Agribusiness Welfare Makes Water "Scarce" In California

Posted on 16 May 2014

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By George A. Miller

How would you like to have a 90-year, interest free mortgage, with no principle payments for the first 50 years? If you are fortunate enough to be one of more than 270 federal water contractors in California - that's the deal.

It has become gospel truth: "Water is a scarce resource in California." But the gospel is a deception sustained by years of governmental interference in the basic laws of supply and demand.

There’s no doubt the drought has been tough on Californians this year, with ongoing water shortages impacting people, farmers, fish and wildlife across the state. But relief will not come until we address the underlying cause of these shortages, which is not due just to the whims of Mother Nature or population growth. The real culprit is a sweetheart deal from the federal government to subsidize cheap water for irrigated crops. In fact, water in this State is not scarce at all - it is simply a grossly under-priced commodity.

More than fourteen years and three presidents ago, many, including myself, sounded the alarm about how the federal government creates water shortages in California by promising excessive amounts of cheap subsidized water to agriculture, which then produces a demand for water that can’t be met even in the best of times. In the waning days of a lame duck Clinton Administration, contracts signed decades before that locked in these massive subsidies were finally terminating. Yet rather than negotiate reasonable terms reflecting social and economic changes over the last half century, a few government bureaucrats and outgunned government lawyers renewed these contracts for another twenty-five or forty years with huge subsidies intact, thereby perpetuating this agribusiness welfare for another generation.

While the alarm we raised went unheard in 2000, today, due to a recent unanimous court decision, the federal government has another opportunity to end its role in contributing to California’s ongoing water crises. And it is my hope that this President will have the good sense to address this problem once and for all.

Here’s how we got here. In the early twentieth century, the Bureau of Reclamation built the massive Central Valley Project (CVP) with federal funds, placing dams across the rivers raging down from California's Sierra Nevada range, and linking the reservoirs with a network of canals and pumps. Almost all of that water went to irrigate crops in the rich soils of the arid Central Valley, producing bounteous harvests.

The original contract terms were quite generous, with prices ranging from $2 to $25 per acre-foot. Today, the CVP has contracts to sell 9.5 million acre-feet of water annually, or enough water to cover the entire state of New Jersey under more than 2 feet of water. These contracts continue to charge most agricultural contractors less than $50 per acre-foot of water, with some paying less than $8 per acre-foot, even though the free market price for agricultural water in the Central Valley is exceeding $2,000 per acre-foot this year. Even in non-drought years, water retails to urban agencies for $1,000 per acre-foot or more.

However the Bureau rationalized this charity in the last century, the current irrationality generated by these contracts is stunning. The single largest crop in California is hay and alfalfa, primarily for cattle feed. These low-value forage crops account for more than 1.5 million acres in California, almost double the acreage of any other crop in the state. It takes 7,000 gallons of water per day to feed and water one cow, about 200 times my daily water consumption. In the last decade, much of California agriculture has migrated towards planting more water-intensive crops, with thirsty almonds and pistachios nearly doubling in acreage. Close to a million acres are planted in flood-irrigated rice and cotton, global commodities that are generally in surplus supply. In short, we’re making the problem worse, because of the government-created illusion of water abundance.

As federal taxpayers subsidize the growth of water-intensive agriculture in California, we get the side benefits of trashing California's environment and destroying the commercial fishing industry. California's once-famous year-round salmon runs are decimated, many fish species are hovering near extinction and drinking water quality in the region has declined as freshwater is pumped south. The cost of restoring just a fraction of this once rich ecosystem is estimated at $7 billion, with a substantial portion to repair damage caused from excessive water diversion by the CVP and the companion State Water Project. Why have diversions from the environment been so high? Because the price was too low!

Fortunately, there is hope on the horizon. The federal appeals court in California recently determined in an 11-0 decision that the Department of Interior should take another look at these long-term delivery contracts and make sure they’re compatible with keeping our rivers and stream healthy. That gives the Obama Administration the opening to revisit pricing and other terms in the contracts, require the users of Central Valley Project water to pay their fair share, and reduce the artificially fueled demand for water in California. At hand is the opportunity to reduce federal water subsidies that are destroying California's environment, to reduce the "scarcity" created by under-pricing such a valuable commodity, and to restore equity by making all California water users fairly share the cost of their water.

For this crucial opportunity, we taxpayers need the best possible negotiator at the table, representing our interests and the environment's. So far the contractors' hired guns have the upper hand, effectively blocking even modest attempts to revamp the contracts. Instead of relying on bureaucrats who administer the status quo subsidy system, the government should be hiring the toughest, most effective negotiating talent available. When the Justice Department decided to take on Microsoft, it did not try to staff it in­ house. It hired David Boies ...and won.

As long as the federal government is willing to price California water at a small fraction of its true value, there will never be enough to serve the demands of agricultural and urban consumers. And the devastated riparian and estuary ecosystems of this state will not get a fraction of the water they need to repair themselves.

Deputy Interior Secretary Mike Connor has invested an enormous amount of his personal time and energy in trying to solve California's intractable water problems. His most durable and important legacy would be to ensure that the government seizes this once-in-a-generation opportunity to rectify the one federal policy responsible more than any other factor for creating water ''scarcity" where in fact there is abundance. The taxpayers, and the salmon, will be indebted to him.

George A. Miller is a retired mutual fund manager for the Income Fund of America. He lives in San Francisco.