The Misallocation of Water

by on March 26, 2015 at 7:25 am in Economics, Food and Drink, Law | Permalink

One of the most remarkable discoveries of economics is that under the right conditions competitive markets allocate production across firms in just that way that minimizes the total costs of production. (You can find a discussion of this remarkable property in Modern Principles. See also this MRU video.)

One of the necessary conditions for this result is that firms must face the same input and output prices. If one firm is subsidized and another taxed, for example, then resources will be misallocated and total costs will increase. In a pioneering paper, Klenow and Hsieh measure misallocation across firms in China, India and the United States and they find that micro misallocations can have large, macroeconomic effects. In particular, if capital and labor were allocated as well in China and India as they are in the United States then output in those countries would double.

We can get some intuition for the costs of resource misallocation by looking at water in California. As you may have noticed at the grocery store, almonds are in demand right now whether raw or in almond milk. Asian demand for almonds is also up. As a result, in the last 10 years almond production in California has doubled. That’s great, except for the fact that almond production uses a huge amount of water and water in CA is severely mispriced and thus misallocated.

In my previous post, I pointed out that agriculture uses 80% of the water in California but accounts for less than 2% of the economy. So how much water does almond production alone use? More water is used in almond production than is used by all the residents and businesses of San Francisco and Los Angeles combined. Here’s a chart from Mother Jones:

(Aside: Some of this water is naturally recycled so net use is likely somewhat lower but a lot of water in California is now being pumped from the aquifer and that water isn’t being replenished.)

At the same time as farmers are watering their almonds, San Diego is investing in an energy-intensive billion-dollar desalination plant which will produce water at a much higher cost than the price the farmer are paying.  That is a massive and costly misallocation of water.

In short, we are spending thousands of dollars worth of water to grow hundreds of dollars worth of almonds and that is truly nuts.

Hat tip: Walter Olson.

1 prior_approval March 26, 2015 at 7:41 am

‘One of the most remarkable discoveries of economics is that under the right conditions competitive markets allocate production across firms in just that way that minimizes the total costs of production.’

One of the most remarkable discoveries about living on this planet is that precipitation only occurs under the right conditions, and that drought cares nothing about the marketplace.

Even when one is reaching for a clever pun, particularly as walnuts, which use 4 times as much water, are such a better example – http://www.motherjones.com/environment/2014/02/wheres-californias-water-going

2 dan1111 March 26, 2015 at 7:56 am

It must be hard work to so consistently refuse to understand Alex’s argument about this.

3 T. Shaw March 26, 2015 at 8:45 am

Ag used to be huge in the CA economy. Most of the irrigation infrastructure (that made the Central Valley an ag powerhouse) was built during the Depression by CCC, etc. The current costs to maintain the earthen dams and various ditches/aqueducts to bring (by gravity) water a few miles to local farmers is far lower than recent building/maintaining huge aqueducts running up to 400 miles south.

Will they do it to CA ag? In the 1980’s, the national park service drove out the last farmers along the Delaware River in NY/PA.

Alex bloviates about private firms, free markets, etc.

Such animals no longer exist. Especially for water issues which are dicated by elitist geniuses (ideologues) and politicians (essentially motivated by coercion and deceit) in Sacramento and Washington, not by the market’s “invisible hand.” But, the genius do-gooders won’t allow the market to work its magic.

The fruits and nuts have been there for at least 90 years. Why now is water a problem???

The problem is a multi-year drought and unnatural So CA population growth. In other words, if there ain’t enough water in LA or SD it’s not the farmers’ fault. There ain’t enough water down there and down there they need to deal with it.

Apples and oranges here. I addition to nuts, the San Juaquin/Central Valley CA produces citrus crops and wine grapes (Ernest & Julio Gallo) plus dairy and meats.

4 louis March 26, 2015 at 8:58 am

“In other words, if there ain’t enough water in LA or SD it’s not the farmers’ fault.”
“Fault” is a pretty tricky concept on these kind of issues, and usually a red herring with respect to finding a good outcome.
If you want to a Pareto optimal outcome, give the farmers rights to the water but let them sell it. The outcome would be the same if Alex is right (less water used overall, less need for expensive desalination plants). At the very least, farmers would have incentives to optimize the value of their produce with respect to water consumption.

5 Pshrnk March 26, 2015 at 9:25 am

Give the city dwellers water rights and let them sell them to the farmers!

6 Eric March 26, 2015 at 9:52 am

There is a system of water rights in place where cities, farmers, and other users have legal rights to certain amounts of water from certain sources with certain priorities. Those who are lacking water already could buy water from those with earlier water rights. Much of CA ag is in federal irrigation projects but each district could sell water and distribute the proceeds to the farmers of they desired. My guess is that the buyers are not willing to pay enough to encourage the farmers who have spent $15000+ per acre to establish almond orchards to let them dry up. The desalinization plant is likely someone’s political pet.

7 Doug March 26, 2015 at 2:14 pm

Pshrnk – What would that accomplish? The city dwellers pay way more for their water than the farmers pay or could even afford to pay.

8 collateral March 26, 2015 at 11:46 am

The delicious bitterness of the man who sees himself as a rugged individualist but is in reality a welfare queen entirely dependent on government largess being forced to recognize it, all the while resisting and deflecting and denying is the sine qua non of schadenfreude.

Keep your government hands off my medicare, indeed!

9 JWatts March 26, 2015 at 12:22 pm

“The delicious bitterness of the man who sees himself as a rugged individualist but is in reality a welfare queen entirely dependent on government largess being forced to recognize…”

How is that an accurate description of the situation? Or are you just creating a Strawman post for ideological reasons?

10 Thomas March 26, 2015 at 9:27 pm

I thought he was talking about P_A

11 Aiyuna April 12, 2015 at 10:56 pm

No way, Doug. City dwellers pay a miniscule amount for water, compared to farmers. Eric’s got it right. Trees don’t take as much water as other crops, so around here, good crop land is being turned into orchards, with a drip irrigation system, because they take much less water. Agriculture is the life blood of California, and farmers here are letting their land go idle (and forfeiting income) because they have no water. If you have food to eat, you have a farmer to thank.

