Wednesday, September 14, 2016

How can a $6.5 billion farm subsidy to Central Valley farmers provide no benefit to Valley farms and the Valley economy? When it is used to subsidize the delta tunnels.

For my detailed comments on last fall's Brattle analysis,  reported by the AP todaysee the memo I wrote that is posted on Restore the Delta's website.  Restore the Delta surprised me late last week by sending me a copy of this report and related emails from their PRA request and asked for my thoughts.  I wrote the comments memo over the weekend, and gave them permission to distribute it with the report.

If you have followed this blog over the years, it should be obvious that I was not at all surprised by the findings that the tunnels' are a bad deal for farmers - even if there is a enormous federal subsidy for costs allocated to the Central Valley Project.  The benefit-cost report I published last month statedIf only the benefits and costs to water exporters who would pay for the tunnels are considered the costs still exceed benefits by more than $7 billion in the most optimistic scenario.”  

The big surprise to me in the Brattle report, was that it explicitly stated the need for federal subsidies, and then openly advocated for additional state subsidies. Coming from a state consultant, that is very newsworthy, especially given 10 years of public denials that there would be any public subsidies.  In addition to the draft report RTD released today, I saw several similar drafts in the PRA documents that went back and forth between the consultants and the state last fall.  The only substantive difference I detected in these drafts was the section with the weak rationalization of state taxpayer subsidies expanded in later drafts.  So it seems pretty obvious to me that the state sponsors were pushing the consultant to find a solid argument for state taxpayer subsidies.  However, the consultant was unable to develop a compelling case despite their best efforts, because there simply isn't one.

It is important to realize that even if there is a combined $6.5 billion in federal and state taxpayer subsidies for agriculture's costs of the tunnels, the net benefit to farmers who would receive water from the tunnels is still zero.  Add in the negative impacts on Delta farmers, and some risks for other farmers upstream from the Delta, and the tunnels are clearly a bad deal for the overall Valley economy.  Why no net benefit?  The subsidy would not pay all of agriculture's cost share for the tunnels - they are still responsible for $3-4 billion in direct payments for the tunnels even if the subsidy is $6.5 billion.  Thus, the billions in costs that they would still pay consumes all of any water benefits they would get from the tunnels.

The Valley economy has many, many needs.  It breaks my heart to think that anyone in government would contemplate a $6.5 billion subsidy to Valley agriculture that provides no net benefit to the Valley economy.  If such a subsidy were to happen, it would be a tragic example of ineffective and wasteful government.  If the government feels compelled to spend billions in industry subsidies in the Valley, I would suggest spending a much smaller amount to entice some other industries that would diversify the economy and create good paying jobs.  If a subsidy proposal is ever formalized, every mayor in the Valley should oppose it and offer up an alternative economic development package that is much cheaper and does more for their constituents.

Three additional comments that occurred to me this evening as I read the AP report and some reactions to it.

1.  Why did I say $6.5 billion in subsidy, when the AP and report only quotes $3.9 billion from the study?  Two reasons:  First, the $3.9 billion figure in the report is a discounted present value, so I have converted it to a $4.6 billion undiscounted value that is comparable to the estimated $16 billion construction cost.  The other $1.9 billion is the amount of additional subsidy that would be needed to get the tunnels break even for farmers, and it is the reason for the extended discussion of additional subsidies for the project.  So while the report does not assume a specific amount for state subsidies, the minimum amount of state subsidy the consultant is trying to justify is pretty clear.  The AP reporter is just being careful to quote exactly what the report said about a federal subsidy, and she also notes that agriculture still comes up short.

2.  Does Californians For Water Security have a secret financial plan for the tunnels?  CWS's response reminds me a little of Donald Trump's secret plan to defeat ISIS.  They said, the draft report "doesn't account for the latest thinking on financing the project."  So, what exactly is the latest thinking?  Please inform everyone.  What exactly is the plan?

If there was an actual finance plan for the tunnels, this "outdated report" wouldn't be so newsworthy. Tunnel advocates have no one to blame but themselves for not putting out a financial plan after 10 years.  An information vacuum will be filled, and this is the best information available.

3.  Doug Obegi's comments on the report are well worth reading.  He highlights some additional points that I didn't discuss, and explains some other points in a different way that may be more understandable to some people.

Friday, September 9, 2016

I wonder if all Modesto residents are really opposed to a regional airport?

Through the Center of Business and Policy Research, I have been involved in studies of the North San Joaquin Valley which have identified opportunities for regional cooperation to improve economic development.  One of the opportunities for regional cooperation is regional transportation infrastructure, such as regional efforts to improve air service - perhaps by combining resources through a regional airport - as well as regional efforts to improve rail transportation, transit and more.

Thus, this article from Jeff Jardine in the Modesto Bee,, a few weeks ago disapointed me.  It quotes a number of folks in the Modesto area who dislike the concept of a regional airport and shows how hard it will be to really get people in the North San Joaquin Valley to see the benefits of greater regional cooperation and identity.

