The southwestern US has plenty of water
Many people are under the impression that the southwestern US suffers from a severe shortage of water. In one sense that’s true. The market price of water is set far below equilibrium. And that sort of price control almost always tends to lead to shortages. If you set prices low enough, even Canada would have water shortages. (Iraq has fuel shortages.)
But the southwestern US has plenty of water, far more than needed to provide a comfortable lifestyle for its residents. Most people assume the region’s water problem is due to its climate and rapid population growth. This is false—there’s plenty of water.
This region is dominated by California, which has a population of nearly 40 million. It’s also one of American’s most urbanized states. And yet the vast majority of California’s water is consumed by farmers.
California’s cities and towns have reduced their water use by 30% in the past 15 years, according to research from the Pacific Institute. Farm use dropped 15 percent between 1980 and 2015, according to a report from the Public Policy Institute of California.
But agriculture still consumes about 80% of California’s water.
If you doubled the amount of water going to California’s cities, you would still leave farmers with 60% of the total supply. So why doesn’t this happen? It turns out that water is sold to farmers at much lower prices than to city dwellers. And even within the farm community, there are vast disparities, with Imperial Valley being a prime beneficiary:
Imperial’s water is also dirt cheap. Whereas farmers elsewhere in the state buy water for hundreds of dollars or more per acre-foot, the base rate for Imperial’s farmers is $20 per acre-foot. (An acre-foot is enough to support two to three California households for a year.)
Think about that final parenthetical sentence for a moment.
So why don’t farmers who benefit from cheap water sell it to the highest bidder? After all, subsidies don’t create shortages where resale is allowed. Unfortunately, there are legal barriers to reselling surplus water, which removes the incentive for farmers to use the water more efficiently.
Unfortunately, Western water laws can discourage conservation and limit the flexibility to move water to higher-valued uses. In many cases, legal rules can discourage or prevent water-right holders from leasing or selling their conserved water. To encourage greater adaptation, water policies should allow someone who needs water to pay another user to forgo water use or to invest in water conservation. But, in reality, a variety of procedural and regulatory requirements can thwart even the most sensible win–win water trades.
Part of the challenge is that, under the prior-appropriation doctrine, the status of conserved water is often unclear. “If a water user adopts more efficient practices that result in unused water, certain interpretations of the ‘beneficial-use’ requirement could cause that user to lose that portion of their water right,” Bryan Leonard, a natural-resource economist at Arizona State University, said in an interview. In some states, farmers who take steps to save water — perhaps by updating an irrigation system or lining leaky ditches — risk forfeiting the unused amount. “Use it or lose it” rules can also make it difficult to lease or acquire water for nonuse purposes, such as boosting in-stream flows for fish and wildlife habitat. . . .
Suppose the share of California’s water going to farmers fell from 80% to 60%. How would this affect agriculture? Some farmers insist that it would lead to land lying fallow, as the climate in places like the Imperial Valley is too dry to support farming without irrigation. In fact, things are much more complicated—not all crops are equally water intensive:
Farmer Kevin Herman grows figs and almonds in the San Joaquin Valley and until four years ago maintained a small planting of figs in the Imperial Valley. He questioned the wisdom of using so much of a dwindling river for desert agriculture.
“Those farmers down there are putting on 7 and 8 acre-feet of water per year for hay, and I just don’t know if that’s a sustainable model,” Herman said. “There are so many people now needing that water and I just don’t think it’s the highest and best use.”
Some experts say Imperial Valley growers should shift to less water-intensive crops. Alfalfa, its leading crop, is notorious for using lots of water, as much as 10 acre-feet per acre each year. Statewide, “large acreage coupled with a long growing season make alfalfa the largest agricultural user of water,” according to a University of California report.
These last two quotes are from a National Review article discussing the Biden administration’s attempt to wade into this thorny issue.
Each year I drive through the Imperial Valley and southern Arizona along I-8. I am continually surprised by the vast green fields I see out in the middle of the desert between Yuma and Tucson. This has become a campaign issue, albeit for the wrong reasons:
Since 2014, the Saudi company Fondomonte has been pumping unlimited amounts of groundwater in the desert west of Phoenix to harvest thousands of acres of alfalfa crops. The alfalfa is then shipped back to Saudi Arabia to feed their cattle.
But a recent investigation from Arizona Central has revealed that Fondomonte, a subsidiary of Riyadh-based Almarai, has the bargain of a lifetime: for only $25 per acre annually, it can pump as much water as it wants. Nearby farmers pay six times more than the Saudi company.