12 Art Deco March 26, 2015 at 8:47 am

The work’s easier if you’re motivated, as you might be if you were fired for cause.

13 mulp March 26, 2015 at 11:44 am

“It must be hard work to so consistently refuse to understand Alex’s argument about this.”

That economics are the ones who should be in control of all property because economists are better central planners than the individuals and nations who have been granted property rights centuries in the past????

Please draw the distinction between communism and the views of economists preaching about how the market is misallocating resources based on individuals making decisions about their property contrary to the opinions of the economists?

14 collateral March 26, 2015 at 11:47 am

There is no market. Water permits are not freely alienable.

15 dan1111 March 26, 2015 at 12:17 pm

Alex is arguing for allocation of water by the market, a situation which does not exist in California right now (see here: http://en.wikipedia.org/wiki/Water_in_California#Water_rights). You seem to be claiming that he is arguing the opposite of that.

Yes, if you take the opposite of what Alex actually said, you pretty much end up with communism.

16 Dude March 26, 2015 at 10:03 am

At least you are consistent. Even though I consider myself an environmentalist at least I understand that sticking your head in the sand about these wasteful water consumption activities is not good for the planet. What gives with your denial?

17 JW March 26, 2015 at 10:27 am

It is so interesting that this individual takes the time to comment on almost all of the articles on this website with some sort of comment. Most of these comments are negative in some fashion either about the story or about GMU in general. I understand from previous comments that he/she used to work for GMU or an affiliate of GMU. It is fascinating that years later, the he/she is still so pre-occupied with commenting in this negative fashion. The amount of energy used on these comments is phenomenal. This must be some sort of obsession or mental illness. Either way, you are an amazing “internet troll.”

18 Urstoff March 26, 2015 at 11:47 am

I like to consider it to be a very dedicated (although terrible) piece of performance art.

19 JWatts March 26, 2015 at 12:26 pm

“This must be some sort of obsession or mental illness. ”

Prior_approval clearly exhibits obsessive behavior.

20 Floccina March 26, 2015 at 12:33 pm

And the fact that he gets in so early makes me wonder if he has a job. I comment late because I have work to do.

21 unemployed professional commenter March 26, 2015 at 1:02 pm

Hey, easy there.

22 Floccina March 26, 2015 at 12:24 pm

Concerning the Mother Jones article how many calories are in one walnut? How many calories are in one almond?

23 cheesetrader March 26, 2015 at 12:40 pm

According to the big google machine – 7 per almond, 28 per walnut

24 Floccina March 26, 2015 at 1:16 pm

Thanks for the answer on reflection I asked the wrong question. I should have asked how much does one almond cost and one walnut cost. The Mother Jones gives us on the almond of water to grow 1 almond and 1 walnut.
Found this:

http://www.huffingtonpost.com/2014/10/13/food-water-footprint_n_5952862.html
Hazelnuts and walnuts at 1,260 gal./lb. and 1,112 gal./lb. respectively. That’s still a lot of water! But almonds and cashews take more, averaging 1,929 gal./lb. and 1,704 gal./lb. It takes 1,362 gallons of water to produce one pound of pistachios.

And this
http://www.nass.usda.gov/Statistics_by_State/California/Publications/Fruits_and_Nuts/201405almpd.pdf
Price per pound of almonds in 2013 was 2.58
And this
http://www.walnuts.org/walnut-industry/announcements/industry-newsletter-february-2014/
The final crop number for 2013/14 was
490,554, just short of the California
Agricultural Statistic Service (CASS)
estimate of 495,000 short tons. It is the
third largest crop in history. Although
we will not have a field price until CASS
releases that number in the spring all
indications are that the record 2012/13
field price of $1.52 per pound in-shell
will no longer be the record.

So I get 823 per dollar for walnuts and 762 for almonds. So assuming that the other expanses are the same P_A is correct that walnuts are worse than almonds. I wonder if he knew that.

25 Bill March 26, 2015 at 7:53 am

Totally agree. You might also add that when you allocate “water rights” to farmers, they have no incentive to conserve; in fact they have a perverse incentive to use water, so that you will pay them later to sell their water rights. It’s not just about the pricing of the marginal water, its also about initial “rights” allocations.

A windfall, or a waterfall, depending on how you look at it.

26 Slocum March 26, 2015 at 8:09 am

That’s true only if the farmer is not permitted to sell his water rights. If he can sell, it makes sense to conserve and sell the valuable extra water he no longer needs. It’s the same principle as all tradeable permits (for pollution, carbon emissions, whatever).

27 Bill March 26, 2015 at 9:20 am

Sorry, that’s not true, and not what the farmers do. In fact, they fear that there water will be taken away from them, so they adopt a use it or lose it attitude, so that if there were ever a sale, they would have priority because of their greater usage.. It would be better to price the water to them, rather than allocate a right to them. If you price the water to them at a market rate, all of the perverse incentives disappear, and they are persuaded by the market to conserve by doing such things as drip irrigation.

There is another problem, by the way, that isn’t discussed here, and that is underground water usage….farmers building wells and draining the aquifer before another farmer gets the water. But, that would involve discussion of agreements on the use of the “commons” which you are unlikely to see on a libertarian website.

28 JWatts March 26, 2015 at 12:41 pm

“It would be better to price the water to them, rather than allocate a right to them.”

No, it clearly wouldn’t. In almost every likely scenario the pricing would become a political issue and wouldn’t reflect the actual market rate. Just give the farmers (or land owners) a transferable, assignable allocation (on a percentage basis, not absolute value) to their historical riparian water amounts. Then the farmers will decide to keep using the water for farming or to sell it to somebody else. A market price will quickly be established and the water allocation issue will quickly sort it’s way out.

29 collateral March 26, 2015 at 1:35 pm

And they’ll collect rent forever, to no benefit to anyone but themselves. Better off just auctioning off permits.

