Cost of Water Increases Likely to Cause Big Shifts in California Crops with Global Economic Impacts

A study led by the University of Maryland found that water conservation policies that raise the cost of irrigation for California farmers could result in farmers leaving agriculture or shifting away from perennial crops like fruit trees toward annual crops like tomatoes. The study reveals potential wide-ranging impacts of proposed water taxes under California’s Sustainable Groundwater Management Act (SGMA), which is designed to achieve groundwater sustainability by 2042.

The findings have important implications for policymakers in all western U.S. states, which are facing a water crisis, and are struggling to develop policies that preserve critical water resources without gutting the agricultural economy. The study was released as a white paper on July 29, 2024.

“Our study found that farmers will ride out short term increases in the cost of water, like during a drought, but as cost increases become permanent, they shift away from crops like fruit trees, which are long-term investments,” said UMD Assistant Professor of Agriculture and Resource Economics Louis Preonas, a co-author of the study. “Fruit trees have high water demand, but they are a high value crop, so the payoff is seen as worth it during temporary cost increases, but as increases become permanent the investment becomes riskier and farmers are likely to shift away from growing fruit trees.”

Preonas noted that California produces 18 percent of total U.S. crop value, with a high percentage of specialty crops. For example, the state supplies all of the almonds sold in the US, and 80% of almonds on the global market. Large-scale shifts away from almonds, which grow on fruit trees, could raise prices and have unintended downstream consequences throughout the economy.

But such shifts may be necessary to achieve the state’s goals for water sustainability by 2024. For many years, California’s robust agricultural production in fruits and other crops with high water needs has required farmers to extract more water from aquifers than is naturally replenished. With increasing heat and drought due to climate change, the future of the state’s water supply is becoming increasingly fragile.  

To understand how farmers would respond over the long term to policies that taxed water use, Preonas and his colleagues looked at California farmers’ responses to changes in electricity prices between 2008 and 2019. Although groundwater is free in most of California, it takes electricity to run the pumps that feed irrigation systems, so the researchers were able to use electricity prices as a proxy for a tax on water use. They estimated groundwater consumption on farms using data about groundwater levels, electricity usage, and the energy needs of the specific pump equipment on each plot of agricultural land throughout California.

Their analyses showed that farmers responded to a 10% increase in groundwater cost with a 3.6% reduction in usage, primarily by shifting to less water-intensive crops. The study suggests that achieving California’s sustainability targets would require a water tax of approximately 60%, which would lead to a shift in crops for 9% of farmland and increase the amount of land pulled out of farming every year by 50%.

“It seems very straightforward to say we want to manage the aquifer, so we don’t run out of water,” Preonas said, “but there are these other effects you have to consider that have economic implications throughout the economy.” 

The study illustrates the challenges countries around the world will face in balancing water conservation with the need to feed a growing population amid the increasing impacts of climate change.

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The study, "Groundwater and Crop Choice in the Short and Long Run” was published as a working paper by the University of Chicago on July 29, 2024. The research was a collaboration with co-authors Fiono Burlig from the University of Chicago and Matt Woerman from Colorado State University.