, equal to $496 per acre-foot.

The contracts, a first of their kind in the U.S., were announced in September as heat and wildfires ravaged the U.S. West Coast and as California was emerging from an eight-year drought. They are meant to serve both as a hedge for big water consumers, such as almond farmers and electric utilities, against water prices fluctuations as well a scarcity gauge for investors worldwide.

“Climate change, droughts, population growth, and pollution are likely to make water scarcity issues and pricing a hot topic for years to come,” said RBC Capital Markets managing director and analyst Deane Dray. “We are definitely going to watch how this new water futures contract develops.”

The report added:

The futures are tied to the Nasdaq Veles California Water Index, which was started two years ago and measures the volume-weighted average price of water. The January 2021 water contract that went live Monday had two trades.

“I’m delighted we have had trades,” said Clay Landry, managing director at consulting firm WestWater Research, which provides the data used to calculate the water index. “In the physical market, it is so hard to get a deal done. This feels like lightning fast to me.”

The index sets a weekly benchmark spot price of water rights in California, underpinned by the volume-weighted average of the transaction prices in the state’s five largest and most actively traded markets.

The futures are financially settled, as opposed to requiring the actual physical delivery. Contracts include quarterly ones through 2022, with each representing 10 acre-feet of water, equal to roughly 3.26 million gallons.

According to Chicago-based CME, the futures will help water users manage risk and better align supply and demand.


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