30 JWatts March 26, 2015 at 2:04 pm

“And they’ll collect rent forever, to no benefit to anyone but themselves.”

They already receive the benefit of the water and have historically. So my position maintains the status quo in regards to the value off assets, but leads to a more efficient future allocation of a natural resource.

Your approach is to change the current status quo, to favor one group at the expense of another. Certainly the farmers probably have a benefit due to facts of history stretching backward for centuries, but nobody’s going to unwind that situation in a fashion amiable to all of the stake holders.

31 collateral March 26, 2015 at 4:54 pm

To favor the public at the expense of special interests …

32 Nyongesa March 26, 2015 at 11:35 pm

In support of JWatts argument, doesn’t property rights work the same. The original farmers (land holders) in the central valley or anywhere really, also staked out the land, under whatever rules of transfer was established at that time, and the farms (land holdings) have been exchanging hands for money ever since, based on optimal use. Some even to city dwellers. San Diego did not get to be the size it is now, without farmers having the right to sell land. Why cant they sell they just a simply sell them their rights to water too?.

33 David Zetland March 27, 2015 at 12:43 pm

You can’t price water when it’s self supply (irrigation district) or groundwater (pump costs), but you’re totally right about the g/w commons issue in CA.

34 Bill March 26, 2015 at 9:28 am

By the way, Slocum, water rights law is quite complicated, and the allocation and priority of rights is the primary issue, along with the absence of pricing signals. Here is a short summary: http://en.wikipedia.org/wiki/Water_right

When you create a right based on usage and historical priority, and do not price water at market prices, you get these problems. What gets me mad is that this is water whose flow, timing, etc. is created by government dams and managed by the federal government, but because of constituency pressure, farmers historically have taken at the expense of urban dwellers.

35 jtf March 26, 2015 at 11:24 am

This is really informative, thanks. I had some idea of how screwy things were, but didn’t realize that there were outright Coaseian-bribe seeking and perennial hysteresis effects in play as well.

36 collateral March 26, 2015 at 11:50 am

You should note that it is “water rights law” per se that is so pernicious and dumb. Just western water rights law — with California and Colorado having the most pathological forms.

37 Nyongesa March 26, 2015 at 11:38 pm

Quite an interesting link Bill.

38 David Zetland March 27, 2015 at 12:42 pm

You’re right, which is why Australia’s farmers LOVE water markets…

39 Aiyuna April 12, 2015 at 11:01 pm

Believe me, NO ONE that farms wastes any water if they can help it! You might just go out to one of the farms and see how they irrigate and how much they “waste.” It’s a valuable resource and it’s used as conservatively as possible. It’s the life blood. I’ve “been there, done that.”

40 rayward March 26, 2015 at 8:06 am

Of course, even suggesting that farmers pay a market price for water will bring howls of protest from defenders of the family farm – even though the family farm is more myth than reality. Florida also suffers from a shortage of water, and, like California, most of the water actually comes from someplace else (via the aquifer in the case of Florida). As I’ve commented before, the law governing water is in many ways counter-intuitive, protecting the rights of downstream users to the disadvantage of the source of the water. This is fertile ground for lawsuits, in the Southeast lawsuits between Florida and Georgia. The decrease in the flow of water in the aquifer has its most apparent effect on Florida’s streams and waters, which at one time were crystal clear but are now opaque due to algae bloom resulting from a combination of decreased water flow in the aquifer and runoff, including runoff from farms filled with insecticides and fertilizers (including the natural kind). Readers my age will remember Silver Springs, Florida’s most popular attraction before Disney World. It’s no more, as the quality of the water is so diminished that the once-famous glass bottomed boats no longer can offer the experience of seeing Florida’s natural environment up close (even the fish have gone elsewhere). The two most protected interests in Florida are farmers and developers, the latter, like farmers, not paying anything near their costs (for roads, utilities (including water), schools, law enforcement, etc.). Voters are outraged that government provides public benefits to the poor, but their outrage is misplaced: it’s the farmers and developers who cost far more than the public benefits for the poor. Politicians promote cuts in public benefits for the poor as a lesson in free enterprise and markets, but those same politicians defend the far larger public benefits conferred on farmers and developers with the same zeal as they promote cuts in public benefits for the poor. I favor the market approach to “free” enterprise. Do you?

41 Agra Brum March 26, 2015 at 5:20 pm

Sure, but you give food stamps to some poor people and that just marginally benefits some stores and food suppliers.
You approve a bunch of big developments, you have a lot of buddies making a lot of money building, selling, and flipping things. And the environmental consequences are someone else’s problem down the line.

42 Sigivald March 26, 2015 at 7:05 pm

As I’ve commented before, the law governing water is in many ways counter-intuitive, protecting the rights of downstream users to the disadvantage of the source of the water

Isn’t Florida riparian law, not prior allocation like California?

There is no “the law governing water” in the US – there are two competing systems; riparian in the east, and prior allocation in the west. (Roughly, and roughly “not desert” and “desert”, respectively.)

43 The Other Jim March 26, 2015 at 8:13 am

This makes me uncomfortable, because we’re it sounds like we’re straying into that zone where we actually hold government accountable for the things that it does.

Could you please rephrase your argument so that you cast all the blame on the corporations who “control” the government? Big Almond, and so forth? It would make a lot of people here feel better, and it triples your odds of getting this published in the New York Times. And I’m sure it’s what you meant to do anyway. Just an oversight on your part, no doubt.

44 cheesetrader March 26, 2015 at 8:51 am

This is me giving a thumbs up to this comment

45 David Zetland March 27, 2015 at 12:44 pm

Well, it’s pretty well known that aggies DO drive water policy in California, but you’re right… gov’t has the monopoly power, so there’s a willing seller there…

46 charlie March 26, 2015 at 8:44 am

I’m fairly certain that close to 100% of water used on earth is recycled.

47 Pshrnk March 26, 2015 at 9:29 am

+1

48 Dude March 26, 2015 at 10:15 am

You’re challenging p_a for dumbest comment of the thread.