This modern day watergate has become a campaign issue ahead of the contentious midterms but candidates across the ballot appear to agree that this is bad. Democratic candidate Katie Hobbs tweeted that “Our water should be for Arizonans, not for sweetheart deals to foreign corporations to grow crops to then send back to their country.”
It is an outrage, but it is sad that the public doesn’t become upset unless the issue is framed in crude nationalistic terms. There is nothing wrong with using the Southwest’s water to grow alfalfa for Saudi cattle, if the water is priced correctly. The real problem is not that Arizona’s precious groundwater is being (implicitly) exported to Saudi Arabia in the form of alfalfa, it’s that our dysfunctional system of water prices causes a grotesque misallocation of resources.
I doubt that we’ll be able to get rid of all water subsidies—farmers have too much political clout. But at a minimum, we need to raise the opportunity cost of agricultural water use up to urban prices. That requires efficient markets where farmers can resell water no longer needed because of improved irrigation techniques, such as drip irrigation or shifting to less water intensive crops. If the price in resale markets is much higher than the subsidized price, then farmers will base decisions on water use on the alternative price for which they could sell the water to urban dwellers–its opportunity cost.
PS. This shows southeastern California and southwestern Arizona. The Imperial Valley is just north of Mexicali. There is also irrigated land around Yuma AZ, and points east (where the Saudi farms are.) In between is Mexican territory. The international boundary is visible from space (Mexico looks a bit less green than the Imperial Valley.)
Feb 27 2023 at 3:43am
The problem is not water subsidies but the baroque and completely unjustifiable system of senior and junior water rights that creates haves and have-nots among farmers. Unfortunately reforming water rights would be tied in litigation for decades and no California politician has been brave enough to attempt it.
Feb 27 2023 at 1:18pm
A water right is a property right, is it not? Shall we use eminent domain to pry water out of the hands of the folks with the senior water rights?
Feb 27 2023 at 1:50pm
Eminent Domain is not a tool to “pry” property rights out of the hands of owners, and especially not for reallocation of rights from haves to have nots. Eminent Domain is meant to be a tool to serve the public interest, not private interests.
Feb 27 2023 at 2:04pm
Jon, Public Choice theory certainly must extend to eminent domain policies, does it not? As Isadore Johnson just said in his Econlog post from 2 days ago, “Oftentimes those aiming to seize property, such as through eminent domain, tend to use it as a tool to extract rents from those weaker than themselves.”
Feb 27 2023 at 2:39pm
Yes. When eminent domain is abused, it creates all sorts of problems. What’s your point?
(Although there can be good that comes out of it. Since Kelo, many states passed legislation greatly restricting ED. I’m working on a paper with two of my colleagues exploring the effects of these legislative changes)
Feb 27 2023 at 4:23pm
My point is that regardless of whether eminent domain is “meant,” as you say, “to be a tool to serve the public interest” (whatever that means; cf. Pierre Lemieux’s numerous articles on that subject), it’s probably more likely to be a means of prying property rights out of the hands of have-nots and into the hands of the haves, and, therefore, probably should not be undertaken…
Feb 27 2023 at 4:52pm
I agree that eminent domain can be abused. All the more reason I object to your invocation of it.
Feb 27 2023 at 9:29pm
I said that eminent domain should NOT be invoked.
But fair enough: since we agree that eminent domain should not be invoked, then what reform to the “baroque” system should be invoked?
Feb 27 2023 at 10:06am
As explained in this piece by the late Del Gardner, the notion of subsidies captured by farmers using irrigation water from federal projects is more complicated than is often suggested:
Gardner, B. Delworth. “Some Implications of Federal Grazing, Timber, Irrigation, and Recreation Subsidies.” Choices, vol. 12, no. 3, 1997, pp. 9–14. JSTOR, http://www.jstor.org/stable/43625777.
Feb 27 2023 at 12:04pm
California is a beautiful place; with a lot of problems. Virtually all self inflicted.
Feb 27 2023 at 1:10pm
Could it be the case that farmers growing figs, almonds, and other high-value crops are making more money off that water than if the water were diverted for urban uses? An acre of almonds takes maybe 4 feet of water per crop. If you can make 3000 pounds of almonds per acre & sell them for $2.50/lb, that’s $7500 per acre gross revenue for the farmer. Total value-added, however, is probably going to run at least $6/lb. So $4500 GDP per acre-foot of water.
Residential water rates in L.A. are what, maybe a $1 per 10 cubic feet? There’s 43,560 cubic feet per acre-foot. Thus retail consumption rates would be $4356/acre-foot. About the same.
