Fallowing of land to make water available for the market raises quite different policy issues. The problem is not one of efficiently managing a collective resource but rather one of determining ground rules under
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3This was a principal point of consensus of the Water Transfer Workgroup (2002).
which those with access to water rights may forgo their use by taking land out of production and selling the water to others. The potential effects on the community are not losses in water availability (a physical effect) but losses in the economic activity associated with the fallowed land. There is no legal tradition for compensating parties affected by this type of transaction, which results from a private business decision to make a different use of resources for which property rights are clear.
As we have seen, water districts differ in their policies with respect to fallowing for transfers, and it appears that landowner-run districts are more willing than popularly run districts to entertain fallowing as an option. This could be expected given the somewhat different nature of property rights associated with the two voting rules: Under popular-vote districts, the district holds the water right in trust for the entire
community, whereas in landowner-vote districts the rights are more directly tied to the farming population. The fact that farmer-run boards appear more willing to consider fallowing for the water market is not in and of itself a bad thing. Farmers are the ones best placed to know the value of the water in their agricultural operations, and they will consider selling only if they can earn more for it on the market. This is the essence of an efficiency-enhancing transaction, which augments collective welfare.
The problem is that despite generating overall gains to the economy, such transactions may lead to some losses, as a result of changes in spending patterns of the farmer and others who earn income associated with the idled land. The studies available on this question suggest that the aggregate local effects have been quite small for programs idling anywhere from 6 to 29 percent of acreage, with local gains from the program largely balancing out local losses. But the modern track record is limited, and there is a tendency for popular sentiment in rural areas to target the notorious case study from California’s past where fallowing for the market had dire consequences for the local agricultural economy—
Owens Valley.
Districts willing to engage in fallowing today argue that they have no intention of harming the local economy. To the contrary, they maintain that including a fallowing component in their operations enhances
financial stability at a time when farm prices are generally low. These districts now operate under a set of rules that makes a full-scale sell-out of the Owens Valley variety highly unlikely, if not impossible. Both state law and locally determined guidelines limit the negative effects of fallowing. Section 1745.05 of the Water Code requires public review of fallowing that exceeds 20 percent of the local water supply. In designing fallowing programs, water districts increasingly include restrictions to maintain the viability of the idled land and to make sure that
participating farmers are not just in the business of selling water. The economics of fallowing also plays a natural mitigating role. Farmers have incentives to fallow the crops that generate the least profit per acre-foot, and these tend to be the low-value, highly mechanized commodities that generate the lowest on-farm employment and the least value-added through further processing.
Even with this combination of operating rules and incentives to limit negative effects to the local economy, there remains the question of whether the community should receive something too. At the federal level, there are some precedents for mitigating economic effects when policy changes in the collective interest cause a structural shift in employment and business opportunities for some sectors or regions.
With different degrees of success, federal mitigation programs have aimed to assist affected workers and businesses to make a transition to other economic activities.
A parallel case could be made for mitigating the economic effects of sizable, long-term fallowing operations, especially if they generate systematic hardships for low-income groups or local governments responsible for providing public services. The water market is, after all, an instrument of state water policy. In the two long-term deals pending approval, a transfer from the Palo-Verde Irrigation District to
Metropolitan Water District of Southern California and one from the Imperial Irrigation District to San Diego, funds have been earmarked for the benefit of the local communities. This will no doubt become a standard component of any future deals of this type, where large volumes of water are sold to distant urban agencies over more than a decade, with expectations of some systematic effects on local employment
opportunities affecting low-income immigrant communities.
For temporary or intermittent fallowing operations, such as those undertaken in the Sacramento Valley since 2001, there are greater questions about the appropriateness of mitigation. The question has come up because the two buyers, DWR and Metropolitan, have developed a policy to provide funds for the community when buying water made available through crop idling. Locally, no one is quite sure what to do with the money, because it is not clear what damages, if any, would merit mitigation. Involved water districts and the county
administration in Butte are even uncomfortable with this term, if what it implies is direct compensation of affected parties. In part, this stems from an expectation that the fallowing programs are likely to generate little if any hardship to low-income workers, given the highly
mechanized nature of crop production and the considerable workload generated by land maintenance and improvement activities on fallowed acreage. In part, it stems from a concern that a direct compensation program would establish a dangerous legal precedent, generate an excessive amount of claims, and ultimately create unrealistic expectations about the potential community benefits from water transfers. For these reasons, it may make more sense to think of such funds as providing opportunities for community development rather than mitigation.
The key policy issues on the table regarding fallowing concern the rules to limit negative community effects: rules on the scale and content of fallowing program design and rules concerning financial mitigation.
At present, most of these rules derive from local practice, with the exception of the Water Code’s 20 percent trigger for public review, introduced in 1992. Since 1998, the legislature has considered bills proposing to institutionalize mitigation on three occasions, although none has met with approval.
Further legislative actions on the fallowing question should be avoided for the time being, for two reasons. First, there is a limited track record on fallowing and no experience with implementing mitigation funds. Second, in the major short- and long-term fallowing programs slated to occur, the transacting parties themselves have been adopting design measures to limit negative effects and setting up funds to benefit the community. These cases provide the opportunity both to assess the consequences of responsible fallowing and to experiment with the use of
funds for community benefit. If, as the farmers in the Sacramento Valley and Palo Verde argue, the overall effects are not harmful to the local economy, this may help build wider confidence in a new model for fallowing that can displace the ghost of Owens Valley.