Should farmers be concerned with water?

Scientists have long been monitoring fresh water sources including rivers, lakes and aquifers and are now pointing to research that shows we’re running out.  Wars have been fought over water because of its importance to humanity: in many places, it’s more valuable than oil. We can certainly live without oil, but we cannot live with water.  National Geographic Magazine provides a very good overview of the global effects of declining water resources (Parker 2016), their implications, and possible solutions.

Figure 11-1: Reduction in yield (Q) across all levels of labour given a drought. Permission: Courtesy of course author Hayley Hesseln, Department of Agriculture and Resource Economics, University of Saskatchewan.

What does water mean for agriculture?  More importantly, what does a water crisis mean for agriculture?  We know that water is an input into the production process for agricultural products and without it yields will fall whether in terms of crop production, or livestock. Figure 11.1 shows a reduction in crop yield due to drought.  Normally, increasing labour would result in production represented by TP1.  In droughty conditions, the output reaches only TP2.  Taking this one more step, we can also estimate that the market supply would also shift to the left.

We can also think of the situation in terms of the supply of water.  We know that water is a scarce resource, and is becoming increasingly more scarce.  As you know, the more scarce a resource is the higher its price.  Figure 11.2 shows the likely effects on price as the water supply falls from S1 to S2 to S3.  The supply curve is totally inelastic to show that it is not responsive to changes in price – the supply is absolute.

Figure 11-2: Water price rises as supply falls. Permission: Courtesy of course author Hayley Hesseln, Department of Agriculture and Resource Economics, University of Saskatchewan.

Is there something odd about the market graph above?  If you consider the fact that water (other than that sold in bottles) is not traded using a market mechanism, you’d be right.  We do not have water markets in Canada with many suppliers that respond to changes in price.  Rather, water is allocated and managed by the government directly or through crown corporations.

If we did view water in terms of markets, there’s another factor that the figure above does not take into consideration: the growing population and the highly likely increase in demand for water for agriculture.  If we considered a shift in demand to the right, the “market price” would rise further illustrating the true scarcity of the resource.

While pricing water to reflect scarcity is economically a good thing because people will have incentives to consume and waste less as prices rise (Spot and Rover will get fewer baths, as will your vehicle), high water prices are a concern politically and socially because of the potential lack of affordability.  Because water is essential to life and is basically a human right, discussions about pricing water can spark heated debate. Try it sometime and see what happens.

Water is also a difficult resource to manage because of its fugacious nature, meaning that it’s a resource that flows across boundaries.  When water flows across provincial, state and national boundaries, ownership and rights to access change according to jurisdiction and quite often, downstream users find what’s left to be lacking and often polluted.

Sidebar: Property rights can be defined as rights and responsibilities assigned to resource use and access, and can range from having full rights to partial rights: and the more rights we hold, the more valuable the resource. Property rights can be thought of as a bundle of sticks, where each stick represents a right. You can hold all the sticks or only some in any combination. Rights define who has access to a resource (the degree of exclusivity), how long they can use it (duration), whether rights can be enforced, how much benefit you get from the resource, and whether you can sell it (transferability). For example, if you have a fishing licence, it is exclusively yours, the Ministry of the Environment enforces fishing regulations associated with your licence, it is yours for only one season (not life), and you may not sell it. If we changed just one aspect of that right – your ability to transfer it – its value would increase because you could sell it after your fishing trip was over. Or, if we lengthened the duration to several years, its value would also increase.
Rights go hand-in-hand with tenure (ownership). Typically we can own resources under four different tenures: private, public, common and open access. Private property is a very strong form of tenure and those who own it can have a full suite of rights. Farmland is private and the farmer has full rights. Public property is any resource owned and managed by the government. Common property is that shared by a group such as a First Nation or Hutterite Colony, whereas open access is a resource that can be used by anyone."

Water is not allocated via the market.  In Saskatchewan, water is allocated and managed by the public (government).  The Saskatchewan Water Security Agency is a crown corporation that allocates water to different uses including agriculture, industrial and residential.  The same is true across Canada (see Alberta and Manitoba for example).  Up to this point, we’ve explored how markets work according to changes in demand and supply, and how the price fluctuates to ensure efficiency and clearing of the markets.

Water is allocated via licences and permits, and sometimes “first in time, first in right” and other types of agreements according to how it will be used (e.g. residential, commercial, agricultural).  In many cases, the price of water is actually zero.  If a Saskatchewan farmer wants to irrigate, he or she needs a permit, but only if for water use that exceeds12,300 cubic metres (Government of Saskatchewan 2016). Given that water is becoming (or could become) increasingly scarce, how can we ensure people and businesses use water in the most efficient way possible?

In the US, particularly California the water crisis has become very serious.  Water is an essential input into fruits, vegetables, and nuts that we import into Canada. Read the article linked to Figure 11.3 to see the severity of the problem.

Figure 11-3: The California water crisis has far reaching effects. Source: Permission: This material has been reproduced in accordance with the University of Saskatchewan interpretation of Sec.30.04 of the Copyright Act.

What does the water crisis mean for Canadians?  It means that there will be reduced produce moving north.  Essentially, the supply of fruits and vegetables will contract due to drought, resulting in significantly higher prices.  Water is an input into production, and without it, production falls, and the supply curve shifts to the left causing prices in the grocery store to increase.

There is another problem as well.  Because the price of water is so low, or zero, farmers have strong incentives to grow crops in drier places where water can be piped in resulting in overuse of water and distorted prices.  Furthermore, because water is taken out of streams and lakes, there is less for environmental functions that support fisheries and wildlife, and other ecological goods and services.

What if society decided to use water markets where scarcity was reflected by the price?  What would the effect be on the environment?  What about  society and the economy?  How would higher water prices lead to water conservation?  What about water infrastructure?  If you had to pay for water on your farm, how would your business be affected?  What are the ethics surrounding water pricing and conservation – can we afford not to price water?  What are the political implications for a government that supports the implementation of water markets, or pseudo markets where prices fluctuate?

This topic will be up for debate as part of this module’s assessment.  You should think about the economic effects of higher water prices as well as social and environmental effects.  To get an idea of how water markets might work, watch the TED talk by Rob Harmon.