Understanding SGMA: How California's Water Laws Impact Farmland Investments
October 1, 2024
The Sustainable Groundwater Management Act (SGMA) is a piece of legislation that has reshaped the way California manages its groundwater resources. Passed in 2014, SGMA represents the state's first comprehensive framework for regulating groundwater usage, with the goal of ensuring long-term sustainability. For farmland investors and operators, understanding SGMA is critical as it has significant implications for agricultural operations and investment opportunities in California.
The Sustainable Groundwater Management Act was enacted to address overuse of groundwater resources in California. For decades, many regions of the state have relied heavily on groundwater to support agriculture, municipalities, and other industries, particularly during periods of drought. Legislators believe this use has led to issues like declining water tables, land subsidence, and deteriorating water quality.
SGMA mandates the creation of Groundwater Sustainability Agencies (GSAs), which are tasked with developing and implementing Groundwater Sustainability Plans (GSPs) for the state’s high- and medium-priority groundwater basins. These plans aim to bring basins into sustainable levels of use by 2040.
SGMA directly impacts the amount of groundwater that can be used for farming operations. In overdrafted basins, where groundwater usage exceeds natural replenishment, farmers may face restrictions on how much water they can pump. This can affect crop yields, operating costs, and ultimately, farmland profitability.
For investors, this means evaluating water resources has become just as important as evaluating soil quality or crop types. Properties in regions with stable or well-managed water resources are likely to be more attractive.
Compliance with SGMA often requires investments in technology, infrastructure, and reporting. Farmers may need to install water meters, adopt more efficient irrigation systems, or even switch to less water-intensive crops. These costs can impact the bottom line for farmland operations and, by extension, the returns for investors.
SGMA has created disparities in land values across California. Farmland in basins with secure, sustainable water supplies tends to command higher prices, while land in overdrafted areas may see declining values. Investors must carefully assess the water security of any farmland property before making a purchase.
While SGMA poses challenges, it also creates opportunities for innovation. Farms adopting advanced water management technologies, such as drip irrigation, soil moisture sensors, and water recycling systems, are better positioned for success under SGMA. Investing in farmland that prioritizes sustainable practices can yield long-term benefits and help build a resilient agricultural portfolio.
SGMA encourages collaboration among stakeholders, including farmers, local governments, and water agencies. For investors, this creates an opportunity to align with forward-thinking operators who are proactively working to comply with SGMA regulations.
California is a global leader in agriculture, producing over a third of the nation’s vegetables and two-thirds of its fruits and nuts. However, this productivity depends heavily on reliable water resources. SGMA represents a paradigm shift in how water is managed, making it a critical consideration for anyone investing in California farmland.
Farmland investors must now evaluate properties through the lens of water sustainability. Factors such as access to surface water, the reliability of groundwater resources, and the local GSA’s approach to implementing SGMA are all crucial. Conducting thorough due diligence on water-related risks and opportunities can help investors make informed decisions and identify resilient, high-potential assets.
The Sustainable Groundwater Management Act is reshaping the agricultural landscape in California. While it presents challenges, it also offers opportunities for investors who understand its implications and plan accordingly. By focusing on sustainable practices, evaluating water resources carefully, and staying informed about SGMA developments, farmland investors can position themselves for success in this evolving market.
At FarmFundr, we specialize in identifying farmland investment opportunities that align with sustainable practices and long-term profitability. As a third-generation farmer in Central California, our CEO, Brandon Silveira, brings extensive knowledge of the land, water resources, and SGMA. His deep expertise and passion for sustainable practices give our investors confidence that FarmFundr will only offer opportunities we believe are positioned for long-term profitability. Contact us today to learn how we navigate the complexities of SGMA to deliver value for our investors.
