Chapter 12:Impacts Upon Business Communities

Chapter 12-
Impacts upon Business Communities

by Vernon M. Crowder

Abstract

This chapter is an examination of the probable impacts of limited water supplies on agribusiness, banking, and the resulting effects on the economy. Since I am an agricultural industry analyst for a major commercial lender in California, the primary focus of my discussion will be California. It is reasonable to make an induction from California to the western region, because the situation in our state reflects that of the West.

This analysis begins with a discussion of the major assumptions of water use, availability, and development, particularly in relation to California agriculture. Assumptions about water are a topic of debate; nonetheless, there is a consensus among the experts in the agricultural industry.

An Examination of Assumptions

Assumption 1

World demand for food has been rising and is expected to continue increasing. The world population is not only continuing to grow, but income per capita has also risen. Increases in world income should boost the demand for many of the "luxury" crops grown in California, such as fruits and nuts. In contrast, many developing countries are making attempts to increase their production of staples such as grains. Since real world income is projected to increase nearly twice as fast as estimated population, there will be an increase in future world per capita income, and, therefore, a probable increased demand for California agricultural goods. (These estimates were supplied by the Wharton econometric model.)

Assumption 2

Energy prices will continue to rise. Costs will increase because energy resources are becoming scarce and more expensive to develop. The cost increases are not likely to be as high as the last decade, however. The cost of energy is a direct input in the cost of water. Energy to claim water is necessary, whether it is pumped from basins or transported across territory to an area of need. Even if water is developed and used in the same area, energy will play a major role since irrigation is energy-intensive.

Assumption 3

The capital cost of developing water supplies has risen sharply and will continue to increase. Reservoir and other water facilities were less expensive decades ago when compared to many of the projects on the drawing board today. The increase in project cost can be attributed to the effects of inflation on inputs-labor and materials-and the sophistication in engineering that is required for remaining sites. In addition, safety and environmental concerns have also contributed to higher capital costs. For example, the proposed facility at Auburn or the enlargement of the Shasta reservoir may result in water that costs more than $300 an acre-foot. In comparison, some projects built prior to the Central Valley Project cost only a few dollars an acre-foot.

Assumption 4

Conservation will be very difficult for agriculture. Contrary to popular belief, agricultural water consumption is already relatively efficient. Most water is reused until it is lost to transpiration, evaporation, or runoff. Very little is lost to evaporation or plant transpiration; most is lost to runoff where it ends in the ocean to begin the hydrological cycle anew.

Regardless of the type of irrigation, what one grower does not use is typically used by a neighboring grower. Many growers are using more efficient types of irrigation systems, such as drip or sprinkler, for the purpose of reducing energy and labor costs. This reduced consumption of water, and the resulting decreases in runoff, mean that the next water user "down river" must obtain other water. Therefore, an increase in efficiency in a particular grower's irrigation system has negligible impacts on the overall use of water by agriculture. Essentially, there is little hope for solving future water shortages by conservation without taking land out of production.

Assumption 5

The transfer of water rights will be very difficult because of institutional and political barriers. In addition to the legal prohibitions to transfer, there is the highly emotional reaction by those not getting the use of water as the result of a transfer. To illustrate, Los Angeles' Department of Water and Power thought that its water rights were very secure in the Owens Valley, since they had purchased vast amounts of land in the area. However, recent court actions have made these water rights dubious. In another case the emotional nature of the water-market issue was evident when the voters of Yuba County turned down a measure to allow Kern County water users to pay for the expansion of a local water reservoir. In the proposed measure, Kern County would have paid for the right to use the water while it was in surplus, leaving it for local use in times of need. In spite of the potential benefit to Yuba County, the voters rejected the plan as a "raid" on their water rights. Since the right of appropriation in California deems that water should go to beneficial use, there will always be controversy, because the evaluation of "beneficial" can vary by individual opinion.

Assumption 6

Urban water use will continue to increase, resulting in more competition for scarce water supplies. Theorists point out that urban water consumption will decline per capita because of more dense housing. However, it is unlikely that such reduction in per capita water consumption will offset increases in populations. According to the National Planning Association, California's population is projected to increase 15 percent by the year 2000. Compounding the problem is the loss of water entitlements to Arizona. As a result of the 1964 federal court ruling, the Metropolitan Water District, which is the primary water distributor to Southern California, will lose more than half of its water entitlements once the Central Arizona Project is completed in 1985.

Assumption 7

Political in-fighting between different interest groups is blocking the way to additional water development. In addition to the friction between environmentalists, farmers, and urban dwellers, there are divisions within each group as well. The recent battle over the California Peripheral Canal referendum is a good example. Agriculture, which normally votes as a bloc, split over the

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proposition, and large agricultural interests were allied with their traditional rivals, the environmentalists. Such coalitions do not last, however, as was demonstrated on the subsequent Water Resources initiative. The polarization of interests has prevented any progress in the development of additional water supplies. I fear that such battling will continue until the situation worsens sufficiently to demand a resolution.

