The water price debate is heating up in Portugal amid intense droughts

In 2020, a year in which record wildfires ravaged the US West Coast, CME Group — the world’s largest futures exchange operator — launched a new contract for bets on the future availability of water in California.

Designed to allow large water users, from alfalfa and almond farmers to electric utilities, to hedge against future changes in water availability, the tool has drawn backlash from lawmakers, including Massachusetts Sen. Elizabeth Warren. Earlier this year, Warren renewed her push for a bill to ban trading water rights in futures contracts, citing the risk that such trading could lead to real-world price spikes due to market manipulation or speculation.

So far, the California water futures market has not taken off. But the debate over trade, pricing and allocation of the resource holds lessons for the future of water-stressed regions – as we highlight today with a story from across the Atlantic.

water pricing

Portugal’s lake debate is prompting a rethinking of water rights

Over the past decade, Europe’s largest man-made lake has transformed a sunny corner of rural Portugal into an oasis.

Alqueva, a lake that irrigates an area roughly the size of New York City, has taken some of the sting out of the heat and drought in the region, guaranteeing a water supply through periods of drought.

Investors flocked to the region, once dotted with cattle pastures and traditional farms, to finance the planting of about 100 square miles (259 square km) of almonds, interspersed with other water-intensive crops.

“It completely changed the landscape and the economy,” according to Diogo Vasconcelos, president of the Young Farmers Association of Southern Portugal, giving farmers the opportunity to plant crops during the scorching summer. “But with climate change, we have less rain. . . so everyone turns to Alqueva water as a magical solution.”

“We are a bit of a victim of our own success,” José Salema, chief executive of state-run Edia, which manages the irrigation system, told me.

The water flowing from the Alqueva Dam, which was completed in 2015, is collected in a huge lake and extended in the summer. Nearby land prices have risen and there is even talk of planting avocados, which are normally grown in more frost-resistant areas closer to the ocean. But the water boom has sparked conflicts between Portuguese and Spanish farming groups and tensions between locals and foreign investors.

In the current system, water is supplied according to land area, regardless of how efficiently it is used. A farm’s allocation is based on its area, multiplied by the water use rates for the crops it grows. Edia sets those rates and if a farm reaches the water threshold, Edia turns off the tap.

But some investors are pushing for an overhaul of how Alqueva’s finite water supply is allocated: by severing the legal ties between water and land and allowing buyers to trade water.

Supporters say this would direct water to the farms most willing to pay for — and squeeze the most revenue from — every last drop.

Others are skeptical. “This is not an economic problem. It’s not about selling water,” Vasconcelos told me. “It’s about not having enough water. It’s a political issue.”

The debate over water pricing and marketing raises questions such as: Who is public water infrastructure for? Should the state seek to maximize crop revenue by giving farms using the latest technology the ability to bid for more water, at the expense of farms – often locally owned – with older infrastructure? And should the competing claims of other interest groups be settled by the state or a market?

The role of the state vs the market in water infrastructure

“When I joined, I couldn’t tell the difference between an olive and an almond,” Jorge Pena, chief executive of Spanish olive oil producer Innoliva, told me.

The former BCG consultant got a hands-on education in agriculture, however, when Cibus Capital, the private equity group and then owner of Innoliva, recruited him to run the olive oil business in 2019.

Innoliva liked the area around Alqueva, he explained, because the lake’s enormous size insured him against multi-year drought.

But Pena has concerns about how Alqueva’s water is rationalized. In the current system, he explained, “I can’t disconnect the water from the ground.”

Water allocation is based on land area – and crops grown – so one farmer cannot pay another to access their water.

Water allocation rates have, unsurprisingly, proved controversial.

António Saraiva runs Portugal Nuts, a trade group that represents what he called “modern producers” of almonds and walnuts – that is, those who use advanced irrigation methods. He disputes the water allocation for almonds, he told me, because “it’s not enough for the full potential of the crops.”

Pena, however, does not only challenge the tariffs set for certain crops. He would like to see the current system replaced by a market where water is competitively priced and the rights to consume it are traded.

Rob Appleby of Cibus Capital is also enthusiastic. Appleby, who is based in the UK, told me he has seen water rights trading systems work in places like Australia, which has separated surface water from land rights since the 1980s.

Exploring new approaches

Three years ago, Salema, of Edia, traveled to California to meet with U.S. Bureau of Reclamation officials and the state water regulator about their approach. He also invited Australian academics to Alqueva to discuss their country’s water rights and argued to Portuguese government officials that the country should adopt its own pricing and trading scheme.

In Australia, environment ministers buy water to flow into rivers for ecological management in the same way that farmers and other users bid for water: on the market. Instead, Salema said, “we only have an obligation to maintain a certain ecological flow, without compensation.”

The share of water Alqueva must retain for ecological flows — which feed downstream rivers, for example — was set in 2002, Salema said, and has not been changed since. A market, he argued, could create a more “integrated” approach to resource valuation.

Salema said his arguments have not yet convinced the Portuguese authorities. But pressure on the basin’s limited resources has continued to mount, which could prompt a reassessment.

In Australia, as well as in California, markets for water rights have proven controversial. Critics have argued that it structurally gives larger farms an advantage, often backed by investors based elsewhere, over local communities, indigenous groups and traditional family farms.

This is not only because larger investors can afford to pay for the extra water, but also because they tend to have more modern farming technology that uses it more efficiently, ultimately getting more revenue from each drop. .

Water needs, meanwhile, are increasing. Spanish farmers demanded that more water be left in the reservoir and sent to their territory, which would further reduce the supplies available to Portugal. Under a current agreement, according to Salema, Spain withdraws 50 million cubic meters of water from Alqueva each year.

Vasconcelos, for his part, shies away from an approach to water trading that lets anyone in if they can pay the right price. “We built a dam, we made investments, we spent the money,” he said. “I have nothing against Spanish farmers. . . (but) they are trying to solve their problem with our water.”

“The desert is moving north,” he added, citing declining regular rainfall. Of Portuguese officials open to such an arrangement, he added, “how can they be sure they have the capacity to give water to everyone?”

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