Inspection services are provided by the Federal Grain Inspection Service, the Food Safety Inspection Service, and the Packers and Stockyards Administration. The state government also provided approximately $147 million for agricultural plant and animal health, pest prevention and food safety services. Outlays for the Foreign Agriculture Service, Agricultural Marketing Service, and Office of Transportation comprise the federal portion of processing and marketing assistance. For the 1999-2001 period, the average state outlays for California Department of Food and Agriculture marketing, commodities and agricultural services totaled around $60 million. For those commodities with relatively small amounts of total support, marketing assistance provides the bulk of the support. Assessments are subtracted from outlays to determine the contribution to the PSE. Finally, there are state and federal marketing order, board and commissions for many California commodities. These are generally financed by check-off systems that apply a kind of excise tax on the marketed commodity to support promotion or research .Infrastructure support includes federal soil conservation programs, which provide assistance in reducing soil erosion and degradation of resources. While the contribution of these programs to overall support of California agriculture is small, they are included as a separate category for consistency with the PSE calculation.There are various tax benefits for agriculture and foreign sales corporations that indirectly support the agricultural industry. Nelson, Simone and Valdes have compiled the total value of federal tax benefits to agribusiness and have also calculated the value of inland waterway construction and railroad interest rate subsidies. In general, plastic pots 30 liters the value of transportation subsidies is relatively small, usually around 2 percent of total support for each commodity. This is likely an over-estimate, however, because the California share in these benefits is likely smaller than the California share of agricultural output .
Tax breaks were a larger share of the support, but were not substantial by themselves. We did not include in our PSE calculations the value of state and local real estate tax benefits to agriculture. California, like many other states in the United States, provides for a special taxation rate on agricultural real estate. The state’s Williamson Act, introduced in 1965, provides a preferential assessment program for agricultural land. Williamson Act acreage currently represents almost half of California agricultural land. Under the Williamson Act, landowners sign a contract with the appropriate local government agency restricting urban use of that land for ten years. In return, property under Williamson Act protection is assessed for tax purposes according to its capitalized agricultural income. Capitalized income assessments are usually about half of the market value-based assessments for Williamson Act land; thus landowners receive approximately $120 million in tax benefits. Contracts may be terminated through non-renewal or cancellation. Non-renewal gradually phases in the market value-based assessment over nine years; at the end of the ten-year contract, the land is appraised at full market value. Cancellation of Williamson Act contracts must be approved by the local governing board after conducting public hearings. If the contract cancellation is approved, the landowner pays a penalty of 12.5 percent of the current market value of the land .Dairy policy is discussed in detail above. Here we note only that, in addition to trade protection and internal price policies, the dairy industry receives support from several smaller programs as well. In addition, the dairy industry receives indirect support in the form of subsidies to the grain industry and, especially, the alfalfa hay industry. Hay is important in dairy production, accounting for about 20 percent of total costs. The major subsidy for alfalfa is irrigation water; some have argued that the water subsidy to alfalfa is a major contributor to lower dairy production costs in California. Let’s examine this proposition. Total alfalfa support is about $34 million. Most of this, about $15 million is attributable to the irrigation water subsidy.
Some of the alfalfa and other hay grown in the state is consumed by other livestock. Approximately $12 million of the water subsidy to hay is ultimately of benefit to the dairy industry. If the $12 million were added to a subsidy of about one billion dollars, it would raise the overall dairy subsidy from 33.4 percent to 33.6 percent. In other words the effect of irrigation subsidy on dairy is very small, especially compared to the subsidy from other sources.Commodities in this category have little government intervention in their markets. The PSEs range from about 3 to 5 percent of the revenue. There are no significant trade barriers or direct payments for these commodities. The main portion of support comes from input assistance, marketing assistance, broad government infrastructure and economy-wide policies. While these commodities have no explicit export subsidies, they do benefit from foreign market development funding to some degree, especially almonds and strawberries . Crop insurance benefits and disaster payments are also a source of a small amount of support for this group . In the citrus industry, crop insurance and disaster payments comprise almost 30 percent of the support; large payments were made following the 1990 freeze that took a heavy toll on the California citrus industry . Most commodities in this group have some sort of marketing order, either federal, state, or both. The marketing order share of total support ranges from 3 percent to around 25 percent . The share of support from research is relatively high for these commodities, around 25 percent. Nevertheless, since these percentages equal very small PSEs for the horticultural commodities, the overall subsidy is quite small.The federal programs for these commodities were discussed in detail above. Direct government payments provide the lion’s share of support: 90 percent for rice, 74 percent for cotton, 86 percent for feed grains, and over 76 percent for wheat. Cotton, wheat, and rice have active marketing orders but compared to the value of the direct income supports, the marketing order budgets are relatively small. The magnitude of the direct payments and the export subsidies also make the value of the input assistance, marketing assistance, infrastructure, and economy-wide policies a small percentage of total support.