Evidence demonstrates that the demand for water is continuing to increase, and that development of additional supplies is doubtful. Since conservation alone cannot offset consumption enough to avoid reduced agricultural production, current facilities will be less than adequate.

An Analysis of Impacts

The major impact of limited water supplies will be a reduction in agricultural production. Any decrease in production for the long term will mean a lessening of overall economic activity.

To illustrate the importance of agriculture to the overall state economy, the California Crop and Livestock Reporting Service estimates that three additional dollars are generated in the state's economy for every dollar of farm receipts. This means that agriculture accounted for $55.6 billion in California during 1981. For the same year, Security Pacific Bank reports a state gross product of $355.2 billion.

Change in crop selection as a result of higher water prices is a commonly cited impact of water scarcity. However, the primary determinants of crop selection are market prices and the availability of alternative crops. In many instances, the availability of water is more important than price. While sufficiently strong market prices can possibly offset higher water costs, uncertain availability makes it less feasible to plant crops that depend upon regular irrigation, or crops that cannot tolerate any long periods of drought. The quality of water, the amount of dissolved solids (salt), is also influencing the selection of crops.

The amount of capital invested in land is also an important factor in crop selection. As the value of land increases and more capital investment is necessitated, operators seek higher returns per acre. The predominant means of obtaining higher returns is to make additional improvements to the land by planting permanent crops such as trees or vines. Ironically, such intensive farming usually means a greater use of water resources. While

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alfalfa is usually cited as an inefficient use of water resources in comparison to cotton, orchards and vineyards use much more water per acre annually. But the higher returns associated with the permanent crops justify the greater production costs, including the increased water use.

To illustrate, Table 12.1 indicates what portion of production costs in the San Joaquin Valley is for irrigation. The two different percentages are for areas of low- versus high-priced water. As other production costs increase, the costs of irrigating become less significant.

The immediate impact of rising water prices or decreasing availability is on land values. Real estate that is entitled to less expensive and/or more available supplies commands a higher price on the market than farmland without available water supplies or supplied only by very expensive water resources. To illustrate, the following examples come from Kern County, at the southern end of the San Joaquin Valley. Open land in the western portion of the county served by the Berenda Mesa Irrigation District sold for between $2,200 and $2,400 per acre this

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year. Only expensive State Water Project (SWP) water is available in this area, and there is no groundwater available. Where groundwater is available, as in Kern County's Simi-Tropic Irrigation District, similar land sold for about $3,700 this year. In the northern portion of the county served by the North Kern Water District, the area is supplied by both the SWP and the relatively inexpensive Central Valley Project, and groundwater is also available. Comparable land there sold for $4,800 this year.

Conclusions

This chapter assumes that energy prices will rise, capital costs for water development will continue to increase, urban water demand will grow, and world demand for food and fiber grown in California will be greater in the future. Additionally, assumptions are that new conservation, greater transfers of water rights, and more water development will be very difficult. Ultimately, this means less water will be available in the future.

Water costs will rise and because of less water availability, agriculture will have to reduce production. This will have a damaging effect on the overall economy. Naturally, agribusiness, banking, and other sectors will feel the effects.

With regard to the remaining agricultural production, higher water costs and less water availability will have great impact on the value of land. There will be significant changes in land values corresponding to its associated water costs. Higher land values will encourage more intense agriculture that eventually challenges water resources to even greater extents. The situation in San Diego, where both water costs and land values are very high, provides an example; agriculture will continue despite water scarcity. Agriculture under water constraints will be very different, though, since more intensive planting will call for more efficient irrigation techniques.

The picture seems bleak. Additional water development would help to alleviate many of the detrimental impacts cited here. Such development cannot come about, however, unless special interest groups find mutually agreeable solutions to our water issues. The in-fighting among agricultural interests will have to be resolved to facilitate agreements.

Discussion:
Dorsey R. Meyer, Sr.

Two primary considerations apply to the general topic of water as it concerns agriculture in the western states. First is the political process, which makes any future water plans difficult. In California the Peripheral Canal issue and the Water Conservation initiative of 1982 are both clear illustrations of this political problem.

Second, too little thought is given to the idea that agricultural production is essential to the welfare of man. A balance must be created between domestic, industrial, and agricultural needs. Vital crop production occurs very often in arid areas dependent upon irrigation water originating in watersheds not always adjacent to productive lands. Yet agriculture competes with the constant demand for water by metropolitan, domestic, and industrial users.

Crowder covers the economic effects of water shortages on the overall California and western agricultural economy. Our history shows that we have maintained low farm prices in order to control consumer food prices. This is unfortunate, as the return on investment to the American farmer here in the West often is inadequate, and limits his ability to seek solutions to the problems of water.

