May 26, 2015

By Gerelyn Terzo

Disque Deane Jr., co-founder of Water Asset Management, LLC, which oversees $500 million in assets under management across public globally and private investment vehicles in water rich agriculture with a focus on the Southwestern United States, addressed the conditions for water development at the recent in Global AgInvesting conference in New York. Events such as the severe drought gripping California have thrust the risks of water investing into the spotlight, and according to Deane transparency is paramount for the investment community.

Deane’s mantra for his presentation was a quote by David Zetland, Water Resource Economist at Leiden University College, which is: “Nature makes a drought, but man makes a shortage.” This is a scenario, Deane said, that is facing many U.S. farmers today, pointing to the water shortage in California’s San Joaquin Valley as an illustration of a manmade event. “More water is being pulled out of the system than there currently is on a natural basis,” said Deane. As for nature’s role, the California snowpack on April 1 measured just 5 percent of the average compared to 25 percent in the year-ago period.

Deane went on to describe three types of water shortages including regulatory, climatic and structural, all of which should be on the radar of water investors. For example, on the regulatory front, he pointed to the Delta smelt, where a court ruling on the endangered species forced farmers to reduce their water deliveries by as much as one-third.

Structural deficiencies, meanwhile, can be more subtle. “In some places, the structural vulnerabilities are just starting to get noticed: people recognize they don’t necessarily have the amount of water in the system they thought they had,” said Deane, pointing to the Colorado River Basin, where demand is outpacing supply. “We’re using more water than exists.”

And regardless of the cause of climatic change — whether it’s manmade or a product of nature — it’s a phenomenon that’s impacting agriculture in the United States, he noted.

The challenges facing the United States surrounding water development are not unprecedented; Australia – the world’s driest continent – has dealt with many of the same issues. “The Australian model can show us things. I don’t think we need to copy it. They made mistakes we can avoid,” said Deane.

One of the key responses to water development risks is transparency, and it’s as much the responsibility of agriculture investors as it is fund managers. Deane urges agriculture investors to ask questions to farm managers surrounding water exposures and well usage so that they can hedge water risk.

“It’s so important as investors that you understand water risk and exposure. Ultimately it can undermine your investment,” he said, adding agriculture investors should partner with professionals to manage their water exposure.

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Disque Deane Jr. sat down with Global AgInvesting to explain why investors need to pro-actively understand the sustainability and viability of the water on which their agricultural investments depend.

Watch here!