By Scott Hamilton, President, Hamilton Resource Economics
Kern has a big problem. It is the subbasin with the most significant water shortage in the state. That problem is somewhere between 360,000 and 440,000 acre-feet per year, depending on assumptions about sea level rise, climate change, and future regulations.
Rethinking the use of farmland will be an essential part of the solution. Will existing farmland switch to lower water-use crops, such as cotton and wheat; will there be more grazing and native lands on the Valley floor, or will the new crops be solar panels? These are the decisions farmers have to grapple with.
Part of the solution is an increase in imported water from the Delta. Undoubtedly, there is surplus water in the Delta in wet years – something in the order of 30 million-acre-feet in an average wet year, with likely no surplus water in dry years. The question is how much it will cost to move the wet year water. In this regard, economics can be deceptively misleading. The typical economic analysis looks at the value of water over a long period, say 30 years, and compares that to the debt service associated with capital construction and the operating and maintenance costs over the same period. If the benefits of the water supply exceed the costs, the benefit-cost ratio is greater than one, and the project is, therefore, economically feasible. That is typically one of the tests to pass for a project to proceed.
One way to calculate the value of the water is to determine how much farmers can pay for it and still make a reasonable profit. While that may sound good in theory, it is typically based on calculating long-term averages. Moreover, the risk of that approach varies greatly from farm to farm.
As farmers are abundantly aware, commodity prices fluctuate. Therefore, the ability to pay for water fluctuates. The ability to pay for a new source of water from the Delta depends primarily on what it will do to the farm’s overall water cost and also the farmer’s ability to endure economic hardship. If new water from the Delta comprises only a small portion of the farm water costs and commodity prices dip, the consequences to the bottom line might be bad but not devastating. If water already comprises a large part of the farm budget, acquiring additional expensive water has a heightened risk during periods of poor prices.
In 1991, agricultural contractors on the State Water Project received a zero allocation. Districts on the Westside of I5 paid millions for a water supply they have yet to receive. Commodity prices were low. Disaster struck. For many farmers, resources stretched beyond what they could bear. In Berrenda Mesa Water District, where water costs were already high due to additional conveyance costs, one-third of the landowners defaulted on their water district payments. That increased the fixed water costs for the remaining landowners in the district by fifty percent. The situation was dire. Lawsuits ensued. Ultimately, the district survived, but there was much reason for concern at the time.
The lesson here is to base payment capacity on something other than long-term averages. The probability is very high that there will be sustained low commodity prices during a thirty-year repayment period for a project. The question is whether the farm can survive financially during that period while still meeting the payment obligations of a new water project. Keep in mind most water districts are already taking on innovative, new water projects to achieve groundwater sustainability, the costs of which will most likely be passed onto landowners. Some of the new proposed projects, like Sites Reservoir, have an opt-out provision – if the project becomes unaffordable, participants can opt-out – a great safety valve – but not the preferred path forward. Farmers won’t want to return the leased tractors because they can’t make the payments; they will want to keep farming. The affordability of a new water project varies from farmer to farmer. The decision to participate or not has far-reaching consequences and requires careful consideration.
It is also imperative that the water communities throughout the state keep searching for feasible, affordable water projects. Severe social and economic consequences are likely to result if they do not.