So who’s to say what is the highest and best use? The farmer quoted above kind of let the cat out of the bag when he said, “I just don’t think [irrigating crops is] the highest and best use.” In other words, he’s practicing effective altruism instead of hard-nosed capitalism. Is that the argument here? Altruism instead of economics?
Then there’s the issue of property rights. The oldest water rights were claimed by farmers back in the olden days and are attached to the family farm that has been passed down the generations. Let’s stipulate that more value-added/acre-foot could be had if the water were consumed by resident of Los Angeles. Question: So what? If the farmer doesn’t want to sell his water rights, does the government have the right to step in to force him or her to sell?
Feb 27 2023 at 1:52pm
It’s too bad there isn’t some vast empirical literature, perhaps maybe even a theory of how prices arise to facilitate the exchange of property rights, that could answer all your questions.
Feb 27 2023 at 2:35pm
Historically, property rights to water from federal projects have been attenuated through transfer restrictions. As such, the only way to acquire rights to use the water was through the purchase of the land to which the water was assigned. See the Gardner piece I referenced earlier.
Feb 27 2023 at 3:32pm
Note the arrangement in which low-fee water use is linked to ownership of designated agricultural lands fits nicely into Gordon Tullock’s “Transitional Gains” framework, summarized here in Bob Higgs’ tribute to Professor Tullock.
Feb 27 2023 at 3:57pm
Thanks for the reference. (Free link here.) As the article notes, having water rights increases the value of the land to which they are attached. Thus if the water rights are separated, the value of the land must decline. That constitutes a taking. Furthermore, as the article points out, most of the “subsidy” consists of the sunk costs of the infrastructure (canals and so forth) that deliver the water to the farms. Thus eliminating that subsidy won’t generate a dime for taxpayers.
But my larger point was that agricultural uses of water in California are, apparently, as economically efficient as urban water consumption at current price levels. Your article defines economic efficiency as the maximum output produced by the economy made possible by the resource. As I endeavored to show above, the value-added to water consumed by an almond grower is about the same as the value-added to water consumed by residential users in Los Angeles.
So a transfer of that water to residential use cannot (and is not) be justified on the basis of economic efficiency. Hence the resort to the language of “highest and best use.” At that point, we are no longer talking about a free market. Residential water rates in L.A., I presume, are set by a public utility. So if they really wanted more water, they could double the price charged to residential consumers. This would in turn allow the City to outbid agricultural users of water. But they don’t want to do that. They would rather use political clout to obtain water at a discount.
Richard W Fulmer
Feb 27 2023 at 4:19pm
Allowing farmers to resell their water, as the author recommends, would not be a taking. Instead, it would give farmers more freedom to use their property as they choose.
If resale is allowed and nothing changes, that would indicate that water is currently being optimally used as you suggest. If water use did change, however, that would indicate that current allocation is less than optimal. So, the worst-case scenario is that allowing resale changes nothing and hurts no one. The best-case scenario is that allowing resale makes both farmers and municipalities better off.
Feb 27 2023 at 9:22pm
I’m trying to say that the market, byzantine as it is, is working. There is a water market. You can get it if you are willing to pay for it. Even under the use-0r-lose it doctrine, there’s nothing stopping someone from paying the farmer to renounce her water rights. That water is then available to be allocated to the entity that wants that water. This might require a meeting with the local water board, but so what? (We looked into this once at my Dad’s ranch: we were thinking about renouncing some water rights out of one ditch in order to gain water rights to a pipeline that ran through the property. There was nothing legally stopping us.)
Thus, if urban municipalities think they need more water to support more people in the driest region of the country, they can simply charge residential consumers exorbitant prices. This will have the salutary effect of both encouraging conservation and encouraging emigration, and increasing the quantity of water supplied..
Feb 27 2023 at 4:54pm
As Richard rightfully notes, allowing people more freedom to alienate their property does not count as a taking. Nor does such wilful alienation constitute a reduction of value. Remember that trade is a positive sum, not negative sum, game.
Feb 27 2023 at 8:56pm
Warren, please clarify your hypothetical. You suggest a farm-gate price of almonds of $2.50 per pound. You then write that “value added” may be at least $6 per pound. What goes in to this calculation? Does this include all the transportation, processing, marketing, etc. costs to get the almonds to the consumer? And you associate all these steps to the water input? Is this a “water theory of value”?
Feb 28 2023 at 9:57am
Total value added is the retail price of almonds (that I got off amazon.com; $6/lb is conservative). So that would include everything that goes into getting those almonds into the bellies of consumers.
Meanwhile, delivering water to consumers in L.A. at the rate of 1.33¢ per gallon to be used for flushing toilets, watering lawns & filling swimming pools entails a huge amount of overhead.
