Bill Jennings needs to simmer down

I'm not surprised that Bill Jennings of the California Sport Fishing Protection Alliance is a fan of the report we released yesterday on unemployment in the Valley, Fish or Foreclosure?

Unfortunately, he is getting a little carried away saying that we are "exposing the lies of Congressman Nunes and Cardoza" http://www.calsport.org/8-11-09b.htm Nobody is lieing, they are getting information from bad sources, and we are providing them with a better source. They are guilty of listening too much to one point of view, but I think they believe what they are saying is the truth.

This is especially unfair to Cardoza, who has consistently stated that it is both foreclosure and water.

Lunch with Almond Growers

Today, I was the luncheon speaker at a meeting of Specialty Crop Trade Council. It was a group of about 40 growers and marketers, mostly of nuts, from Chico to Bakersfield, including a large representation from the Fresno Area. I generally do about 2 talks like this a month to various business groups, and it is a good way to learn about business issues.

The talk was about our general economic forecast, not the water issue, which didn't come up at all. At my lunch table, they were discussing the thousands of acres of 20 year old almond orchards being ripped out because of low prices. I asked "what about water? Isn't that the reason we are losing almonds?" The response was that there was some of that too, and I was also advised not to believe everything you hear out of Westlands.

I also noted that the salmon was a more popular lunch choice than the chicken. I should have asked them how they felt about eating the imported salmon (pacific coast salmon fishery closed again this year), if they felt safe eating that imported stuff, and if they cared about the California salmon fishery being closed. Oh well, at least I saw first hand that almond growers recognize that salmon is food:)

This was a great group. Great questions, very smart.

Manufacturing Jobs

An interesting pair of viewpoints on manufacturing jobs in the Sunday Sacramento Bee.

Chris Thornburg and Jon Haveman of Beacon Economics shred a recent Milken Institute report on manufacturing jobs promoted by Jack Stewart in the other forum article.

Beacon (Thornburg and Haveman) are very good at what they do. You have to respect private consulting economists who have the guts to criticize the "chamber of commerce" point of view, because that usually isn't good for business.

Although there are serious issues with costs in California, I am cautiously optimistic about manufacturing in the state after we emerge from the recession.

Buy One Anyway

As someone who subscribes to several newspapers even though I mostly read them on-line, this video made me feel warm and fuzzy inside. I can now view this behavior as a humanitarian act instead of economically irrational. Maybe I should subscribe to a few more and sponsor another reporter.

In all honesty, I encourage everyone to do this. Society needs newspapers. Maybe the editorial pages should start lobbying for public subsidies. After all, other industries lobby for handouts in their stories every day. On second thought, that is the stupidest thing I ever typed on this blog. Government influence over the press is not good!

Mother Jones Magazine on Water Footprints

Some interesting comments from some of the hard hit Westside drought farmers in this Mother Jones article (No I don't normally read Mother Jones, the link was sent to me). Jim Dietrich has a multi-million dollar water-sipping irrigation system, but no water to put in it.

On a recent afternoon, he climbed into his Dodge Laramie with his golden retriever, Joey, and drove through his fallowed fields. He passed a jumble of blue pipes, part of his $20 million drip irrigation system, which uses a third of the water of his old furrow system. "We paid more for that drip system than we paid for the goddamn ground," he grumbled. It didn't seem fair that he'd been cut off from his carefully allotted supply while nearby farmers with grandfathered water claims were still flooding their fields. "We're trying to be the most efficient as we can, and now we get no water."

I agree that this is ridiculously inefficient, but it is less the fault of "wacko environmentalists," than the lack of well-functioning water markets and higher prices for water. With higher prices and markets, those who have not invested in efficient irrigation will sell water to those who have made the investment. The flood irrigation next door stops, and Dietrich's system is using the same water efficiently. See David Zetland's Aguanomics blog for many posts on this concept that explain it far better than I.

The Mother Jones article goes on to describe ideas for allocating water to the most efficient through some elaborate process of grading farm's efficiency that is social engineering at its worst. Amazingly, it makes no mention of how markets allocate resources to the most efficient users without all the people and politics involved in rating and choosing the most deserving. It even fails to mention markets as an option, even as it compares it to cap-and-trade (market) programs for greenhouse gas emissions. That reminds me why I don't read Mother Jones regularly.

Cash for Clunkers

Damn, I knew I should have bought a used SUV 5 years ago instead of a used VW. If I had made that bad environmental choice in the past, I could now be rewarded in the Cash for Clunkers program.

My old VW Passat is a borderline clunker, and I would love to replace it with an even more fuel efficient and reliable vehicle (maybe a hybrid). My Passat has $1850 trade-in value according to the Blue Book, so a $4500 rebate could be just the incentive to get me in the door to buy a new car. Too bad, the Passat doesn't have bad enough gas mileage to qualify as a "clunker." Even if the clunker program was expanded to accept my car, it would still be wasteful because the program would require my car to be junked, even though it is a useful car with above average gas milage.

If we want subsidies to create a more fuel efficient fleet, we should just subsidize the purchase of fuel efficient vehicles period and not link it to what you are trading in.

Yes, I'm annoyed that I don't qualify for the program, and that make me quicker to complain. I also am in favor of government stimulus for the economy, but not this kind.

Update: While driving down 99 this morning, I was noticing all the "clunkers" being used for work. I saw several dinged up Ford F150s and vans loaded up with tools and supplies, and on the way to a job. If this program gets too big, it will become more difficult and expensive for many lower-income people to find affordable work vehicles in the future (because the program requires these vehicles to be scrapped, as opposed to resold when they are traded in now). In other words, this "stimulus" program hurts poor people who benefit from used vehicles. It's an unintended consequence that is not mentioned in most of the articles about it that only mention positives.

New Downtown Stockton Hotel to Close

The Lexington Hotel is set to close next week due to foreclosure proceedings after being open less than 20 months.

This is a shame, because it may be the nicest hotel in the Valley (not that the competition for that honor is real tough). They say the hotel is viable and I think that is credible. The problem is the condos. The top 3 floors of the 7 story structure are condos, not the hotel. Not a single condo was sold. Zip. And all the extra debt to build those luxury lofts is putting them under. They should have stopped building after 4 floors!

In a grand statement of how screwed up finance and real estate lending was a few years ago, designing the structure to be nearly 1/2 condos was key to financing. There was zero market for those condos even during the boom, but there was a tremendous appetite for lending to residential development.

I suppose it could be worse. In Fort Myers, FL (which now has higher foreclosure rates than Stockton), this 32 story condominium high-rise has only 1 tenant.

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.