Is a Smaller Peripheral Canal More Cost Effective?

An article in today's Contra Costa Times says a 5,000 cfs canal might make more sense than a 15,000 cfs peripheral canal.

In simple terms it comes down to the purpose of the PC. Is it a) insurance against a massive levee failure, most likely an earthquake, or b) creating the infrastructure to increase water exports. If it's insurance, the little canal most likely makes sense if it costs less - and I have no idea of the cost difference.

My favorite quote from the article is from Laura King Moon of the State Water Contractors. She has been pushing the large version for years, and states in this article that 15,000 cfs is what we need. Then she says...

"They presume to know the right answer. It's not possible to know the right answer right now," King Moon said.

California COPS grants

$1 billion in grants to local governments from the federal stimulus package were announced today. In contrast to the infrastructure money, California raked in a large share of these grants, 21%, and just about every major city in the Valley received a signfiicant sum. Unfortunately for California, this program is only 1/787 of stimulus spending. [For comparison, California is a little over 12% of the population; and in most stimulus spending breakdowns I have seen is slated to receive 10-13% of funds in most programs.]

All the large cities in the Valley received grants, but it is interesting to see which of the smaller cities, suburbs, and counties in the Valley received grants (I am assuming all of them applied). Not much in the the Sacramento area. For example, I noticed most of suburban Sacramento: Sacramento County, Elk Grove, Roseville, etc. did not receive grants. More in the rest of the Valley (although certainly not all). For example, San Joaquin County, Lodi, Clovis, Manteca (although no Tracy, Fresno County).

Here is the list to look for yourself.

This is particularly interesting to me, because I helped two of these departments find the economic data they needed for their application. They both got grants, but I don't think there is any correlation.

Some have argued that this kind of spending is not stimulus, but I would argue that it is. I don't think this grant application process is the most efficient or timely way to distribute the funds, but it's hard for me to complain too much in this case when our region faired well.

On Vacation

Hope you are on vacation too. No posts for a week or so.

Central Valley water shortages not impacting tomato supply

From the Central Valley Business Times and Rabobank.

Despite water shortages in the Central Valley, tomato processors won’t face
supply shortages in 2009 but they are likely to face softer consumer demand,
especially in foodservice, according to a new Rabobank report, “U.S. Processing
Tomatoes,” released Thursday.
“The impact of California’s drought is
expected to have limited impact on processing tomato acreage this year because
processors took steps to secure supplies,” says Marieke de Rijke, vice president
of Rabobank’s Food & Agribusiness and Advisory department. “In fact, we’re
seeing some farmers shift to growing processing tomatoes because of the higher
expected returns than they are receiving from crops grown for the dairy and
other sectors badly hit by the economic crisis.”
While California’s Central
Valley, which produces 95 percent of the processing tomatoes in the United
States, has entered its third year of drought, the supply of tomatoes should not
be affected, the bank’s report says.

Is legalization good for pot farmers?

The Board of Equalization has made an interesting assessment of the potential revenue from legalizing, regulating, and taxing marijuana. Report is here. It estimates potential tax revenue of $1.4 billion, but the report is even more interesting for some of it's other information.

According to the report titled Marijuana Production in the United States (2006), an estimated 22.3 million pounds of marijuana was grown in the U.S. in 2006 with a value of $35.8 billion. California was the top producing state; it produced 8.6 million pounds with a value of $13.8 billion.

This estimate is based on numerous assumptions, all of which come from law enforcement estimates and academic studies. The most significant ones are as follows: • Legalization of marijuana would cause its street price to decline by 50 percent. • This 50 percent decline in price would lead to additional consumption of 40 percent. • The imposition of the $50/ounce tax would then lead to reduced consumption of 11 percent.

This esimate doesn't tell you whether it is economically efficient (that wasn't the point of the study), but we can make some guesses. It is good for state revenue by raising revenue and cutting law enforcement costs (although presumably bad for corrections jobs). I think it is pretty clearly good for pot smokers due to the reduced cost, and risk of criminal activity. The question is the impact on non-pot smokers (are they harmed by more pot use around them or perhaps better off due to state revenue and law enforcement focus on other things).

There is also the interesting question of the impact on pot growers and retailers. This isn't a small question if it is really a $14 billion industry producing almost 40% of the U.S. supply. To put that $14 billion in perspective, all of California agriculture was about $33 billion in 2006. Milk was $4.5 billion, grapes were $3 billion, almonds $2.25 billion, lettuce $2 billion, strawberries and tomatoes about $1.2 billion each. Put them all together, and it is about the same as this estimated value of local pot production. However this probably isn't a fair comparison, because presumably the $14 billion in pot is valued at the retail/street level not the "farm" level. With the 50% predicted decrease in price, it suggests that selling costs of pot are pretty high. Still if only 20% of price goes to growers, it is still as big as grapes.

They estimate the price will drop by 50%. That will cut producer and seller revenue, but what impact will legalization have on their costs. Also, the majority of California pot is currently grown for export to non-legal markets. How will this impact exports, both prices and quantities? Local demand is expected to grow due to lower price and legality, will this cause increased local production or will the extra supply come out of exports?

It isn't clear what all the impact of this will be on growers/sellers of pot? I suspect that most current sellers are opposed to legalization and growers probably have mixed opinions. Presumably someone has studied it, but I'm not aware of it.

Walking Away Study

This article describes some interesting research on walking away from mortgages. The results make sense to me.

The study found that 26% of the record numbers of home mortgage defaults across the country are "strategic"

An important factor in walkaways, according to the researchers, is the level of foreclosures owners observe in their local community and their personal acquaintance with owners who have defaulted. In the latter case, owners who know someone who defaulted strategically are 82% more likely to default themselves

If it is true, we should expect walk away foreclosures to keep increasing, even after we some the effects of ARM resets and unemployment decrease. It also explains why loan modification plans without principal adjustments are doomed to fail in much of California.

