The uncertainty of future water supplies and energy costs in central Arizona has led farm lender Farm Credit Services Southwest (FCSSW) to take a harder look at loan collateral risks.
Last fall, FCSSW conducted a study on Arizona water trends and related issues facing agriculture and how these changing issues could impact the lender’s future loans to farm and ranch customers.
“The purpose of the study was to determine what issues are on the horizon which may affect real estate value and the economics of farming in the foreseeable future,” said Thomas Schorr, FCSSW vice president of appraisal services, based in Tempe.
“We wanted to utilize the information and intelligence gathered within the study to determine real estate loan collateral risks.”
Schorr discussed the FCSSW study findings during the American Society of Farm Managers and Rural Appraisers Arizona Chapter’s Spring Ag Forum held in Tempe.
FCSSW is a borrower-owned cooperative where all borrowers are farmers and ranchers.
FCSSW holds the note on 46 percent of all Arizona farm and ranch loans. The rural lender also lends money to agricultural businesses in Imperial County, Calif., and others in California.
The study findings clearly proved that water is the 500-pound gorilla in Arizona agriculture. Arizona is in a water quandary caused in part by more than a dozen consecutive years of drought.
Unknown is whether ongoing drought conditions are the new norm in Arizona, or whether improved rainfall and snowfall in the next few years could dry up the drought cycle.
In addition, proposed government clean air expectations could increase water and electricity costs to central Arizona farmers which could make farming costs prohibitive.
The FCSSW survey addressed several key areas:
- 1 - Power costs: Are sharp increases in energy costs expected which may adversely affect the financial feasibility of farming?
- 2 - Water supply and costs: What happens in 2030 when long‐term excess water contracts expire for Central Arizona Project (CAP)-Colorado River water-supplied districts?
- 3 - Water supply: When will CAP water no longer be delivered in reliable amounts to the districts?
- 4 - District viability: Will CAP irrigation districts cease to be viable when CAP water is used more by non‐agriculture users?
CAP users shorted first
The Central Arizona Project delivers Colorado River water 336 miles uphill — from Lake Havasu near Parker to Phoenix to 20 miles south of Tucson in a concrete-lined canal. The CAP supplies about 1.5 million acre feet of water annually to central and southern Arizona for agricultural, municipal, and industrial uses in Maricopa, Pima, and Pinal counties.
About 400,000 acre feet of the total (27 percent) is for agricultural use including irrigation in the tri-county area, says CAP spokesman Robert Barrett. He says future deliveries for agriculture will decline in the future; in part due to the 2008 Arizona Water (Indian Tribe) Settlement.
Central Arizona farmers produce a wide variety of crops with irrigation including alfalfa, wheat, barley, cotton, melons, citrus, and others; plus water for livestock operations.
CAP is the primary water supply to more than 300,000 acres of farmland and is available as a supplemental supply to many more acres.
CAP-supplied irrigation water users have the lowest water priority on the Colorado River. If available water is reduced, CAP farmers would be shorted first.
Colorado River-supplied districts in Arizona’s Yuma County and California’s Imperial and Riverside counties which border the river are the most secure with more senior water rights on the river. Schorr says this does not guarantee existing water supplies will continue in the future.
“Colorado River-supplied districts in Yuma, Imperial, and Riverside counties are not free of worry,” Schorr said. “If the drought persists and there is a forced reallocation, this will have some effect on these river counties as well.”
Arizona shares the Colorado River lower basin annual allocation of 7.5 million acre feet (AF) with California (4.4 million AF) and Nevada (300,000 AF). Arizona receives 2.8 million AF. One acre foot equals 325,851 gallons; enough water to supply an average size family for one year.
In 2010, the water level at Lake Mead on the Colorado River in northwest Arizona dropped to 1,190 feet. If the Arizona drought persists and the level falls below 1,075 feet, a shortage could be declared on the Colorado River. At that point allocations for all states could be reduced.
If this occurs, Schorr says CAP districts would suffer the most due to the lower priority.
After the year 2030, CAP long-term excess water contracts will expire. It is possible that Colorado River water deliveries could be scaled down to central Arizona irrigation districts. At this point, districts could lease Indian-owned water allocations, invest in new wells, acquire wells via lease, or purchase water from other area farmers to maintain the use of existing water delivery infrastructure.
“Farms without good on‐farm wells may be marginally productive if the irrigation district is not able to furnish enough water,” Schorr said. “If groundwater pumping increases significantly, a water-table recession would be likely.”
Navajo Generating Station
Also tied to the Colorado River issue is the 2,250 megawatt coal-fired Navajo Generating Station (NGS) located near Page, Ariz., close to Lake Powell. NSG generates electric power for customers in California, Arizona, and Nevada, including power for pumping Colorado River water for the Central Arizona Project (CAP).
The NGS produces about 95 percent of the energy used by CAP. In fact, CAP is the single largest end user of power in Arizona.
The Environmental Protection Agency (EPA) is currently evaluating additional nitrogen oxide (NOx) controls for NGS under the agency’s regional haze rules to further improve visibility in the area.
Two types of controls are under consideration to reduce emissions: low NOx burners through a system called ‘separated overfire air’ at a cost of $46 million; and a selective catalytic reduction (SCR) system with a $1.2 billion price tag.
If EPA mandates the SCR method, Schorr says CAP energy costs could increase by at least 20 percent for irrigation-water users. If the Salt River Project, the NGS owner, chose to close the operation due to high NOx changeover costs, replacing NGS power and revenue could double or triple CAP water rates; making agriculture an unviable business for some producers in central Arizona.
The persistent drought could have serious implications for all Colorado River water users. Closing NGS could make central Arizona agriculture cost prohibitive due to increased energy and water costs.
These water-study findings led FCWSS to initiate changes in its lending policies where higher water costs and supply risks are involved.
“A loan on property within a CAP district could have a shorter repayment period and/or lower loan to value limits on the availability and costs of water,” Schorr said.