Location of the water does actually matter.

49 Cooper March 26, 2015 at 1:31 pm

Not to mention its salinity. If you dump fresh water into the ocean, it ceases to be drinkable.

50 cheesetrader March 26, 2015 at 2:00 pm

fish might disagree

51 Nyongesa March 26, 2015 at 11:44 pm

I’ve met many fish in my time Cheesetrader, and i’ve yet to meet one who could disagree, even to such objectionable exaltations to “get in my belly”. Although I did meet a barracuda once that signaled, via biting, me that it wasn’t sharing my outlook for its future. Well, that’s what I think it was signaling.

52 David Zetland March 27, 2015 at 12:44 pm

Yes, but not fast enough or in the right places. Hence California’s problems (besides the BIGGER problem of mismanagement)

53 SolutionBringer March 26, 2015 at 8:51 am

Problem not! You can just buy almond milk and filter it though osmosis, to get drinking water!

54 triclops March 26, 2015 at 10:52 am

Think of the jobs created or saved by such a plan!

55 louis March 26, 2015 at 11:26 am

There is no great stagnation.

56 sam March 26, 2015 at 8:54 am

This seems more like a failure of economics as an explanatory paradigm than a “misallocation.” I don’t see how it is “nuts” that human beings, who are biological creatures with certain innate taste preferences (or socialized taste preferences—either way these preferences follow rules separate from the laws of economics) might prefer to eat costly almonds instead of whatever else they could be doing more “efficiently” with “properly allocated” water usage.

57 dan1111 March 26, 2015 at 9:09 am

The allocation of water rights in California has nothing to do with people’s preference to eat almonds. It’s not as if “we want to eat almonds” was the driving force behind the water policy.

Also, you are misunderstanding efficiency: this is about producing the goods that the market demands for the minimum expense/effort. Even goods that are completely unnecessary luxuries can be produced efficiently in this sense. The problem with misallocation of water is that it is making the production of many goods less efficient than they otherwise would be. Drinking water is produced by an expensive desalinisation plant, while crops that require a lot of water are produced in a dry climate with wasteful irrigation, instead of in climates more naturally suitable to the crop.

58 sam March 26, 2015 at 10:35 am

“The allocation of water rights in California has nothing to do with people’s preference to eat almonds. ”

This is patently false, or else you are assuming that the market for water usage in CA (most of which is used in agriculture, a significant proportion of which is used in almond agriculture) and people’s preferences for which foods to eat are completely independent. I don’t know the whole backstory, but I’m sure the driving force behind CA’s water policy was some combination of the usual suspects: market forces, politics, lobbying from Big Ag, historical contingencies, etc. I do know that California already has an excellent climate for agriculture, and I suspect the reason for the expensive desalination plant in San Diego has to do with geographical proximity. (Water may be cheaper in, say, Minnesota, but that doesn’t help California’s farmers, and you can’t grow almonds in Minnesota.)

And I would contend it is you (and the author) who are misunderstanding, or else misconstruing, efficiency. “The market” doesn’t “demand” anything; people demand things, and we call the mathematical models we use to predict those demands by the shorthand term “the market.” So in order for water to truly be misallocated in this example, there would have to be some other more preferable usage for it that people are demanding (via their checkbooks). And what would that be? Which other goods are being inefficiently produced as a result of the alleged misallocation of water? Agricultural usage of water (almond production, in this example) and, for instance, residential usage are not exactly interchangeable. One of the first things you learn in Econ 101 is that water is relatively inelastic: people aren’t going to change their water habits all that much just because almond producers use more or less of it, even though this may affect how much water utilities charge.

So, as I proposed before, water usage in CA may be “inefficient” in some bizarrely technical (and unhelpful) economic sense. But economics is not a holistic way to explain why we use water the way we do in California. Nor is economic efficiency the best way to judge how we ought to be using water in CA.

59 triclops March 26, 2015 at 10:57 am

Your argument would only make sense if farmers purchased water the same way other users did, and paid the same price.
It isn’t some bizarre technical sense of inefficiency.

60 Das March 26, 2015 at 11:05 am

People demand almonds BUT NOT almonds-from-california. The reason there are so many californian almonds is not due to people’s demand for almonds but due to a market skewed towards almond production in california as opposed to anywhere else in the world.

if water was allocated efficiently, more money would be saved on subsidies than lost by almond buyers. just like any other subsidy. It’s weird seeing that one doubted in a comment referring to Econ 101.

61 sam March 26, 2015 at 1:04 pm

It’s true that almonds are a commodity and most people don’t care where they come from. But just because almonds don’t have to be grown in California doesn’t mean that isn’t still the best place to grow them.

Now, the scale on which they are currently grown may result in a less-than-optimally efficient use of the inputs/outputs relavant to almond production—but my point was that the desire for almonds is a biological/socialized one, which may necessitate a somewhat inefficient production process. (We may wish to produce fuel for our vehicles in the most economically efficient way possible, but if the upshot is leaded gasoline, we may opt for a more economically inefficient process due to our biological/socialized concern for human health. This might be inefficient from a cost perspective, but you would be hard-pressed to call it a misallocation of resoueces.)

Moreover, all those almonds must be going somewhere, else either the almond producers would produce fewer of them or the government would see no reason to keep subsidizing them. Unless you assume the government is in bed with Big Almond Ag—which is possible, but still: the almonds are getting eaten, aren’t they? People don’t seem to mind having to pay extra for them; perhaps the market inefficiencies are just a sunk cost of a democratic political system and industrial agricultural production. But I see no mandate from this that we ought to reallocate water distribution—only the possibility that the process by which we produce almonds at scale is, perhaps irremediably, somewhat inefficient.

