26 Aug 2014

Do water subsidies help SMALL farmers?

MH emails:
I have a question that has come up in my conversations with a friend (who is actually a libertarian, but I guess not on this issue) about water.

He claims that subsidized water in California is necessary for small farmers to make a profit. If the price of water increases, it will only hurt the small farmers and not big agribusiness. I tried to explain that someone has to absorb the cost of water (infrastructure, transportation, negative externalities etc.) but he kept returning to the idea that without these subsidies for small farmers, it would put an entire sector of the economy out of work, while raising prices for fresh produce.

My response was if you are growing a crop that is not profitable without government subsidies (say rice), you should stop growing it. Though, to me, this seems logical, it also seems heartless, especially towards small farmers. My friend works for a small, organic, sustainable farm and knows from experience the value of cheap water for their survival.

What say you on this dilemma?
In response, I wrote:
I disagree with your friend.
  1. Subsidies goto people who are organized enough to GET them, via paperwork, political lobbying, etc. Small farmers are often too busy to "get subsidies"
  2. Assuming EVERYONE has access to "cheap" water, larger farmers will see a greater share of their costs in water, since they've minimized capital costs, management costs, etc. per ton of production. That means a 20% increase in water prices will raise total costs by a larger share than it would for a small farmer who is less efficient and/or has a larger share of costs from other inputs.
  3. Small farmers are better able to adjust (different crop mix) than larger farmers with big fixed operations (think almond orchard), which gives them more flexibility.
Now I agree that some organic farms struggle and that "they need all the help they can get," but I think cheap water helps the COMPETITION stay in business, which lowers prices to small farmers.

So, I'd predict that expensive water would hurt large farmers and help small farmers.
What do you think?


David Zetland said...

MH sends an update on my post: "It actually played out really well. He understood more what I was saying after I gave him some articles to read on how farm subsidies and water subsidies hurt small farmers. I think -- and I have observed this is common with many people -- that he didn't really consider all the unintended consequences of farm subsidies. The immediate effect (what? no free water?!) seemed to enough for him to decide that small farmers needed subsidies."

MG Chandrakanth said...

First, I do not agree there are small farmers in the US. If you are taking of small farmers, they are in India and similarly placed nations. The size of holding is around 1 hactare which normally do not allow for scale economies. In fact green revolution technologies were largely neutral to scale and hence their adoption lead India's small farmers to feed the country and made India to be the second largest food grain producer. Without subsidies on water, energy, fertilizers, credit and plant protection chemicals, India could not have achieved this. Farmers responded to not only new technology but also lower input prices and the minimum support price offered in addition to procurement. The history of India's green revolution is a testimony to these.

Anonymous said...

Does anyone on the blog actually know anything about farming in the US? It's not obvious from the blog, with broad generalities about big and small farmers and the inherent godliness of organic growers.

NM said...

I think the answer is more like "it depends," i.e.,

On 1. Often the subsidies are spread wider, because a. the people pushing them think they will get better acceptance if the subsidies aren’t so focussed on themselves and thus look more high minded by specifying a broader class of recipients, b. granters of subsidies operate on similar bases i.e. more willing to include all farmers in the valley rather than large farmers, and c. often times there’s no way of efficiently excluding the smaller farmers from subsidies so they get swept into the trough as well.

On 2. It is reasonable to posit also that larger farmers will in fact be more capital intensive and that natural inputs such as water will be a smaller proportion of their costs. For example, larger farmers may be more likely to line and cover their irrigation channels and use drip irrigation to reduce water costs. Larger farmers may also be able to afford better education in things like water and other input efficiencies. There may be water saving techniques that are only viable at a minimum scale, so smaller farmers can’t access them. I don’t think you can make your assumption without a good deal more data.

On 3. I think your almond orchard is a poor example, because adjusting your crop mix out of almonds is likely just as hard if you have ten almond trees or ten thousand. It may be that larger farms with more area may be able to divide their area into several economically viable units producing different (and maybe complimentary) crops than a small farmer. I go back to the education proposition above and the capital investment hypothesis.

David Zetland said...

@MGC -- I agree that the average "small" farmer in India works wiht less land than the "small" farmer in the US, but my point is on relative scale. I think we both know that larger Indian farms have an advantage b/c they can afford deeper wells, larger bribes for irrigation water, etc. We can argue on the benefits of subsidies or procurement prices for farmers in India, as these seem to drive boom/bust cycles for farmers as well as wasting vast quantities of food.

@Anon -- I'm happy to sit on your farm and talk about YOUR scale, but it's necessary to generalize when talking ag, worldwide. I'm not a big fan of organic, btw.

@NM -- I don't have your experience with (1), as it's much more common to see subsidies going to larger scale, esp if we compare a diversified farm with a monoculture farm of the same acreage.

On (2), those capital investments are SUNK, so they do not affect cropping decisions as much as long term profits. Most "water saving" tech works at lower scales.

On (3), I used almond orchards b/c many California farmers have switched huge acreage into that crop, not on the assumption of crop subsidies but access to cheap water. Many of them are currently screwed.

@All -- no doubt, there are exceptions and relevant factors for different locations, worldwide, but my point is still that the vast bulk of subsidies go to larger scale farmers (as is the case with energy subsidies going to richer people, etc.)

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