STACEY VANEK SMITH, HOST:
Back in 2011, a horrible drought hit California. Rivers ran dry. People's taps ran dry. Crops died in the fields. Desperate farmers and cities started going underground for their water, sucking it out of aquifers.
CARDIFF GARCIA, HOST:
Surface water, the water from rivers and streams and lakes, is heavily regulated in California. But groundwater, water that is underground that you get from aquifers, is largely unregulated in the whole western United States.
VANEK SMITH: At least it was. People leaned on aquifers so hard during the drought that many of them were practically drained. The ground even started sinking in places, creating these big sinkholes. Water that had collected underground for thousands of years was drained in less than a decade.
GARCIA: So California started crafting regulation that would limit the use of groundwater. And a lot of those regulations will kick in next year. They cap how much water farmers and cities can use.
VANEK SMITH: This has caused a lot of anger and panic, especially in farming communities. But it's also created a lot of innovation. Pilot programs have cropped up all over the state that create these little marketplaces for water where farmers and others can buy water and sell it like you'd sell oil or gas or wheat.
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VANEK SMITH: This is THE INDICATOR FROM PLANET MONEY. I'm Stacey Vanek Smith.
GARCIA: And I'm Cardiff Garcia. Today on the show, California's new water markets - what they could mean for farmers and for water use in the western United States.
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VANEK SMITH: Edgar Terry is a farmer in Ventura County, Calif.
EDGAR TERRY: Hello. Hello.
VANEK SMITH: How are you?
TERRY: Good. I'm Ed.
VANEK SMITH: I'm Stacey. Nice to meet you.
TERRY: Stacey, do you want to walk over to a water well and stand next to it?
VANEK SMITH: Yeah, let's go stand next to a water well.
TERRY: Let's go stand next to a water well.
VANEK SMITH: He meets us on his farm, and it is absolutely beautiful - rolling brown foothills and green fields. His neighbor is growing all of these lemon trees, so the air smells really good. This is - you know, it's Steinbeck country.
GARCIA: Sounds idyllic.
VANEK SMITH: It was.
GARCIA: Edgar's family has farmed that land for generations. He grows celery, cilantro, peppers.
VANEK SMITH: So what was the drought like for you?
TERRY: Well, you know, we managed through it. The scary part was - we're standing next to one of our newer water wells here. And when we drilled that well in 2010, our standing water level was 35 feet. As of the end of last year, it was down to 135 feet, so it declined a hundred feet.
GARCIA: This happened in aquifers all over California. Many farmers and municipalities brought in oil drilling rigs to reach deep into the Earth, sometimes a thousand feet deep, to get at the water.
VANEK SMITH: At one point during the drought, the water level in Edgar's aquifer got so low, some of his pumps couldn't reach it. Things are much better now. California's drought is officially over. And Edgar takes us to see the pump. It is a fat white pipe that rises up out of the ground with a little wheel on it. And Edgar turns the wheel and starts the pump.
TERRY: You'll hear the electric motor start up.
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VANEK SMITH: So this is a good sound that we're hearing now?
TERRY: Yes, that's a good sound. Yeah.
VANEK SMITH: You're smiling.
TERRY: Yeah. It's very quiet, and we have water. (Laughter) So I'm employed for another week here, right? So that's coming from the aquifer.
GARCIA: Edgar says the aquifer has come back - not to its former levels, but at least a little bit. And getting it back to its former levels is part of the rationale behind California's new groundwater regulation.
See, before and during part of the drought, Edgar could pretty much use as much water as he wanted from the aquifer. But new regulations have capped his use, and the amount of water he can use will get a little bit smaller every year.
TERRY: It has to be reduced 2% a year for 20 years for a 40% reduction of water - to get there. Well, so in essence, all else being equal, 40% of my land's going to go fallow. Well, OK, I'm broke.
VANEK SMITH: If your allotted water isn't enough, you could lose your crops. If you use more than your share of water, you face huge fines. Edgar and other farmers were looking at trying to turn a profit and grow a business in a situation where a key component of their product was getting scarcer all the time.
GARCIA: So Edgar teamed up with - who else? - an economist.
VANEK SMITH: Who doesn't want to team up with an economist?
GARCIA: They teamed up to create a marketplace where local farmers who shared the aquifer could buy and sell water. If a farmer had extra water, that farmer could set the price, post it to a website. And if a farmer needed water, that farmer could go to the website and buy it.