And it’s not clear to me that we could correct this (while maintaining the same scale of almond production) by producing almonds somewhere else in the world. If you have evidence to the contrary, feel free to offer it, but I would bet that the reason we grow almonds in California is because that’s the best place to grow them—even if the result is that we grow more than local water economics would suggest is optimal and therefore have to subsidize the industry. (This reasoning doesn’t apply to all industries, of course, but agriculture can be a special case.) Of course, it’s unfortunate for California taxpayers if they have to subsidize the local almond indsutry to satisfy burgeoning Asian (and not Californian) demand. But in a global economy, Asian money is as good as Californian money, and I don’t see a clear indication that Californians should reallocate their water just because the current allocation isn’t to their maximal benefit. As long as they keep voting their subsidy-friendly government into office and the almonds keep selling, who’s to say there’s a problem with the current water allotment?

62 asdfG March 26, 2015 at 5:57 pm

>> As long as they keep voting their subsidy-friendly government into office and the almonds keep selling, who’s to say there’s a problem with the current water allotment?

You know what might help change the status quo, and mobilize diffuse interests getting screwed by concentrated ones? Blog posts on popular blogs, magazine articles in popular magazines. And so forth. Did you really need 1000 word essay for the tautology that the status quo is the status quo?

63 dan1111 March 26, 2015 at 11:08 am

So by your own admission, “politics, lobbying from Big Ag, historical contingencies” may be some of the influences on California water policy. Is it not possible for these influences to introduce inefficient allocation?

64 collateral March 26, 2015 at 11:51 am

There’s not much of a water market in California. It’s almost all historical contingency.

65 Hazel Meade March 26, 2015 at 9:37 am

Problem is that the cost of the water is not being priced into the cost of the almonds.

We just don’t know unless it is possible for city consumers to freely purchase water from the farmers at a market price.
The situation right now is the farmers get the water first for free, use as much as they can, and then the city utilities get whatever is left over, and sell it at distribution costs.

66 Sigivald March 26, 2015 at 7:20 pm

What is the cost of the water?

I mean, last I checked, most of that SWP [California State Water Project] water came from rain, collected in reservoirs.

The operating cost of the SWP must make for a pretty low cost per acre-foot (and 70% of it goes to urban users, too, they claim).

(Now, the price of that water, if the market was allowed to set it, might be another matter. But prices and costs aren’t the same thing.

Per their numbers, it cost $600M/yr in 1996, of which about 1/3 was bond service.

For long-run operating, we can ignore the bond service – it will be paid off – and guess at a doubling of costs over 20 years, for a guess of $800M/yr in operating costs today.

This suggests they use about 420M acre-feet of water between cities and agricultural uses.

That gives us just under $.50 per acre foot as a ballpark “cost of water” via the SWP.

Using numbers above at 2000 gal/pound of almonds, we get, from the 325,853 gallons in an acre foot, 162 pounds of almonds from that $.50 in water. At $2.58/lb that’s $417. Even if the “cost” of water if four times my guess, it’s rounding error in that price.

I don’t think the problem is not pricing in the cost of water; it is, if anything, that the allocation and pricing of water has little to do with markets.)

67 Aiyuna April 12, 2015 at 11:17 pm

What do you mean, “the cost of the water is not being priced into the cost of the almonds?” Of course it is. Otherwise the producers could not produce them in the first place. Isn’t the cost always part of the cost of producing something? And farmers (with almond orchards in this case) do NOT get free water, no matter where it comes from. They either buy surface water (at $1500 minimum, here in the Sacramento valley, per acre foot) or pay to pump the water from deep wells. I don’t know where some of you people get your information, but it doesn’t sound like many of you are even the slightest bit familiar with how a farming operation actually works.

68 Ted Craig March 26, 2015 at 9:02 am

That 2 percent figure is misleading. About a third of California’s economy is government, healthcare and education. Another 17 percent comes from real estate. Something has to pay the bills for that. California’s agriculture industry is twice the size of any other state’s. Any industry that produces stuff needs water, whether it’s manufacturing or farming. Almond prices, by the way, have doubled in the past few years due to increased information about their health benefits. Almonds are the fifth largest export from the state.

So tell me, where would the water be better allocated and what is your justification?

69 Ted Craig March 26, 2015 at 9:07 am
70 dan1111 March 26, 2015 at 9:26 am

What is your justification for not market pricing water? You haven’t really responded to the post.

71 Ted Craig March 26, 2015 at 9:52 am

The justification is the same for any other government support of business. Some of that is misallocation, but some of it is governments looking at the revenues they need and taking steps to achieve it.

72 dan1111 March 26, 2015 at 9:58 am

Why does government do a better job of allocating resources to businesses than the market?

73 Alain March 26, 2015 at 10:52 am

Wait, wait, I know the answer to this one!

It doesn’t. Full stop.

74 Dan Weber March 26, 2015 at 2:07 pm

They lose money on every gallon but make for it with volume.

75 Bernard Yomtov March 26, 2015 at 3:37 pm

Who is the supplier?

Isn’t that a big problem with water markets? We are not talking about something that can be grown, mined, or manufactured with the use of labor and capital.

There are rivers, aquifers, rain, whatever. What we think of as normal market mechanisms don’t work so wonderfully.

76 asdfG March 26, 2015 at 6:03 pm

There’s no reason markets can’t work. You have a limited supply of water in the state of California. Simply do a dutch auction every year for the right to withdraw water. Put the proceeds in the state treasury. Low value uses of water will be priced out. Voilà.

77 David Zetland March 27, 2015 at 12:45 pm

+1 Dan

78 collateral March 26, 2015 at 11:54 am

Facebook needs hardly any water and has far larger exports than the almond industry.

79 Ted Craig March 26, 2015 at 11:59 am
80 collateral March 26, 2015 at 12:01 pm

Because farmers are big net taxpayers.

81 cheesetrader March 26, 2015 at 9:16 am

Nut joke as told to me by an almond grower

The trees are called almond trees, but the nuts are pronounced “amonds” – because to harvest the nuts, they have to shake the ‘ell out of the trees

82 MLD March 26, 2015 at 9:39 am

An unsaid problem here is that the water rights were established in the 1920’s. We have now figured out that the years the water rights were based on were probably some of the wettest of the past THOUSAND years. So not only do farmers have cheap access to water, they are guaranteed access to way more water than the sources will normally produce.

