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Law Offices of Ronald W. Rutz
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April 21, 2005: Investing in Water

Q: I think that water would be a great investment given the drought and the rise in the areaŐs population. Do you have any input that might help me decide whether to invest and if so, where to invest.

A: Because I have been asked this question so often, I decided to yet again write a column on this topic responding to your question, but from a different perspective than previous columns.

My input may seem counterintuitive but water ownership may prove to be a poor investment. Yes in this part of the country, supply and demand has an impact on the price of water, especially if it is viewed as a commodity. But letŐs run through some generalities.

The drought should have sent water prices soaring but for the most part that has not happened. Why? Municipalities have lowered water use through various means and when necessary have leased extra water to cover any short falls. Farmers often can make more money leasing water than by going through the crop growing cycle. So for the most part water supplies have flowed toward the money.

Cities find it cheaper to lease water when demand exceeds the amount of owned water and thus not tie up scarce capital. (In fact several cities have sold water during the drought.) Other water owners, including farmers, find the cost of water too high to buy to use for farming or to buy and lease out. So the sale of water does not seem to significantly rise when cities do lease.

Builders have often "inventoried" water for future projects. Thus, when they are ready to begin the planning process, often the water is already either controlled or owned by the builder, or "trades" go on between builders or water investors and water brokers. Also, if additional water needs to be purchased, there seems to be more than enough willing sellers of the 87% of the water used in agriculture to the other 13% users, including cities, industry, and recreational users. Thus, water demand is more like a partly filled sponge. If more water is needed in part of the sponge, then the other side is squeezed (i.e. money paid) to move water where needed.

Besides the shifting use from farming (where profits are hard to come by) to the other uses, the supply of water is also increasing. The drought has spurred plans for more reservoir capacity, which in the long run will expand useable water supplies by catching those Colorado spring floods where during a 45 day period, in excess of 85% of available water for the year roars down from the mountains and onto points east and is lost for use in Colorado unless caught. There is still a significant part of that flood water, especially during wet years, that has not been captured. Also certain reservoirs being planned will make water exchanges and second and third reuse of water more efficient.

Additionally, water like other investments such as stock seems to run in value cycles. The drought hit during a down cycle in valuation but now the cycle appears to be on an upswing from the lows just a few years ago. As a water investor, you need to know that not all water is created equal. Certain water is actually owned by ditch companies and must be used on lands serviced by that ditch or its laterals. Other "water rights" are merely contracts to use water on specific lands and as recently rediscovered by local owners, cannot be transferred. Thus investing in this water will not result in significant increases in value. Still other water stock carries no water ownership but only the right to use that ditch to transport water. So be careful to determine what water rights are represented by the stock.

Here in northern Colorado, the three major investment choices are North Poudre stock, Water Supply and Storage stock, and The Northern Colorado Water Conservancy District (NCWCD) units. Why? This water can flow relatively easily from agriculture to other uses or from one use location to another.

But each has its problems that might inhibit value appreciation. Water Supply and Storage sells for several hundred thousand dollars a share and probably is out of the price range of most investors. North Poudre is tied to NCWCDŐs value and has a somewhat smaller potential demand market. NCWCD has land ownership requirements but more alarming has set itself up for a one-two legal punch in the future that could crack its presently perceived status as a stable water source.

So just remember that one personŐs watered Garden of Eden could in reality be a swampy moor with hidden stretches of quicksand ready to engulf the novice and uneducated water investor.

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