The article rejects the idea of regional cooperation on an airport, and stokes unproductive regional rivalry by suggesting that people like me who suggest the concept of a regional airport are just trying to help Stockton to Modesto's detriment.  It ignores the impact of subsidizing an airport on the city of Modesto's budget, and whether such ventures are better handled at the County level or through multi-jurisdictional JPAs.  It defies location theory by suggesting locations in Merced or Modesto a few miles from highway 99 is a better location for a regional airport than adjacent to I-5 and 99 south of Stockton, arguing that it is more important to be far away from competitors than it is to be close and convenient for potential customers.

Honestly, I don't think explicit cooperation or support from the rest of the North San Joaquin Valley is necessary for the Stockton airport to develop into a regional service center.  If it stays on its current course of expanding service, I think consumers across the NSJV region will vote with their feet and wallets over time.

In the long-run, I think the regional concept around the airport could work not just because of economies of scale and efficiency, but it could also be valuable in trying to develop a name that doesn't include the words Stockton and Modesto and use it as the basis for a new regional brand with fewer negative associations to outsiders than San Joaquin Valley, Stockton, etc.. I am not a branding guy, but I know enough that a regional brand is most likely to stick if it is authentic and connected to an actual thing like an airport.  So, why not a regional airport in the NSJV that is not called Stockton-Modesto Regional but something like "NorCal Crossroads Airport" or "NorCal Gateway Airport"  or "Zinfandel Airport" or many much better ideas that real marketing and branding experts can come up with.  Now that is probably pushing an unpopular idea way too far, but it is a thought I have had.

Thursday, September 1, 2016

Farm Revenue Drops as Labor Costs Rise: Is the Era of Record Farm Profits Over?

Two interesting news stories about California agriculture this week.  First, initial estimates for 2015 farm revenue show revenues dropped sharply by $9 billion in 2015 compared to 2014.  Second, a bill that would align overtime regulations for farm laborers with all other workers passed the legislature and is on its way to Governor Brown.  If the Governor signs it, this will increase costs for farmers and comes just after the state approved large increases to the minimum wage that will likely have even bigger impacts on farm costs.

A couple of graphs help put the news in perspective.  The first shows total revenue and the net income of farms in California over the past 20 years according to the USDA data series released this week.  The data is adjusted for inflation, all values in 2009 dollars.  As the graph shows, farm revenue has increased sharply since 2011, and profits (net income) for the period of 2011-14 were at all time highs.  While the 2015 results are down sharply from the previous year, they still look very good from this historical perspective.  Expectations are for another decline in 2016, despite much less fallowing from drought.  If the 2016 drop isn't too large, it may just be that farming revenue is returning back to trend growth after an anomalous 2011-14 period were prices were unsustainably high, and that nut prices finally came down in response to a decade of massive increases in production. 

The next graph only goes until 2014, and shows labor costs and net income as a percentage of total farm revenue.  In 2014, labor costs (the sum of farm employees and contract labor costs) was about 32% of California farm revenue, making it the largest cost category for California agriculture.  This percentage varies significantly from crop to crop, with the highest labor costs for vegetables and fruits and the lowest for field crops.

Historically, profit margins have been about 25% and labor costs about 35% but there are big fluctuations as farm revenue can be volatile.  What will big changes in labor costs due to minimum wage and overtime regulations do to this picture.  If nothing else changes (meaning farmers did not adjust their labor usage, crop choice, and technology as labor costs grow), the minimum wage increase and overtime regulation would likely push the labor share up to nearly 50% of revenue, and profit margins would drop to about 15%. 

Both numbers would be at or near records. That's a major shift, certainly enough to drive substantial changes in agricultural practices.  There is going to be a lot of interest in labor-saving or productivity enhancing capital and technology investments in the agriculture sector over the next decade.  That will reduce jobs, but should lead to better, higher-paying jobs. 

These are big changes for the Valley economy, and I think the changes will be mostly positive.  However, I am concerned that the changes will be too much, too fast for Valley agriculture - especially as revenue seems to be coming back to normal.

So what should Governor Brown do?  I am very sympathetic to the overtime rule and aligning labor standards across industry.  I don't see how the current rules can be seen as anything but discriminatory, so my views are the same as they were in this 2010 post when the legislature sent a similar bill to Governor Schwarzenneger.

Having said that, I was alarmed that the minimum wage increase passed this fall did not allow for regional variation in the state like was done in Oregon.  In my view, $15 per hour is too high for places like Fresno and Redding even though it may make sense in the Bay Area.  There is a chance that the legislature could revisit this issue before the largest increases hit, and I would encourage them to make the $1 annual increases that begin in two years, 50 cent increases in inland regions so that the final phased in minimum wage is $12.50 not $15 in the Valley. 

I am not an expert in the political process and how negotiation between the Governor and the legislature work.  I do know the outcome I would eventually like to see:  a) minimum wage increase for the Valley adjusted from $15 to $12.50, and b) farmworker overtime regulations normalized to be aligned with other industries.