The rights need to be renegotiated to actual sustainable water use levels, at a price where farmers will be encouraged to use less wasteful forms of irrigation, like drip irrigation.

83 dan1111 March 26, 2015 at 9:59 am

Of course, if water were market priced, as proposed by Alex, then there would be no need to re-adjust policies if the amount of available water changes. This would simply get priced into the market.

84 JWatts March 26, 2015 at 10:07 am

“The rights need to be renegotiated to actual sustainable water use levels, at a price where farmers will be encouraged to use less wasteful forms of irrigation, like drip irrigation.”

Just transferring the property rights from the Water district to the actual farmers and making them salable would pretty much handle the issue.

85 Hazel Meade March 26, 2015 at 10:30 am

Just transferring the property rights from the Water district to the actual farmers and making them salable would pretty much handle the issue.

Thanks, that was a missing piece of the puzzle for me.
I wasn’t entirely clear on why farmers couldn’t just sell the water now and make more money that way than growing almonds.
this now makes it make sense.

86 Randall Parker March 26, 2015 at 11:34 pm

Some California farmers have the right to sell water and do so. I’ve come across articles where farmers are quoted saying they are doing this. I’ve not come across a clear picture of what percentage of the water can be resold to cities.

87 Bill March 26, 2015 at 10:47 am

Yeah, the rentier class of farmers exploiting a grant they shouldn’t have received. An allocation by the government shouldn’t be treated as a permanent property right. I wouldn’t pay them a penny because they have no rights other than those granted by the water authority.

And, let the pay for it….unless they want to pay for the dams and the reservoir system.

88 JWatts March 26, 2015 at 12:48 pm

“Yeah, the rentier class of farmers exploiting a grant they shouldn’t have received. ”

Well Bill, when you are Emperor you can just ignore all the messy aspects of this pesky Republic, but in the meantime we’ll just have to suffer through the democratic mechanisms and sorting out these historically ill defined properties rights.

89 collateral March 26, 2015 at 1:16 pm

It’s not property to begin with. Speaking of democracy, someone should put together an initiative to abolish prior appropriation.

90 JWatts March 26, 2015 at 3:25 pm

Maybe Bill and you can be co-Emperors and on your day as the “One who Rules Us all”, you can abolish Farmer property rights including the right to use water from their very own wells.

91 collateral March 26, 2015 at 11:56 am

They should abolish the system of prior appropriation and move to an annual permit auction system (including groundwater).

92 David Zetland March 27, 2015 at 12:46 pm
93 Jose March 26, 2015 at 9:41 am

Is everyone just going nuts ?!

94 Travis March 26, 2015 at 10:14 am

Just thought I would throw in a quick note here. It seems to me, if you are going to discuss allocation/pricing of a resource, then you need to include all of the users. And one of the major users seems to have been left off of the Mother Jones chart.

“Water is still flowing to meet the projected needs of the Delta Smelt. All wildlife refuges in California are still receiving their full allotment of 400,000 acres feet of water. Meanwhile, many farms aren’t getting a drop while urban users are facing severe cutbacks.”… http://www.mantecabulletin.com/archives/96764/

So about 493 million cubic meters of water is being used in an attempt to preserve the habitat of an endangered fish, and in past years it has been more than twice that.

95 RoyL March 26, 2015 at 10:42 am

It doesn’t fit the narrative of the coming war against the almond growers, sadly I am not being ironic. They are an easy target considering the median farm size of less than 35 acres.

Kulaks…

96 Ryan R March 26, 2015 at 11:18 am

Suggesting all of that water is just for the Delta smelt is a misrepresentation by the article at that link. All of CA’s wildlife refuges do not sit within the Sac-San Joaquin drainages.

And for those refuges that do fall within the drainage, a great deal of the allocation ends up maintaining wetlands for waterfowl in the following winter and maintaining stream flow for anadromous fish – both of which are relevant to the state’s economy as natural resources. I’m not sure how much of that is a product of the ESA and how much is pre-existing water agreements, but they are more often then not affected by the heavy engineering of the Central Valley.

It is a significant amount of water, but the region has great importance to migratory fish and waterfowl for all of western North America that would be tremendously difficult to replace. Is the application of the precautionary principle a huge offense by the government here?

97 Travis March 26, 2015 at 1:28 pm

I am pretty sure that the quote I provided said that number was for all refuges, but if you read the article you also saw “Just a few years ago, the state was annually diverting a million acre feet of water specifically for the Delta Smelt.” And if you look at the Q&A sheet for the California Natural Resources Agency (http://resources.ca.gov/docs/Smelt_QandA.pdf), they talk about reducing pumping out of the delta by 700,000 acre feet over 3 months… so 2,800,000 acre feet (3.45 billion cubic meters) annually, specifically to protect the delta smelt (they were being sucked up into the pumps and being killed if I understand correctly) … of course that reduction was back in 2013. I can only spend so much time trying to tease more recent numbers out of Google.

It seems clear to me that the Delta Smelt is a major component but go ahead and throw it all under the category of Environmental Uses if you want, the point stands. It is a significant use of the available water and should be included in any discussion of allocation and pricing. In short, treated like one of the ‘firms’ that needs to face the same input and output prices.

Of course, this is about the surface water, the pumping out of the aquifer strikes me as a fairly standard Tragedy of the Commons, possibly triggered/made worse by the misallocation of surface water combined with the high price of almonds.

98 Ryan R March 26, 2015 at 4:05 pm

Your first comment lumps all of the diversions for wildlife refuges in CA under the Delta smelt program. My intent was to clarify that the uses for that allocation are more diverse and directly related to human consumption than just the smelt program.

Not saying your point about clarifying rights doesn’t stand. I also think conservation groups are growing tired of this uncertainty. The Nature Conservancy’s land purchases and agreements in the Cosumnes and Shasta River watersheds are probably good examples of a shift in strategy here.