As noted above, the most important feature of support for alfalfa and other hay is the water input subsidy. Alfalfa production in California uses approximately 2.3 million acre-feet of CVP or SWP water per year. Like fruits, nuts, and vegetables, alfalfa production does not benefit from trade barriers or direct payments. Research accounts for about 15 percent of alfalfa support, while the input assistance , marketing assistance, infrastructure, and economy-wide policies provide about 35 percent. Excluding water, the alfalfa industry would have a PSE of 2.2 percent.One of the major problems in California is that the state’s water is concentrated in the north, but the majority of the state’s urban population and irrigated agriculture is located in the south. California contains 32 million acre-feet of developed water,round plastic pots of which 84 percent is used to irrigate 9.68 million acres of agricultural land. Because such a large proportion of water resources is used for irrigated agriculture, most water management conflicts involve the movement of water to or from irrigated agriculture. While most of the water is used to irrigate field and fodder crops, the high value vegetable and fruit crops generate the majority of agricultural revenues.From the 1950’s to 1970’s different government agencies at the State and Federal level implemented a massive water development program in California. This program was built upon the traditional supply augmentation approach to water development. Unfortunately this approach to water development is flawed. The main weakness of the traditional supply based method is that it assumes that the demand for water is perfectly inelastic and unchanging over time. An inelastic demand assumes that there is little quantitative response to changes in the price of water. Under this planning approach the quantity of water to be delivered by a water project is fixed, and the only question is how to minimize the costs of supplying it. Economic analysis is then performed to see if the total costs of the water project are less than the total benefits. Both the State Water Project and the Federal Central Valley Water Project were developed using the principles of the supply-based approach to water development. The SWP was originally projected to supply an average annual quantity of 4.2 million acre-feet of water in two stages. The first stage of 2.2 million acre-feet was built and put into service in the late 1960’s and early 1970’s.
However, subsequent attempts to build the remaining 2 million acre-feet capacity have met with effective opposition from environmental interests, who want to prevent any further water development, and current contractors, who know that the average cost of water delivered by the system will have to increase by up to 300 percent to finance the completion of the planned project. In 1994 the SWP project contractors and operators met to renegotiate the conditions for water sales among contractors and the allocation of cuts in water deliveries during drought periods. The resulting Monterey agreement also enabled contractors who overlie a state operated groundwater storage project to exchange the control of the project for surface water entitlements; these entitlements could then be transferred to urban contractors. Finally, the agreement sanctioned the permanent transfer of 130 thousand acre-feet of water from agricultural to urban users. The CVP parallels the SWP and delivers 4.6 million acre-feet of water to both urban and agricultural contractors. Urban contractors receive 10 percent of total water deliveries while the remaining 90 percent of water is diverted to agricultural contractors. The CVP was operational in 1965, but by 1992 there was considerable political pressure to modify the operation of the project to reduce environmental damage to different fish populations in the Sacramento River Delta. The resulting Central Valley Project Improvement Act reallocated water to environmental uses by cutting water deliveries by 1 million acre-feet in normal rainfall years and by 804 thousand acre-feet in critical rainfall years. The CVPIA mandated that 800 thousand acre-feet of water be reallocated to in stream uses to protect the salmon runs, while 400 thousand acre-feet of water be reallocated to wildlife refuges . Water markets in the CVP districts are limited to local sales among agricultural contractors. These sales are short in duration and are generated by differences in the water allocations between farm regions and years. Due to institutional constraints, CVP water is still largely used for agricultural irrigation despite a three-fold difference between the value of water in nearby urban sectors and agricultural sectors.In recent years, State and Federal law have mandated a set of modifications that affect both the state and federal water projects in California. In 1996 and 1997 California developed the 4.4 Plan that aims to reduce diversions from the Colorado River to 4.4 million acre-feet over a period of 15 years. Moreover, in 2000 the Environmental Water Account was implemented by the state and federal governments. The purpose of the EWA is to regenerate the fisheries of the San Francisco Bay-Delta system while simultaneously securing water supplies to both urban and agricultural users. Both these developments have encouraged water trading.This transfer, while historic, is more like an intergovernmental reallocation than a prototypical water market exchange. The QSA settled a large array of issues regarding use and conveyance of Colorado River water, many of which were unrelated to the transfer itself. There is also some question as to the willingness of IID to enter into the agreement. While it appears that many landowners and the IID itself will benefit substantially from the agreement, local opposition to the transfer remained strong until the Bureau of Reclamation found under a Section 517 proceeding that IID’s use of water exceeded “reasonable and beneficial” amounts. This finding raised the possibility that, unless transferred, IID stood to lose a significant share of its annual use with no compensation.Figure 3 plots both actual transfers and regression predictions of water transfers in California between 1985 and 2001. The regression fitted to water transfer data confirms that rainfall levels have a significant effect on annual water transfers . The data also confirms a positive correlation between the time trend and water transfers. When expressed as a percentage of the mean level of water transfers, the regression time trend shows an annual growth rate of 1.26 percent over the period.