Read the following Bloomberg article from April 2015 about the California drought and show graphically how the state’s policy is affecting the agribusiness market.

(A) In the first paragraph, show graphically how the state’s policy is affecting the agribusiness market (you can use
WORD TO DRAW YOUR OWN GRAPH PUT into your document). First define the market. Next, explain the policy and how it causes changes in this market and state the ultimate effect on price and quantity in this market.

(B) In the second paragraph, provide evidence from the text (examples, quotes) to support your reasoning from the first paragraph.

(C) In the third paragraph, explain whether you believe there is an economic rationale to justify this policy
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Added on 11.06.2016 13:57
(A) In the first paragraph, show graphically how the state”s policy is affecting the agribusiness market (you can use
WORD TO DRAW YOUR OWN GRAPH PUT into your document). First define the market. Next, explain the policy and how it causes changes in this market and state the ultimate effect on price and quantity in this market.

B) In the second paragraph, provide evidence from the text (examples, quotes) to support your reasoning from the first paragraph.

(C) In the third paragraph, explain whether you believe there is an economic rationale to justify this policy.

Save California Farmers From Themselves

Apr 27, 2015

By Daniel P. Beard
You would hope the worsening drought in California would bring out the best in the states politicians, particularly those who profess to care about the waste of taxpayers” money.

Alas, this isnt the case when it comes to several important members of California”s congressional delegation. Take Kevin McCarthy, the House majority leader, who is using the dire conditions to call for projects to channel water to a select number of politically well-connected farmers.

“I”m from the Central Valley,” the Republican congressman said, “and we know that we cannot conserve or ration our way out of this drought.”

In fact, we don”t know this because California hasn”t seriously tried it. Agribusiness has traditionally used dry periods to demand more diversions of water from the states already heavily tapped mountain rivers. These proposals include two reservoirs McCarthy and other California politicians want: The Temperance Flat Dam on the San Joaquin River and the Sites Reservoir on the Sacramento River would cost approximately $3 billion each. But neither project would supply a drop of water for 20 to 25 years. It will take at least that long to plan, approve and construct the reservoirs, and in the end it”s possible there wont be enough water to fill them.

The growers and their political allies respond that if California”s drought is punishing them now, the shortfall could be worse in 20 years, meaning state and federal taxpayers should ante up now before it”s too late.

To understand why this is a terrible deal, look at the financial arrangements and recall the saying in the West: “Water flows uphill, toward money.”

The federal Central Valley Project has delivered subsidized water to a group of California farmers for more than 60 years. This water nobility, as I call them, thinks it is entitled in perpetuity to pay less than what would be the market rate for a scarce resource channeled hundreds of miles for its benefit. Only 15 percent of what it cost to do this has been repaid more than six decades after water was first delivered.

In a 2004 study, the Environmental Working Group estimated that the total subsidies for the Central Valley Project added up to roughly $600 million a year. While farmers dispute that figure, they dont deny they have a very special deal. Why else would they fight efforts to make the pricing of water more market-based and defend their rights to it?

This competitive advantage has been worth tens of billions of dollars. All over the West, farmers served by federal projects have benefited from 50-year zero-interest loans, with generous repayment rates, plus low-cost power. And about 45 percent of the farmers who receive irrigation subsidies are growing commodity crops (such as rice and cotton) that qualify for price supports from the U.S. Department of Agriculture — a classic example of double dipping.

In 2014, the federally run system delivered water to 140,000 operations farming 10 million acres of land. One-half of those irrigated acres are in California.

Because some districts may have senior water rights, they get preferential treatment during shortages. The so-called junior rights-holders look for other means to firm up supplies. Some plant less water-intensive crops, and others idle land or buy water from other districts. And they try to get Congress to force supplies to be delivered to them, or give them compensation.

No group lobbies harder than the Westlands Water District in the southwest corner of the Central Valley. Its 600 or so farms make up the largest irrigation district in America.

By one estimate, the yearly water subsidy to Westlands of up to $110 million was the most profitable arrangement for any water district in the U.S., until the current drought forced cutoffs in the supply. A big part of that amount came from the difference in the price farmers paid for the water and the price the taxpayers could receive if it was sold on the open market.

The federal Bureau of Reclamation, which built and oversees the Central Valley Project, could have fixed this imbalance when it renegotiated the contracts with Westlands more than a decade ago. Instead the 25-year contract the bureau negotiated would commit the government to delivering more than one million acre-feet each year, if water is available.

The problem now is that the bureau doesn”t have enough water to meet the needs of farmers in Westlands and the rest of the Central Valley Project, plus meet its obligations to local cities and endangered species (meaning the state”s rivers have to have some water left in them to sustain life).

So why did it commit to deliver more to Westlands for the next 25 to 50 years when it knew there might come a time when it couldn”t deliver it? One reason was to pressure the taxpayers to pay for construction of new storage and conveyance facilities because the government would be “contractually obligated” to deliver the water. Luckily, despite the efforts of McCarthy and Democratic Senator Dianne Feinstein, among others, this hasn”t happened yet.

The Bureau of Reclamation doesn”t question the rights of the water nobility in the West, or even calculate the total subsidy from the agency”s programs. (The last time the subsidy was calculated, more than 25 years ago, the figure was $116 billion.) Congress wont let it.

These practices have meant that several generations of farmers have had too little incentive to conserve. Yes, there has been a movement away from more water-intensive crops such as cotton and rice and greater use of more efficient sprinkler and micro-irrigation methods. The cost of water on the open market has risen, but water from the federal government is controlled by contracts signed years ago. As a result, the federally delivered water involves an even greater loss.

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