99 Ryan R March 26, 2015 at 4:32 pm

Actually, re-reading my first post, I guess I was questioning the incorporation of refuges into water markets, but got sidetracked thinking about news I’d heard on finding resolution on water rights. Who would represent these water uses to procure allocation? Agencies? And how do you accommodate budgetary restrictions that might change year to year if that’s the case? Otherwise, what do you do about a coordination problem that might veil the actual value of these ecosystems regionally?

100 luther blissett March 31, 2015 at 12:06 pm

“It seems clear to me that the Delta Smelt is a major component”

It seems clear to me that the Delta Smelt is mainly a totemic object of hatred for Central Valley farmers who believe that if that water is diverted and the smelt abandoned to extinction (with compounding effects on the rest of the delta ecosystem) then somehow Everything Will Be Okay. When that proves not to be the case, and smallholders find that they’re outcompeted for water rights by massive agricultural interests such as Paramount Farms — run by the same people who draw Fiji Water from an unsustainable aquifer — then they’ll move on to the next totem.

Perhaps sacrificing virgins will work.

101 JWatts March 26, 2015 at 2:10 pm

“application of the precautionary principle a huge offense by the government here?”

I would certainly assume that the government is not justifying it’s actions off of the precautionary principle. The precautionary principle is just another aspect of Ludditism.

102 collateral March 26, 2015 at 11:57 am

What are the people of California thinking?!? Rivers that actually contain water, that’s crazy talk. Water is for growing alfalfa to send to China.

103 fwiw March 26, 2015 at 9:28 pm

+1. Until fish get money, the market will not be a proper allocator of resources.

104 Go Kings, Go! March 26, 2015 at 10:28 am

There is vast difference between the water used by San Diego and by Almond growers. Both in quality and point of delivery. The comparison seems ludicrous.

105 JLK March 26, 2015 at 10:48 am

@Travis I don’t believe they have tried allocating a salable water use permit to the smelt. But there is a legitimate human need for the smelt to signal their marginal benefit of water use at the bargaining table. More generally, this thread uses the term “market rate” as though there isn’t a market for water. There is! It’s just not a competitive one. And there are reasons (many indicated above, many not) why this is so. Don’t get me wrong : I think the post does a valuable service at pointing out bad economics in action, and a clear case for reform. But monitoring and enforcement of the regulations necessary to create a more competitive market for water would impose their own costs.

106 John Mansfield March 26, 2015 at 10:53 am

Is misallocation what to call it when the owners of a property, perhaps the heirs of those who created it, don’t want to sell it?

107 collateral March 26, 2015 at 12:00 pm

They can’t sell it. Or at least it is very difficult to do so, due to rules like no-harm-to-juniors, anti-speculation, beneficial use, appurtancy, and so on. That doesn’t even get into the water district system that makes it even more difficult.

Also, no one created any of this “property”. The “property” sprung it to existence by the operation of law, with no payment required.

108 Bernard Yomtov March 26, 2015 at 6:01 pm

The owners’ ancestors created water?

109 fwiw March 26, 2015 at 9:29 pm

and the property?

110 fwiw March 26, 2015 at 9:30 pm

oops read too fast. But yeah. what BY said.

111 John Mansfield March 26, 2015 at 10:54 pm

No one creates water, but people do create dams, reservoirs, and aqueducts that make water useable. They also create systems of law to manage competing claims to use it.

112 Axa March 26, 2015 at 10:55 am

I love to eat cheap and delicious California pistachios, this graph endanger a simple and earthly pleasure :/

113 Steve Sailer March 26, 2015 at 11:05 am

More immigration of uneducated farm workers will no doubt solve these problems.

114 collateral March 26, 2015 at 12:00 pm

The record seems to be stuck. Might want to change the needle.

115 Lime Coke March 26, 2015 at 12:05 pm

By making agriculture less expensive in a wetter part of the US, allowing them to take over California’s nut industry? Quite possibly, actually…

116 Ted Craig March 26, 2015 at 12:14 pm

Wetter with the same weather?

117 Richard A. March 26, 2015 at 12:25 pm

The nod and wink our leaders give to agribusiness to hire illegal aliens and the right given to this industry to legally import indentured labor as guest workers is just another way we subsidize agribusiness.

118 Michael Tinkler March 26, 2015 at 12:07 pm

Back in the first decade of the 21st Century, New York City spent a lot of money paying for water treatment facilities in small towns in the Catskills so they could continue to use unfiltered aqueduct water – they found it more cost effective. What about the City of Los Angeles paying farmers to adopt something more sensible than inundation irrigation?

119 prior_approval March 26, 2015 at 1:21 pm

They already have.

As noted here ‘Many fields will stay dry because farmers will be doing what was once considered unthinkable: selling their water to Southern California.

“In the long term, if we don’t make it available we’re afraid they’ll just take it,” said Charlie Mathews, a fourth generation rice farmer with senior rights to Yuba River water.

He and his fellow growers have agreed to sell 20 percent of their allotment to Los Angeles’s Metropolitan Water District as it desperately searches to add to its dwindling supply.

It’s not really surprising that Southern California is looking for a place to buy water. But what is making news is how much they’ve agreed to pay for it: $700 per acre foot of water.

Just last year, rice farmers were amazed when they were offered $500 per acre foot. This new price means growers will earn a lot more money on the fields they don’t plant, making water itself the real cash crop in California.

“It’s much more than we ever expected to get. But at the same time, that just shows the desperation of the people that need it,” Mathews said.’ http://sanfrancisco.cbslocal.com/2015/03/17/drought-some-northern-california-farmers-not-planting-sell-water-rights-los-angeles/

However, the key word is ‘desperation’ – the market does not create precipitation, and the supplies continue to dwindle, regardless of where the water ends up.

120 Thomas March 26, 2015 at 9:34 pm

“This new price means growers will earn a lot more money on the fields they don’t plant, making water itself the real cash crop in California.”

Microeconomics 101 was correct all along.

