Exporting Water In A Drought

The good news is that El Nino came back in 2016 bringing with it much needed rains and a snowpack that is already well above normal. California’s drought may not be gone—in fact it could go on for some time—but its effects are clearly reduced.

That doesn’t mean we should stop talking about water, however. There will be another drought in the state—possibly worse than the last one. Moreover, California has plenty of water to deal with these periodic dry spells. It only needs to appropriately manage its supplies to avoid both the billions of dollars in losses that stem from sharp reductions in urban consumption, and environmental damage.

California has always had erratic rain patterns and the state has wisely invested in an extensive infrastructure to store and transport water. But this wisdom is being squandered because of the incomprehensibly bizarre “use-it-or-lose-it” water rights system that rules the state. The system predates 1914, when a formal water permit system was established. It gives many farmers the right to divert a fixed amount of water for irrigation, but they lose those rights the next year if they use less than the maximum. As a result, those farmers, not knowing what their water needs might be in the future, never voluntarily cut back their water usage.

These outdated water rights have skewed incentives so badly, they actually encourage shockingly wasteful consumption by agricultural interests even in the midst of a record drought. Despite the surge of media stories about a “devastated” industry, agricultural has been enjoying record years for both production and revenues, indicating that the industry truly can prosper with far less water than it normally consumes. Even more problematic is the agricultural industry’s growing business of functionally exporting California’s scarce water to foreign buyers at rock-bottom prices as the rest of our economy and ecology grapples with tough cutbacks.

By now, the statistic that agriculture makes up 2% of the state’s economy but uses 80% of the consumed water supply is well known. The problem with this number is that agriculture doesn’t need to use 80% of the state’s water in order to prosper. If you didn’t hear the news, agriculture had a banner year in 2014—recording a record high $53.4 billion in revenues, up 5% from the previous year. This calls into question the decision by policymakers to place the majority of the reductions in supply on urban and environmental needs.

Even more recent data suggests 2015 will be similarly prosperous for the agriculture industry. Through the first three quarters of 2015, overall incomes for workers and proprietors in the industry averaged $32.2 billion, up 4% from the previous year—and this is despite the decline in agriculture prices last year (NOTE: The difference between the total revenue numbers and the income figures from the U.S. Bureau of Economic Analsyis are earnings from farms that are incorporated). According to the California EDD, farm employment in 2015 was 417,000, the highest number in 25 years. Exports of agriculture and agricultural products produced in the state hit $4 billion last year—another record.

Some want to credit the industry for managing well in a crisis situation. For example, some farmers have cut back on consumption through methods such as drip irrigation, which conserves water better than surface irrigation without meaningfully impacting production. However, most farmers have resorted to simply drilling deeper groundwater wells to make up for lost access to surface water.

In Beacon Economics view, the success of the industry suggests something completely different—it proves that agriculture doesn’t need the water it consumes on an average basis in order to truly thrive. It may well be easier and cheaper for farms to behave as if the supply of water is largely limitless, but it clearly isn’t necessary. This is important for the long run—by preventing unnecessary consumption in times of plenty the system leaves more water for recharging reservoirs and water tables, efforts that will help the state through the next inevitable drought.
Moreover, the figure that is perhaps the most shocking isn’t the size of the revenues being earned by the agriculture industry, but the source of them.

The largest crop in the state by acreage is alfalfa, also known as forage or hay. According to the 2014 data, there was 1.37 million acres of state land devoted to growing this plant, roughly 5% of the state’s total land acreage. Hay is a very water-intensive crop, needing 4.5 to 6 acre-feet of water per year to grow. This implies that over 7 million acre-feet of water were used to irrigate hay grown in the state in 2014.

In context: this one crop, all by itself, used almost as much water as all of California’s urban areas combined even as reservoirs were rapidly drying up.