San Joaquin Valley Groundwater Depletion

An interesting new report from the USGS details decreasing groundwater levels and soil subsidence in the San Joaquin Valley. In addition to the reduced groundwater supply, the subsidence threatens infrastructure such as the California aqueduct. There is a lot to discuss here, but I will just highlight the very last sentences from this article in the Sacramento Bee.

Officials could use the model to determine where and when groundwater pumping most threatens the canal. The state could then manipulate surface water delivery in those areas to prevent groundwater pumping.
Another option might be to stop farming in threatened areas.

These two uses of the groundwater model couldn't be much different. The first, sends additional surface water to those who have overdrafted groundwater the most (moral hazard?); whereas the second would stop farming in the same areas. Each strategy would have costs/benefits and I don't know which would be more efficient; but like most of these issues the political battle will be about how those costs and benefits are distributed.

1.5 months of inventory

The San Joaquin County real estate market continues to post amazing numbers. As everyone knows now, the nation's highest foreclosure rates have driven property values down by more than 50%. Now, inventory (homes for sale/monthly sales) is down to a shockingly low 1.5 months. 1.5 months of inventory! This is a market paralyzed by uncertainty.

Despite the record low inventory, prices aren't rising as everyone is waiting for an expected tsunami of new foreclosure properties to hit the market. With inventory so low, the market can probably absorb a lot more foreclosures without seeing any substantial additional price declines.

Two Fresno Bee Commentaries on Water

The Fresno Bee published two different takes on the water issue from local water users today. The column from a long-time Fresno area farmer, Walter Shubin, was most interesting. Many of his comments are similar to what I have written on this blog.

While national agriculture policy continues to destroy the family farm, the biggest problem in the San Joaquin Valley -- world capital of farming -- is not water, as many believe, but continuing low prices due to surpluses.
Does anyone seriously believe another 100,000 acres of almonds or another 50 mega-dairies are going to help almond farmers or dairymen?

The other long-term problem affecting the health of our Valley's family farms is the influx of non-farming people -- doctors, lawyers, business investors -- who hire "custom farming" companies to operate their ranchlands, often as tax shelters.

Shubin makes it clear that not these water protests don't speak for all farmers, and that many will actually benefit from the land fallowing.

He also makes some interesting points about the growth in outside investors buying valley farmland. This is important to the Valley's economic development strategy as it means an increasing share of farm income is leaving the region. As this trend develops, the incomes of farm workers becomes relatively more important than the income of farm owners from a regional economic development perspective.

The second piece, by David Hopelain, was a retread of the economic apocalypse message of which I have been so critical. I suppose what is unique about this piece is how much he rails about "welfare." He says we wouldn't need welfare if he had water. He fails to mention that the Valley has by far the state's highest welfare rates when water is flowing.

If water were maintained for the Central Valley's $25 billion economy, that promise (welfare) would not be necessary.

Squeeze Inn Sued

I have tried my best to stay optimistic and not join the chorus of people proclaiming California is going down the drain.

Then, this story comes out about the Squeeze Inn being forced out of heir venerable 10 stool diner by a disability lawsuit. One of my favorite things about California is the quirky, old-fashioned burger joints. Of these, Squeeze Inn is one of the gems.

And Gavin Newsome wants to ban doughnuts in San Francisco.

Depressing.

Farm Bureau Drought Damage Estimates

A story from the California Farm Bureau calculates drought damage estimates by County Agriculture Commissioners. The individual reports linked on this page are interesting.

Looking at unplanted acreage estimates, cotton leads at over 120,000 acres. Wheat is next at just under 70,000 acres. Lettuce, processing tomatoes, and carrots lead the vegetable category at about 20,000 acres each. A number of miscellaneous vegetables and field crops have much smaller unplanted acrage.

It is worth noting that there are some mathematical and data inconsistencies in these estimates. The Kern report has an obvious math error in the way it is estimating yield loss on planted acres, and this is resulting in some large overestimates of $ losses for certain crops (e.g. a $127 million loss on Roses which is 4-5x typical total revenue for a year). The Fresno report details much fewer unplanted acres than the article states. Perhaps, there is an update that wasn't posted. Overall, I think I will go with the $600-700 million revenue loss from the latest UC-Davis projection over the $1.4 billion reported in this article.

Stimulus Funds for Water Recycling

Here is a bit of news that virtually everyone involved in Calfornia's water debate likes, more investment in water recycling.

Continued disagreement over surface water conveyed through the Delta should not stop investment in recycling and conservation.

Refinance LTV limits go from 105% to 125%

I'm surprised Fannie/Freddie are raising the limit for refinancing's to 125% hasn't made more news today. See this Bloomburg article or the HUD press release. http://www.hud.gov/news/release.cfm?content=pr09-104.cfm.

In reality, this won't do much to stem foreclosures as the most at risk people are well over 125% and many won't have the income to qualify anyway at their current loan balance. As we have argued in other posts, only principal reduction will keep these high risk borrowers out of foreclosure.

That isn't to say that this won't help some families. I personally know one or two that want to refinance but their appraisals have been coming in the 105-125% range. These are the kind of families that are experiencing some financial stress, but were riding out the cycle and very unlikely to default unless they lose their job.

Cut State Pensions

I agree with the Governor's proposal to cut pensions for workers hired in the future. California pensions are way out of line with the rest of the country, create substantial animosity in the private sector for public employees, are a significant contributor to long-run deficits, and have to be reformed. Yes, it won't solve next year's budget crisis and is more of a long-run solution, but we need long-run solutions too. Ideally, we could switch them to a defined contribution (401k type) plan like most of the private sector, but that is unlikely.