121 alkali March 26, 2015 at 12:41 pm

When you have Marginal Revolution and Mother Jones in agreement … well, I’m not really sure what happens. The manual doesn’t cover it.

122 JWatts March 26, 2015 at 2:13 pm

I think they are both agreeing on the fact that there is a problem. I’m not sure their favored solutions would line up.

123 Bob from Ohio March 26, 2015 at 12:44 pm

A new efficient water desalinization plant in Israel for 127 million cubic meters cost $425 million in 2010. If I am reading the graph correctly, that is roughly what SanFran uses for residential purposes.

“Shmulik Shai, CEO of H2ID, said the plant will supply water at the cost of $0.57 per cubic meter and will demand 450 gigawatts of electricity each year.”

Perhaps California should attract H2ID to help it out?

124 JWatts March 26, 2015 at 2:17 pm

…” and will demand 450 gigawatts of electricity each year”

That’s a lot of power. I’m assuming that the writer actually meant it would demand 450 GW Hours per year. San Francisco’s retail rate is $222 per MWH. So, your talking about roughly $100 million per year just in electricity costs.

125 DBrower March 26, 2015 at 6:08 pm

http://www.eia.gov/electricity/monthly/epm_table_grapher.cfm?t=epmt_5_6_a says industrial electric rates in California are about $0.09 KWH, so I’m not sure where you get $222 per MWH.

Desalinization is a good candidate for PV, too.

In this discussion, I’m puzzled what a better “right” scheme is for water — prior allocation seems problematic, but it’s not clear what would be better.

Independent of many other things, while we might complain about “Southern Californians watering their lawns and washing their cars”, the real reason for their increased demand is population growth. It’s not obvious to me that the relatively stable population of the Central Valley should have more “rights” to water than anyone else, though it’s probably cheaper to transport. But transport isn’t a very large part of the cost equation when amortized.

An off the cuff estimation of a pre-market allocation might be

allocation_units =

((human population) * (human_location_cost) * (human_weighting) +
(land_area) * (land_location_cost) * (land_weighting) )

allocation_oer_unit = (available_water – environmental_maintenance) / allocation_units;

Then trade away. Each person gets their allocation, the owner of each acre gets an allocation, and everybody can trade. We can fiddle with weighting factors to achieve whatever balance we’d like.

I suspect the almond farmers would not do well, and production would migrate somewhere else to supply the demand.

allocation = available_water

126 David Zetland March 27, 2015 at 12:37 pm

Israel has a different regulatory regime and national security goals behind its desal.

127 Floccina March 26, 2015 at 12:53 pm
128 TrackVikings March 26, 2015 at 1:42 pm

The premise is of course sound, but no guarantee people do rational things with their property. Drive around West L.A. and see the number of undeveloped homes sitting on land that has appreciated millions of dollars since the home was built. These people could not afford to buy these homes now, but also don’t move with current prices!

Many rentals are seen as good investments when they’re “cash-flow positive” even though that’s a meaningless measurement of property ownership. Many of these people won’t raise rents even when property values increase and will resist rent cuts when property values decrease.

129 Doug March 26, 2015 at 2:25 pm

What is an undeveloped home?

130 John Mansfield March 26, 2015 at 10:48 pm

One that is worth more after it’s demolished than when it is still standing?

131 Glenn March 26, 2015 at 1:57 pm

It is unclear to me how one is to conclude – based on any of the information contained in this post – that water in California is misallocated

132 Boonton March 26, 2015 at 3:27 pm

What if the city just opted to buy some almond farms and use their water rights to divert the associated share of water back to the city?

133 DBrower March 26, 2015 at 6:09 pm

Owens Valley.

134 Boonton March 26, 2015 at 6:56 pm

So I’m not seeing the misallocation problem? Buy a fraction of the almond farms, their water allocation could easily supply the city for all its needs. No need for a desalination station.

135 kb March 27, 2015 at 9:38 am

+1
finally someone on this blog mentions the hippo in the room

136 Sebastian H March 27, 2015 at 12:05 pm

No. The whole problem is that the almond farm can’t sell the rights in most cases.

137 David Zetland March 27, 2015 at 12:36 pm

Often they can. Even if on the “wrong” canal system

138 meets March 26, 2015 at 7:44 pm

Let California continue to be a laboratory that shows the rest of the states what not to do.

139 Lee March 26, 2015 at 11:23 pm

isnt it just that almonds are being mis priced? Shouldn’t the almond price factor in some of the water cost by virtue of the state taxing the water usage?

140 David Zetland March 27, 2015 at 12:35 pm

The idea you’re talking about is “opportunity cost subsidies,” which are not cash subsidies but the lost surplus from political misdirection and/or failure to reallocate. I address them in my all-in-auction design for reallocating rights (http://www.aguanomics.com/2012/12/all-in-auctions-is-published.html). The loss is similar to what you see with US sugar quotas…

141 John Kehr March 28, 2015 at 6:33 am

Just because almond production and San Diego are in the same state, does not mean that water should be the same price in every place. It is dishonest to directly compare the price of water in San Diego to places hundreds of miles away that have different climates.

The Sierra mountains near the region of almond production can get nearly 50 inches of rainfall a year. That water can be dammed, stored and used as needed, while San Diego has no such option. This also explains is why there is almond production in the central regions, but not in San Diego.

Water may be misallocated in California, but that point has not yet been proven.

142 Toby Roessingh April 2, 2015 at 2:33 am

While I don’t disagree with the general ‘gross misallocation of resources’ conclusion, we still need to acknowledge that we are part of the problem and need to be part of the solution.

If you’re going to account for all the food we export as ‘water used by people who live somewhere else’, you need to account for all the food we import and grow for ourselves as ‘water used by people who live here’. The difference between the last two bars is ‘water used by people who live here’ for a single food. That makes our water consumption much greater. If the midwest is more efficient at raising cattle and California at growing nuts, then it is not clear we should stop trading! It’s not as though we can stop exporting but continue importing.

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