Monday, March 3, 2014

What's the value of water to agriculture?

Over the past month, lots of people have been emailing me the $1,100-$1,200 per acre foot price for price irrigation water is selling for in a Kern County auction.  It is indeed an incredible price for agricultural water.  It shows that this drought is very severe and likely will impact some high-value permanent crops, and it tells us what orchard owners are willing to pay for one year to keep an orchard alive when they have few other alternatives.

But what does this data point tell us about the value of water to agriculture in California?  What is the value of agricultural water that should be used for major policy analysis - such as evaluating infrastructure investments such as Delta tunnels, new reservoirs, alternative agricultural water supply investments (like solar powered groundwater desal), or intra-regional conveyance to facilitate more local transfers between Valley farmers?

I would caution people from over-interpreting the $1,100 per acre foot price.  In fact, the same article in the Bakersfield Californian that reported the $1,100af auction, also reported this...
Buena Vista plans to use part of the proceeds from the auction to pay for a land fallowing program within its district. It has offered to pay farmers $400 per acre not to farm this year to reduce demand on the aquifer.
It had hoped to be able to fallow 4,000 to 5,000 acres.
The district ended up getting applications for 11,000 acres, Etchechury said.
After weeding through all the applications, he said, it looks like about 7,500 acres are eligible for the fallowing program, which could cost the district $3 million.
Thus, in the same county where farmers are willing to pay $1,100 per acre foot, a 50,000 acre water district on the west side of the Valley has 7,500 acres (about 15% of the district) accepting $400 per acre to forgo planting. Assuming 3-4 feet of water to grow a crop, this second data point suggests the marginal value of water in agriculture on the west side of Kern County is about $125 per acre foot.  [Data on irrigated land rental rates from the California Department of Food and Agriculture (see page 2) imply a similar value.  CDFA reports irrigated cropland rents for an average of $340 per acre in 2012, and non-irrigated land rents for $40 an acre, a difference of $300 per acre.]

This $1,000 af difference in agriculture water values in the same year in the same area shows large gains could come from local trades, and that there would be considerable value to infrastructure and market institutions to support local, intra-county and intra-basin trades between farmers.  It seems that these sorts of investments could make a lot more financial sense for the San Joaquin Valley than the $15 billion tunnels under the Delta.

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