VANEK SMITH: But there was a problem. Edgar says the way a farmer uses water is a proprietary thing. And the idea of your neighbor knowing how much water you use and when you're using it and when you're running low or when you have extra - that was just a non-starter.
TERRY: So I don't want my competitor knowing how I irrigate a crop because I might know something better than they on techniques to water. And if they had access to that, that wouldn't be good. It'd be no different than a pharmaceutical company giving up their, you know, molecule to figure out a cure for cancer. I don't want to give up my molecule to figure out how to irrigate celery more efficiently than my competitor across the street. We all think we have a better mousetrap, and I don't want anybody else to know my mousetrap.
GARCIA: So the economist created an online marketplace that's kind of like Tinder but for buying and selling water and with one big difference, which is that it's all anonymous. It's like Blind Date Tinder or something, where buyers and sellers are machine-matched.
TERRY: It's all done anonymously. You put into the market algorithm what you're willing to sell for. I put into the market algorithm what I'm willing to buy for.
VANEK SMITH: The pilot is just getting started, but Edgar says he holds out a lot of hope for this idea. He says we need to start putting a price on water. He says that will make people treat it more thoughtfully, value it more. And for that to happen, says Edgar, there should be a system where you basically own the water you've been allotted. You can do what you want with it.
TERRY: And when you own something, you tend to take care of it better than you do if you think it's for free. I've always had this thought that - what's the difference between an acre-foot of water and a share of stock in a company? If I can trade a share of stock in a company, why can't I, you know, trade a share of water?
VANEK SMITH: Edgar says if farmers own a share of water instead of just having it be a free resource, they will use it better, be more responsible with it.
TERRY: Otherwise, without that ability, the incentive is, well, heck, I need to drain the aquifer before my neighbor does then. Well, what good does that do? It puts us both out of business. And so consequently, let's think about a way of creating a system of market forces where there's an incentive to conserve and, also, you're able to still grow your crop.
GARCIA: A similar pilot program is being tried out with a group of farmers near Sacramento. Alex Johnson helped put it together for a nonprofit group called The Freshwater Trust. Alex used to be an oil trader for Morgan Stanley, and he says he started thinking that a lot of the principles that are used to price and trade oil could help with the ownership drama and water shortages in the western United States.
ALEX JOHNSON: Water's managed by a lot of very risk-averse managers because it's a public good, because it has public health impacts. That was well-intentioned, but it means that it's a not-very-innovative space. And that's the opportunity. You can take things that work in other commodities markets and apply them to water, and you look pretty smart.
VANEK SMITH: Alex's program includes smart sensors attached to water pumps that can help farmers track precisely how much water they've used so they know how much they have to sell or how much they have to buy.
JOHNSON: The prototype that we are testing is a blockchain prototype and...
VANEK SMITH: Sorry. I feel like my brain starts to shut down when I hear the word blockchain.
JOHNSON: It's important for me to note blockchain is not bitcoin. Bitcoin is...
VANEK SMITH: (Laughter).
JOHNSON: Bitcoin is built on blockchain.
GARCIA: Alex says blockchain is a way to establish ownership that can be done anonymously. So it's a way for a farmer to put water up for sale and set a price anonymously, and another farmer to buy that water, also anonymously.
VANEK SMITH: Alex says he's excited to see people starting to put a price on groundwater and seeing water as a valuable and limited resource.
GARCIA: Edgar Terry says that was his experience. When the drought hit and water became such a limited and valuable resource, he and everyone else changed how they used it.
TERRY: Most everything we farm is on drip irrigation now. Drip is very efficient. And if I look back 30 years, what we used, we're using about a third of what we used to use.
VANEK SMITH: Still, Edgar says margins on his farm can be tight, and water management systems, like drip irrigation, are expensive, not to mention the potential costs of buying extra water at a price set by the free market.
GARCIA: Edgar expects water costs will continue to be a bigger and bigger issue for his business. But he says he wouldn't do anything else.
TERRY: It's what I do. It's - you know, I couldn't imagine myself sitting in a high-rise, looking out over a sea of other high-rises. I like looking out over a sea of dirt.
VANEK SMITH: (Laughter).
TERRY: It's what I - how I was raised. You know, I love dirt.
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VANEK SMITH: This episode was produced by Constanza Gallardo, fact-checked by Emily Lang and edited by Paddy Hirsch. THE INDICATOR is a production of NPR.
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