Market Reaction to LB 701

 I believe that LB 701 makes it possible for the NRDs to keep the State in compliance on an annual basis.  I think the plan they have is workable.  I don’t like how they put it in place but I do think it will work.

The graph shows how.  The blue line is Nebraska’s consumptive use if we count both groundwater and surface water.  The red line shows what consumptive use would have been if no surface water would have been used.  As long as we stay above the 0 line we are in compliance. 

This chart shows what the precipitation has been and what the allocation has been.  Based on this and on the precipitation events we have had on the Republican River Basin this year, I think it likely that the allocation line will jump up.  I don’t think it will go up enough to eliminate the existing accumulated overages but up enough to help.

I think that LB 701 will be sold as a solution.  And from my analysis, I think it is likely that it can work.  I expect the Governor, the NRDs, and most farmers will find this to be workable.

As a result there will be a collective increase in hope.  People want to believe that the problem is gone.  They want to take advantage of the high corn price.  They want to have some good news.  The plan to purchase surface water will be seen as fulfilling that desire.

I think this will result in a significant jump in land values in the Republican River Basin.  They will jump for the following reasons.

1. Many will believe the water problems are being adequately addressed.
2. The price of corn is high enough and looks to remain high enough for long enough that higher land values can be supported.
3. Initiative 300 has been removed.  This allows corporations to purchase land.
4. Ethanol is causing a change in cattle feeding.  It pays to put the cows near the ethanol plants.  I expect that we will see more cattle move into Nebraska.
5. Other parts of the State have seen much greater increases in land values, causing a much better rate of return on Republican River Basin property than can be achieved in other locations both within and outside of the State.
6. Colorado has a more significant water problem that should make Nebraska land more attractive in spite of the higher taxes.

This combination of factors should cause the price of good irrigated land in the Republican River Basin to go to at least $3,000 an acre by the end of 2007.

Things that could cause this to fall apart.

1. The NRDs totally mismanage their new authority.  I don’t think that will happen.  Even though some of the NRD board members are very arrogant and intolerant of public input, I don’t think they will mess this up.  They have every incentive to do what is required.
2. The price of corn could collapse.  I don’t think that will happen.  Given that the US House of Representatives Natural Resource Committee just voted to require a major increase in ethanol use, demand and support for ethanol should be strong.  The viability of ethanol is dependent on the price of corn, the price of natural gas, and the price of ethanol.  http://news.yahoo.com/s/ap/20070503/ap_on_go_co/ethanol_coal 
3. Kansas might persuade a Federal judge that Nebraska has not done enough on the water issue and that Nebraska should not only pay damages but be penalized.  While that is possible, it will be difficult for Kansas to win that argument when it can be demonstrated that shutting off the wells will not solve the problem.   LB 701 could put in place the mechanism that would keep the Basin and State in compliance.

There are a number of problems that remain in the Basin but none of them should prohibit continued irrigation or an increase in land values.  The things that I would like to see fixed are:

1. A change in attitude by many of the NRD board members, especially the Upper.   The exclusion of the public from the process is destructive to our system of government.  The refusal of the NRDs to require accurate information from the DNR has significantly contributed to the new tax and the need to buyout surface water.  The NRDs decision to appease the State and to cooperate with the false information provided by the DNR is a dereliction of duty by our representatives.    
2. The DNR has repeatedly provided inaccurate information.  There are numerous problems with the inputs to the Model and there are several major problems with the parameters put on the computer simulation that governs the water situation.  If these problems are not corrected now, then the flaws will become accepted as how the system works and condemn future people to live on a system based on lies.  The politicians with the responsibility to oversee the DNR are doing a great disservice to the State by allowing these problems to continue to exist.   In defense of the oversight people, some of them are ignorant that there is a problem.  As they learn the facts they will have to decide if they will allow the incorrect information and the process by which it is permitted to exist to continue or if they will fix the problems.  Hopefully honest people will choose to correct the problems.

Even with these major annoyances, the fundamentals are strong enough to provide a good base for the economy of the region.  The crisis has a decent chance of being declared over within the next year or two.  Perhaps the Governor will then do as he says he will and attempt to renegotiate the agreement we made with Kansas in 2002.  But he should first start with cleaning up the problems in the DNR.