Thus the question is whether there is a huge difference in economic efficiency in growing almonds versus growing humans, defined as in the Gardner paper that Bill linked to as maximum output (aka contribution to GDP).
Now, I could be making a fundamental mistake here — if so please point it out. However, it seems to me no water equates to no almonds. That’s just a law of biology. Without water, the land would be reduced to virtually useless desert. Thus, an acre-foot of water consumed in an almond grove allows the generation of a roughly $4500 contribution to GDP that otherwise would not have happened.
Alternatively, the water could be diverted for direct consumption by human residents of Los Angeles. They will pay about the same: roughly $4500 per acre-foot. That also would count as a contribution to the GDP. Right?
Yes of course there are all sorts of other inputs involved in the production of almonds: labor to harvest, fertilizer, trucks, food manufacturers. But there are also a lot of extraneous inputs that go into the network of pipes that deliver water to a house in East L.A.: labor to install the pipes, plumbers to fix leaks, quality control inspectors, office staff, sewars. So what’s the difference? It’s all economic activity that contributes to the GDP.
I guess we could get into multiplier effects. Probably half of all water consumers in southern California have a job. No water, no workers, no economic output from workers. As for almonds, what is their multiplier effect? I don’t know. They supposedly reduce cholesterol and hence human heart disease. How much is that worth?
Bottom line: it’s not clear to me that agricultural use of water in California is an economically inefficient use of water compared to direct human consumption.
Feb 28 2023 at 10:44am
Attributing the entire retail price of almonds to a single factor at the farm level – even an “essential” input – seems problematical to me. Might one just as reasonably attribute this retail value to, say, the farm-level labor involved in the almond enterprise?
Feb 28 2023 at 1:03pm
I see what you’re saying. The cost of the water used in almond production is a small fraction of the total value added when the final consumer buys a bag of roasted almonds, whereas when that city water flows past your water meter, you get the whole enchilada, as it were.
However, this is what the water expert Delwood Gardner wrote in that paper that Bill recommended:
Thus, the question, I guess, is: Which use generates the most GDP? If we go by total value added as paid for by the end consumer, it seems they are about the same. But if you add in multiplier effects, probably a vibrant city like Los Angeles that’s made possible by imported water generates a lot more GDP. So if the water supply could be doubled, the population could be doubled and thus the GDP could be doubled.
But if that’s the case, then what is the problem? If water is so much more valuable being consumed by urban consumers, then why don’t they simply outbid agricultural users? Subsidies cut both ways: if the price of almonds goes up, consumers pretty much just suck it up. But if the public utility raises the price of water, mayors, council members, governors might get voted out of office. Appointed officials might get fired. So that creates intense political pressure to keep the price of city water low — perhaps lower than the real market price.
Feb 28 2023 at 5:31pm
“So who’s to say what is the highest and best use?”
How about the free market? If the farmers have the best use for the water, why ban them from selling it?
Mar 1 2023 at 2:34pm
My point is that there IS a market for water rights, byzantine as it is. And the fact that agricultural water isn’t gushing toward municipalities says there’s currently more money in agriculture than in selling water for urban consumption. Say you have a line on free water for 4 acre-feet. Someone offers you $500 for each: $2000. Not bad right? Except when you consider you could transform that 4 acre-feet into a $7500 almond crop. Indeed, it’s potentially profitable to buy more water at $500 acre-foot in order to grow almonds.
Mar 1 2023 at 5:01pm
No, farmers are not free to sell the water to the highest bidder. If they were, there would be no water shortage.
Mar 3 2023 at 8:57am
Again, respectfully disagree. In the economic sense, a shortage happens when the quantity demanded is more than the quantity supplied. The evidence for when a shortage is happening are things like rationing and “progressive” cost schedules. Here is the tariff for the Rancho Tobanga sector of Malibu.
Mar 3 2023 at 9:08am
Ugh.. link here: 2022 LACWD Water Rates (lacounty.gov)
For a household that can manage to keep their water usage to around a half an acre-foot of water per year can expect a monthly water bill to be about $200 per month. That may seem like a lot, but that’s also about 1.33 cents per gallon: a nickel per toilet flush.
But my point is this: the people doing the rationing are the same people setting the retail water price: the public utility! If Malibu charged everyone the “excessive use rate” of $13 per hundred cubic feet (around 2 cents per gallon including the monthly service fee), I suspect the water shortage would go away in the sense that the quantity demanded would equal the quantity supplied and there would be no need for rationing or progressive price schedules.