Why is this a problem? First, hay isn’t a particularly valuable crop. Revenues per acre are less than 20% of what they are for grapes, nuts, or other such cash commodities. This low value implies that the profit per acre-foot of water consumed is shockingly small—just $41 per acre-foot (based on an average gross margin of 17%). The typical California family pays well over $900 per acre-foot for their water while San Diego is currently paying a private vendor $1,700 for each acre-foot of desalinated water.

The standard justification by the agriculture industry for this incredibly low-value use of large quantities of water is that it is necessary to support the far more valuable meat and dairy segments of the industry. This argument has no logical basis. The local meat and dairy industry could easily purchase feed from other parts of the nation where water is far more plentiful. The increase in cost from importing hay rather than growing it locally would assuredly be less than the billions of dollars in value that would be created by diverting this water to urban usage in the state.

But what makes this all the more troubling is that a large portion of California’s hay crop is not being used by the state’s dairy and cattle operations. It is being put on boats and shipped overseas for foreign consumption. The last four years have seen a record flow of hay, alfalfa, and other forage products grown in the state going to foreign buyers – an average of 2 million tons per year. This represents over one-fourth of the state’s annual harvest.

If calculated out in terms of water used, this means that the state’s agricultural sector exported roughly 2 million acre-feet in water in the form of low-value animal feed in the middle of one of the worst droughts in memory. This is enough water for 4 million Californian households – the population of Los Angeles County. It is also a significant portion of the water that flows through the Sacramento Delta into state and federal water projects in a normal year. And it is 80 times the water that the San Diego desalination plant is producing on an annual basis.

In addition to the volume, the state isn’t getting much in the way of value for its water. The price of these exports is only slightly above average—revenues of $288 per ton of feed produced, much of which may well be driven by additional processing. In 2015, state agricultural interests received just $560 million for the 2 million acre-feet of water exported and sold abroad even as state and local regulators pledged billions in spending to expand water storage and capture systems. The industry is profiting roughly $50 per acre-foot consumed. For that $50, the highly touted San Diego desalination plant can product 3% of one acre-foot.

Who is buying California’s water? Recent news has focused on Saudi Arabian purchases of farms here and in Arizona. The reality is that buyers from the Middle East are late to the game. For years, the largest buyer was Japan—but a new buyer has rapidly climbed to the top. As of 2015, the largest foreign buyers of California’s hay exports, in order, are China (36%), Japan (33%), and South Korea (12%). In 2009, China consumed only 2.5% of exports—one-third of Taiwan’s consumption.

Hay and alfalfa are the worst offenders, but not the only ones. Cotton, rice, and wheat are all grown in the state at low values per acre-foot of water consumed. If these wasteful crops were scaled back even by a small amount—say 25%—the saved water would be enormous—plenty for urban needs, storage recharge, and environmental needs. And the reductions in revenues would be less than $1 billion out of a $50 billion haul in 2014.

The online news site ProPublica and The Atlantic recently published an article about a Wall Street “maverick’s” proposed solution for the water issues in the West. While this financial guru is surely a bright person, the West’s water problems don’t need an off-kilter genius to solve them—the answers are pretty obvious. If farmers had to pay for water at a rate that was even one-tenth of what urban areas pay, production of these low-value, water-intensive crops would slow substantially.

And if farmers were allowed to sell their water to whomever they wanted, they would happily sell it to urban areas in lieu of growing hay in the desert. The arbitrage possibilities are so large that a $100-per-acre-foot “tax” could be levied on the sale of the water and the proceeds used for economic development and environmental renewal in areas where hay farming would be retailed. In short, everyone would win.

Why doesn’t this happen? Largely because politicians to date have been far too timid to try and break down the horrendously distorted yet highly calcified water allocation system in the state. And sadly, the return of El Nino may have allowed them to avoid the obvious for yet another year—making the long-term harm to the state’s economy and eco-system even worse. Hopefully our leaders won’t waste the opportunity to take action during the next record drought.