Could SGMA’s Gradual Introduction Have Been Bad for Almond Growers?
Delayed implementation of groundwater pumping regulation was intended to give farmers time to adjust but instead gave them time to overinvest.
This article was written by UC Berkeley ARE PhD student Nshan Burns. It is the first of two excellent articles written by students in my ARE 242 class this past spring that I will publish here.
California accounts for approximately 80% of the world’s and 100% of the United States’ almond supply. Between 1995 and 2024, almond acreage more than tripled and production increased more than sevenfold, due in part to the availability of groundwater, which farmers could pump without any charge, for a crop whose production is notoriously water-intensive. Roughly 1.6–1.7 gallons of water are required to produce a single almond.
California’s 2014 Sustainable Groundwater Management Act (SGMA) was designed to ensure the sustainable use of groundwater by farms. However, SGMA’s gradual rollout gave farmers years of warning without changing their immediate incentives, and high prices and uncertain future regulatory conditions may have caused farmers to ignore this signal in favor of continuing to invest in almond orchards. Enforcement is now bearing down on an industry that overinvested at the wrong time. Counterintuitively, a more immediate and aggressive signal may have reduced the long-run transition costs for farmers.
SGMA requires 127 water basins, covering 96% of California groundwater, to achieve sustainability by 2042. “Sustainability” here means that water extraction cannot exceed natural replenishment. Local authorities were required to establish Groundwater Sustainability Agencies by 2017, which were required to adopt Groundwater Sustainability Plans (GSPs) by 2022. These GSPs typically involve caps on pumping, overage fees, or groundwater trading markets.
Aquifers are currently so overdrawn that reaching sustainability will likely require the fallowing of irrigated land. Before GSPs took effect, farmers could still pump freely, and they only faced an uncertain, remote signal of future regulation – they may not have even known how heavily their basin would be regulated or what compliance would cost them.
Much of the almond planting since 1995 happened during (and likely because of) a period of high prices from 2012-2019. Once these trees started to bear fruit, large consecutive harvests, combined with the impact of the COVID-19 pandemic, drove the price of almonds down far below $2.10 per pound (estimated by one analyst as the 2024 break-even price) from 2020–2023. Prices recovered to $2.14 in 2024, as plantings leveled off, yields reduced, and demand continued to grow. However, farms have been left financially destabilized and hoping for a market rebound.
Perennial crops like almonds exhibit a lower short-run elasticity of supply than annual crops, due primarily to “asset fixity” (see Siegle et al., 2024). Orchards lock in capital for decades, and production does not start until years after planting, meaning that immediate supply responses to price fluctuations are more costly. This suggests that myopia regarding future regulatory or market conditions could be especially burdensome for perennial farmers. Those who borrowed heavily during high prices might not be able to exit in the future without crystallizing significant losses.
The Public Policy Institute of California estimates that compliance with SGMA will eventually require the fallowing of at least 500,000 acres of irrigated cropland in the San Joaquin Valley by 2040. Combined with the effects of climate change and other environmental regulations, this figure increases to 900,000 acres (in the worst-case scenario), representing more than half of cropland in some basins. Appraisers estimate that almond orchards in parts of the San Joaquin Valley lost 25–50% of their value from 2023–24, especially in groundwater-reliant parcels, therefore attributing the loss partly to looming SGMA compliance.
Unfortunately, the preliminary economic research suggests that SGMA’s long implementation window didn’t help farmers adjust. Work by Ellen Bruno and Nick Hagerty shows no difference in well construction and orchard planting rates in more-regulated versus less-regulated basins after SGMA’s passage (see the below figure from their article). Farmers in more-regulated areas did not change their behavior throughout the entire 2014–2019 window when the law was on the books but regulations were not yet in effect. Perennial crop acreage increased by nearly 50% after SGMA passed. High almond prices dominated future regulation as a signal, the latter of which remained years away and highly uncertain.
This points to an irony of SGMA’s design. The long transition period was intended to give farmers time to adjust, but instead, it gave them time to overinvest. Because farmers in more heavily regulated basins have not been reducing planting or drilling relative to their neighbors, the industry’s exposure to the 2042 compliance deadline is larger than it otherwise would be. Now the adjustment will arrive to an industry with millions of water-dependent trees it cannot easily remove, loans it cannot easily repay, and land whose value has declined, all in the context of precarious market conditions.
None of this means that SGMA’s goals are wrong; California’s aquifers are being depleted at an unsustainable rate. But maybe its implementation could have been better. A uniform, state-implemented groundwater pumping fee that escalated predictably from 2014 onward could have lowered the net present value of planting new orchards, in a salient manner, exactly when the boom was happening, and caused farmers to make more efficient investment decisions.
Policymakers can learn from the SGMA example. Arizona’s groundwater basins are rapidly depleting. The state produces a large quantity of pecans and dates (both water-intensive perennials), but it has not yet imposed an equivalent to SGMA. Unfortunately, its proposed Rural Groundwater Management Act (RGMA) is designed to allow local councils to set their own conservation targets on decade-long review cycles — exactly the kind of uncertain regulatory signal that experience suggests farmers will ignore.
RGMA died in Arizona’s 2025 legislative session without a committee hearing, and it will likely do so again if reintroduced in 2026. Regardless, groundwater constraints will arrive, whether in the form of regulation, a pricing mechanism, or catastrophically low water levels resulting from inaction. The best policy for farmers (and for the long-term stability of supply, which would benefit consumers as well) is an immediate, strong signal that causes farmers to adapt sooner rather than later.