The chapter states that less water will be available for agricultural production. Yet the same amount of water exists on this planet that existed before domestic agriculture was initiated. We process it, change it, drink it, use it, but it nevertheless remains. The question is one of distribution and utilization of this reusable resource, in contrast to hydro-carbon fuels which are a finite resource. Domestic, industrial, and agricultural users must be stewards of water. The distribution of available resources needs adequate long range planning, taking all three categories of users into consideration.

The increased recycling of wastewater, both for industrial and agricultural use, also provides a partial solution to water shortages. Tail waters which carry impurities and high salinity will be utilized in future more than at present. Research indicates that it is possible to raise two bales of cotton per acre on land with higher salt water content, as high as 6,000 parts per million, compared to the normal 500 parts per million contained in water from the California Aqueduct. This possibility is offset somewhat by salt buildup in soil, but nevertheless the benefits of recycling remain.

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The redistribution of water in subcanals and thence into furrows, overhead devices, etc., to produce crops in the semiarid West requires a great deal of energy. Since energy prices are expected to increase, energy needs to obtain water for agriculture will become even more acute in the near future. Political decision makers must be continually informed and properly persuaded that agriculture has limitations as to what it can afford to pay for surface or underground irrigation water. The domestic and industrial water user must bear an even larger share of the cost of distributing water in the West from one point to another, and relieve some of the burden from agriculture. Economic production of farm crops must be maintained to keep consumer food prices reasonable.

Costs of water development are escalating daily. Because of the slow process necessary for approval and eventual construction of facilities for moving water, costly projects are inevitable. Here again, consumers, industry, and agriculture must take a commensurate share of the burden. In publications such as the California-Arizona Farm Press, we see methods being undertaken by various growers, educators, and extension services to improve and make more efficient agricultural use of the available water supply. Some of the more exciting developments are the use of computers, drip irrigation, and modified overhead irrigation using the drip principle. It is interesting to note that much of this technology is coming from Israel, where necessity has been the mother of invention in respect to agricultural use of water.

More effective use of water by agriculturalists is progressing in many areas. Improvement in pumps, drip irrigation, recycling of wastewater, and the development of agricultural crops which have higher salt tolerance, will add to more control of water by farm growers.

A total water program needs to be created for the semiarid West. With a sufficient amount of water, hundreds of thousands of acres can yet be brought into production in climatic areas most favorable to high production of both food and fiber. The problem, obviously, is to transfer water from where it is created to the place where it can be utilized. Arizona represents a strong potential area, in my view, for the additional development of agricultural acreage, but the metropolitan areas will probably use up the water available and prevent further significant agricultural development in the Arizona desert. A new master water plan which incorporates all of the western states is badly needed.

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If no new water is developed in the next decade, it will be a tragedy resulting in exaggerated costs in future.

Tax legislation is also badly needed in regard to our land resource in the western states. In the near future, governmental control of all underground water will probably occur, as in Arizona, with the resulting higher cost of water for growers. Land with available water will be expensive, and land without water will not be fully utilized. Because of economic pressures on growers, the development of various machines and new approaches to more efficient crop production and reduced operating costs are processes of dire necessity, rather than desire.

Though some say that the western states may be less competitive in agricultural production with areas that have greater water resources, I do not agree with this view. Many of the western irrigated lands have more favorable climatic conditions, and with proper research and development, recycling and proper use of water, the West can continue to outproduce, per acre, other parts of the nation.

The semiarid West must share in untapped water resources. One of the constant problems, however, is that underground aquifers are continually being reduced without proper replenishment. In the EPA Journal of March 1980, Eckhardt C. Beck, Administrator for Water and Waste Management, stated: "Some of the underground aquifers in Arizona, for example, drop ten feet per year, and are replenished at the rate of about a quarter of an inch per year."^[1] This clearly illustrates that mining of underground water is only a temporary cheap supply at best.

I have great confidence in the ingenuity of our western farmer and agribusiness community to solve problems, including water supplies. Farms in the West will become larger, as far as commercial production is concerned. The very small part-time farm will also advance, but these farms do not produce a high percentage of our essential food production.

All of us in agribusiness serving agriculture today are aware of the problems facing agriculture, including water resources. A purposeful depression of farm profits is an ancient strategy to hold down basic food costs, but is in my opinion self-defeating in the long run. It is far better to permit growers to make adequate returns on their investment and thus be able to spend adequate amounts to solve their own problems.

The almost $14 billion produced as revenue for California farm products in 1981 represents 10 percent of the nation's gross farm receipts, derived from only 3 percent of the country's farm

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acreage. Western agriculture is a force to be reckoned with. If growers can derive a profit from their hard efforts, they can produce, to the amazement of the entire world, food and fiber needed not only by this country, but much of the world at large.