9 Aug 2011

Land, water and money

SS asks:
I am interested in water investing, particularly investing in raw productive agricultural land with water on site. My interest was generated from closely following [famous guy]. He is arguably the world's most prescient investor. Even Warren Buffet and Alan Greenspan have referred to this in interviews.

He is cryptic about his current investments but in some interviews the transcripts do include mention a significant portion of his portfolio is invested in raw land, specifically "productive agricultural land with water on site". In an interview with the author of a book about him, the author says that [FG] told him it was a complicated way of investing in water. The author also said he was focusing on almond farms. Since he lives in Northern California and California produces 80% of the world's almonds, it seems likely he is buying almond farm land in California.

Assuming he is buying almond farm land that is productive agricultural land with water on site, what is your best guess as to the way in which this works as a water investment?
FG's plan to buy almond land and sell the valuable water is not new. The Bass brothers tried to sell ag land in Imperial Valley and sell its water to San Diego, but they were blocked and ultimately sold the land to the Imperial Irrigation District.*

Here are a few more comments:
  1. Water sales in California and most of the US are not easy. They require approval by regulators, water-using neighbors, local politicians (area of origin laws) and environmental panels.
  2. Almond farms may be a good investment now, since almond prices are not so high but costs are rising. Farmers can, of course, rip out trees and plant a different crop.
  3. Water trades (as in Australia) are difficult without standardized procedures, access to conveyance, adjudicated groundwater, etc.
My overall thought is that this is a high risk strategy. If I had my way (allowing more water marketing), it would pay off, but many people are either too conservative (don't change anything) or too greedy (give ME free water) to allow markets.

Bottom Line: Maybe FG is talking up this idea so he can offload some almond land on newbie investors.
* That sale and farmers' decision to allow IID [article] -- but not individual farmers -- to sell water ultimately backfired. Now farmers who want to sell water ANYWHERE are blocked from doing so by "city" IID board members who want to keep cheap water in the area "for jobs."


  1. In the past couple of years I have gotten several calls from very wealthy people wanting to invest in farm land and/or farming. They say nobody rings a bell at the top of markets, but these calls come pretty damn close.
    If a region has profitable agricultural operators, they will always be the logical buyers of property in their immediate area. If those operators see more dough in selling some water than growing a crop, they will do so (despite whinings). Given this, an outside investor ought to have pretty sound reasons, and very good information, to justify paying more than a local.
    One place where outsiders can do OK is in a sale/leaseback, whereby land rich but cash poor operators can recapitalize sensibly. This is a very common practice in asset heavy industries like shipping and airlines, but still uncommon in agriculture.
    An outsider buying land in the hopes of selling water to third parties needs to have his head examined. It may be possible in theory, but undertaking a difficult task when you have started out by putting yourself in a horrible strategic position does not strike me as very wise.

  2. Yes, high risk with high barriers to trade. Water is not the next gold.


  3. Right, I saw a speech by [famous guy] receiving an award at Texas A&M. He made a semi-convincing case for investing in agricultural land with good water.

    "Pure plays" in water are difficult to pin down and the political risks are great. If you are hungry for media attention and even tangentially associated with conservative politics, a real estate purchase with good water may have you featured in the next documentary about the looming global water crisis (http://www.youtube.com/watch?v=hI2QPnvEQh4).

    Water has been the "investment play of the future of the past 20 years." Water ETF's have struggled in recent years. However, their time may have come (http://www.etftrends.com/2012/04/rising-tide-water-etfs/).

    The safest and likely most effective way to invest in the water value hypothesis is to go after companies that pursue cost-effective technologies that allow producers and consumers to do more with less water. Think "drip irrigation" and "drought resistant varietals" rather than "bore wells."

    Follow this link for investment thesis published through Wharton's IGEL program: http://www.scribd.com/doc/97097829/Banking-on-Scarcity-Risks-and-Opportunities-for-Investment-Funds-in-the-Water-Sector


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