Mar 3 2023 at 11:12am
While rationing is a clear sign of a shortage (Qd>Qs), I’m having difficulty with the idea that a graduated, progressive price schedule is necessarily evidence of shortage.
Thomas Lee Hutcheson
Feb 28 2023 at 7:30am
Just allow the water rights, screwy as is the initial allocation, to be bought and sold. This would also require pigou taxes for extraction of ground water from aquafers.
And of course both climate change and population growth affect the prices at which water rights would be transferred.
Allowing transactions in water rights would have huge income distribution consequences, but that’s what we have progressive income (ideally progressives _consumption_) taxes for.
Feb 28 2023 at 7:46am
Cheap water equates to high land prices. Therefore, the Saudi’s are not getting a free lunch; the price of the water is capitalized into the price of the land they bought ($18,000 per acre). Moreover, the Saudis are not pumping “unlimited” amounts of water. They would only pump enough to grow their crops.
And this quotation from Scott’s article is a gross exaggeration: the article it links to says that alfalfa production in California uses from 4 to 5.5 feet of water per acre! Alfalfa has the added benefit that it’s a legume and can extract nitrogen from the atmosphere, thus needing less fertilizer inputs while providing higher protein concentrations than grass forage.
Mar 1 2023 at 9:39am
Isn’t here is such misinformation about alfalfa? It can be grown without any supplemental irrigation at 10 or so annual inches of rain. Of course you can cut it year round in the south if you constantly irrigate, but it doesn’t require that as a plant. It has remarkable flexibility with respect to water use.
Mar 1 2023 at 2:38pm
If growing alfalfa using tonnes of water wasn’t profitable, the Saudi Arabians wouldn’t be here growing it and shipping it half-way around the world.
And don’t tell me it’s only profitable because they got a sweet deal on the water rights. The value of the water would have been capitalized into the price of the land they purchased.
Feb 28 2023 at 9:15am
Speaking as an American citizen who lives east of the 100th meridian you’ll have to pry that Imperial Valley lettuce from my cold, dead hands.
I’m curious at what point Netherlands-style indoor agriculture becomes cost effective in this country. And, if the NEOM projects are including that in their science fiction vision of Saudi Arabia.
Feb 28 2023 at 9:40am
It would be interesting and more representative to see the cost comparison for an acre of alfalfa using 5 acft vs a municipal water cost of $3 for ten cubic feet.
Water marketing is all well and good but there are public welfare statutes for water rights to keep all of it from becoming a fair market commodity, sold only to the highest bidder.
Finally how do we keep the market fair and balanced and Not a free for all market favoring the few who make the rules.
Feb 28 2023 at 5:36pm
Not a free for all market favoring the few who make the rules.”
The market is the alternative to the system “favoring the few who make the rules.”
Feb 28 2023 at 5:38pm
Many of you are missing the point. You don’t know the best allocation of water. The government doesn’t know. I don’t know.
Let the market allocate water.
Feb 28 2023 at 8:38pm
Scott, you may find Del Gardner’s paper, “Removing Impediments to Water Markets,” interesting.
Mar 3 2023 at 1:24pm
This is the right answer.
Why is it so hard to understand?
Feb 28 2023 at 8:36pm
The foundation of the problem is
a) Far too many people.
b) Industrial agriculture.
c) Very poor management of the water resource.
d) Inter-basin transfer of water.
e) Mining groundwater.
Mar 1 2023 at 5:03pm
No, there is plenty of water for California’s population. That is not the problem.
Mar 1 2023 at 9:35am
Removing water from naturally productive systems — rivers and estuaries especially, has been hidden as an externalized cost that will be the greatest subsidy of which future generations will absorb the adverse impacts.
The first order of business is to cancel that subsidy until these externalities are covered by the price.
Mar 1 2023 at 11:46am
I live in the Imperial Valley and I do agree that we should be growing winter vegetables for American northern cities and stop growing hay for export. However, if you’re talking about increasing the price of Colorado River water for farmers to what city residents pay, those cost will be passed on to consumers in higher food cost. So, triple the cost of agricultural water and be prepared to see the same increase in vegetables at the grocery store.
Mar 1 2023 at 5:05pm
Both farmers and city dwellers would benefit from higher water prices, even if food cost more. Let the market set prices—there is no free lunch from subsidies–just hidden efficiency costs.
Mar 3 2023 at 1:26pm
I dont think the consumer and farmer price would be EXACTLY the same, but the raw water price to the farmer and to the water utility should be the same.
I would assume residential water is more filtered and involves more infrastructure to deliver than the farm water, so I would expect the farm water to be cheaper.