from the price-versus-cost dept.
Bill Davidow and Michael S. Malone write in The Wall Street Journal that recent rains have barely made a dent in California's enduring drought, now in its fourth year so it's time to solve the state’s water problem with 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. According to Davidow and Malone, 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 problem is mis-pricing. If water were priced properly, it is a safe bet that farmers would waste far less of it, and the effects of California’s drought—its worst in recorded history—would not be so severe. "A free market would raise the price of water, reflecting its scarcity, and lead to a reduction in the export of virtual water," say Davidow and Malone. "A long history of local politics, complicated regulation and seemingly arbitrary controls on distribution have led to gross inefficiency."
For example, producing almonds is highly profitable when water is cheap but almond trees are thirsty, and almond production uses about 10% of California’s total water supply. The thing is, nuts use a whole lot of water: it takes about a gallon of water to grow one almond, and nearly five gallons to produce a walnut. "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," say the authors. "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 would take creative thinking, something California is known for, and trust in the power of free markets," conclude the authors adding that "almost anything would be better, and fairer, than the current contradictory and self-defeating regulations."