How ‘Virtual Water’ Can Help Ease California’s Drought
Market incentives will reverse the economic logic that drives local farmers to plant more water-intensive crops.
While the recent rains in California are welcome, they’ve barely made a dent in the enduring drought, now in its fourth year. Solving the state’s water problem will take radical solutions, and they can begin with “virtual water.”
This concept describes water that is used to produce food or other commodities, such as cotton. When those commodities are shipped out of state, virtual water is exported. Today California exports about six trillion gallons of virtual water, or about 500 gallons per resident a day.
How can this happen amid drought? The answer is mispricing. A free market would raise the price of water, reflecting its scarcity, and lead to a reduction in the export of virtual water. But California water markets are anything but free. A long history of local politics, complicated regulation and seemingly arbitrary controls on distribution have led to gross inefficiency.
Water trades amount to some two million acre-feet, barely 5% of California’s actual usage. Twenty-two of the state’s 58 counties have ordinances restricting sale of ground water outside the county. These ordinances, combined with local pressures, recently undermined the transfer of water from the Modesto Irrigation District to the San Francisco Public Utilities Commission—though the commission would have paid $700 per acre-foot, or 70 times more than local farmers. Because of these practices and difficulties in transferring water through the Sacramento-San Joaquin Delta, half of all water sales in the region are local.
Richvale, Calif. PHOTO: ASSOCIATED PRESS
The result is myriad misdirected incentives. Exhibit A is the almond industry.
California produces about 80% of the world’s almonds. The state’s 940,000 acres of almonds consume about 1.2 trillion gallons of water a year, or about 600 gallons of water per pound of nuts. So how much does all that water cost? Answer: It depends.
In 2014 Oakdale Irrigation District farmers spent about a penny for the water to produce a pound of almonds. Lodi farmers who use well water paid about seven cents a pound. Meanwhile, a farmer who tried in 2013 to purchase desalinized water in San Diego to grow almonds would have paid about $4 per pound.
Producing almonds is highly profitable when water is cheap. With adequate irrigation, new varieties of trees and a surge in almond prices, farmers can net $5,000 per acre, even become overnight millionaires.
This can certainly be a better strategy than growing less-profitable tomatoes—which use about 26 gallons of water per pound. But the advantage of growing tomatoes is that if water is in short supply in any year, you don’t plant them. Almond trees have to be watered every year, drought or glut.
The availability of cheap water made California almond production possible. In the 1970s a little more than 100,000 acres of almonds were under cultivation; today it is nearly 10 times more. Because of the increased use of irrigation, improved trees and better methods, orchard yields have more than doubled. But those trees are thirsty, and almond production uses about 10% of California’s total water supply.
This can’t continue much longer. Given the competing needs of the state’s residents and farmers—and the rapid depletion of the region’s great underground aquifers—something is going to snap.
California needs to use a lot less virtual water, but without putting unreasonable burdens on the state’s farmers. Here is how it might work.
Suppose an almond farmer could sell real water to any buyer, regardless of county boundaries, at market prices—many hundreds of dollars per acre-foot—if he agreed to cut his usage in half, say, by drawing only two acre-feet, instead of four, from his wells.
He would then be given an option to keep one acre-foot for his own use and sell one acre-foot at a very high price. He might have to curtail all or part of his almond orchard and grow more water-efficient crops. But he also might make enough money selling his water to make that decision worthwhile.
Using a similar strategy across its agricultural industry, California might be able to reverse the economic logic that has driven farmers to plant more water-intensive crops. This skewed system of economic rewards has led California farmers in the past 10 years to plant 30% more strawberries, 44% more almonds, 80% more raspberries, and 102% more pistachios—all while reducing the planting of less water-intensive crops such as asparagus by 57% and cantaloupes by 22%.
The devil is in the details, notably in getting all that water distributed and sold. But if markets and exchanges can be created for everything from carbon emissions to placing kids in schools, surely they can be built to price and sell virtual water.
This would take creative thinking, something California is known for, and trust in the power of free markets. Almost anything would be better, and fairer, than the current contradictory and self-defeating regulations. We are running out of time. It is time to do something else we Californians are known for—taking risks on innovation.
