Projects Funded for 2012-2013

California's Air Quality Regulations on Dairies: Multiple Environmental Externalities and Interactions of Regulations

  • Julian Alston
  • Wei Zhang


Specific Objectives of the Project

We will study the economic effects of California's air quality regulations on dairies and provide insights into the future design of environmental policy related to the livestock sector. This research will make four contributions. First, we will identify consequences of local air quality regulations on dairies for ambient air concentrations of ozone and particulate matter. Second, we will estimate the economic cost of local air quality regulations borne by dairies in the South Coast Air Basin and San Joaquin Valley. Third, we will investigate the interactions between air quality and water quality regulations and empirically test whether these different regulations are complementary or incompatible. Fourth, our research will shed light on cost-effective approaches to regulate environmental extern alities from livestock.

Summary of Results

California dairy farms have experienced hard times in recent years. In addition to changes in market conditions in both input and output markets, the burden of environmental and other regulations has been mentioned as a culprit. This research examines the effects of a local air quality regulation on the costs of milk production for dairy farms in the San Joaquin Valley in California. Unlike previous analysis of the effects of environmental regulations on ag ricultural production, in this work it was possible to identify the realized operational changes associated with abiding by the regulation. Estimated adoption rates of different pollution-mitigation practices reveal that dairy farms have adopted labor-intensive production practices to comply with the air quality regulation. Using farm-level cost data on a panel of dairy farms, the effects of the regulation on the costs of milk production were estimated. Different from ex-ante analyses, my econometric results indicate that the air quality regulation has not affected the total costs of milk production. Estimates from different specifications indicate that the regulation may have reduced feed costs during some periods, perhaps because some pollution-mitigation practices can reduce feed fermentation. The regulation has increased the costs of hired labor by about $0.15 per hundredweight of milk, which is equivalent to an 11% increase in hired labor costs for dairy farms facing the regulation.

Forecasting California's Urban Water Demand

  • Maximilian Auffhammmer


Specific Objectives of the Project

Construct a forecasting model based on the most extensive retailer level consumption and price dataset ever collected for the State of California.

Summary of Results

We have built the code and data for the forecasting model and it works. We can generate results for Southern California and are working on completing the Northern California results. We hope to have a working paper targeted at Water Resources Research by the end of the summer. Progress was a bit slower than anticipated due to unforeseen complications in writing code that estimates 250,000+ models a few hundred times each.

Adoption of Technologies and Management Practices by California Avocado Growers in Response to Water Scarcity and Quality Problems

  • Ariel Dinar


Specific Objectives of the Project

  1. Understanding the socio-economic and physical determinants of adoption of technologies and management practices by California Avocado growers.
  2. Estimating economic impact of adoption of technologies and management practices on the ability of avocado growers to withstand drought and water quality deterioration.

Summary of Results

Avocado growers use a variety of management practices for crop irrigation and control of soil salinity. When faced with changes in water availability, reliability, and quality, growers must consider not only the effects of these changes on yields, but also the economic implications of their decisions. As new information becomes available on best irrigation practices that conserve water while avoiding salinization, growers must access this information and apply it to their own situation. Avocado is an important crop in the economy of California, which is sensitive to water availability and quality. This study determines how growers make decisions about water management and irrigation technology implemented at their avocado orchards. This study considers how farm traits, socio-economic and regional factors affects how growers adopt strategies and technologies in response to water quantity and quality changes. The results of this study are based on primary information collected from avocado growers in California. The final results will determine which irrigation management strategies are most cost-effective for responding to drought or a shift to low quality groundwater resources, and what are the behavioral aspects of grower decisions with respect to water management and adoption of new technologies. Ultimately, these research findings can both be applied to avocado production globally and extended to other crops that require precision water management.

Understanding the Role of Marketing Orders in California Agriculture

  • Rachael Goodhue


Specific Objectives of the Project

  1. To identify the key uses of marketing orders in California agriculture.
  2. To identify the key characteristics which determine producer demand for marketing orders in California agriculture.
  3. To explore how changes in producer characteristics affect producer surplus and producer demand for these marketing orders.
  4. To explore how changes in market characteristics affect producer surplus and producer demand for marketing orders.

Summary of Results

The initial step in the project was a literature review of past work on marketing orders in California. It was complemented by research regarding recent changes in marketing order status including cases of termination, establishment, and changes in activities. This project component was reported in an ARE Update article in 2013. We focus on the question of how the structure of the agricultural production sector affects producers' prospective gains from a marketing order and, hence, their voting decision regarding its establishment or disestablishment. Very few studies have examined distributional issues related to marketing orders. The few that have take the presence of the marketing order as a given, and then examine distributional issues. In our theoretical model, we examine the case of an industry with two firm types – a low cost dominant firm and a competitive fringe composed of high cost firms – and compare voting outcomes for a marketing order that engages in demand-enhancing generic advertising activities with the money from a unit assessment. We compare voting power to market share. Voting power is characterized using Banzhof power, a concept from political science. Because legal requirements for forming/dissolving a marketing order require a double (federal) or triple (California) majority there is the potential for substantial differences between a firm's voting power and its market share. We model the federal requirements that a majority of producers accounting for a majority of production must approve formation/dissolution. We find that under the double majority rule the greater the cost advantage of the dominant firm the less voting powe r it has relative to the competitive fringe. Work on the model continues. Currently we are expanding the range of market structures analyzed. The next step will be to introduce a two-period model incorporating entry and exit.

The Safe Drinking Water Act and Water Quality: The Case of Nitrate Contamination in the Salinas Valley and Tulare Lake Basin

  • Katrina Jessoe

Effect of Trade Costs on Vegetable Markets

  • Ethan A. Ligon


The primary objective of this research project is to test for and measure changes in the domestic competitiveness of wholesale markets for fruits and vegetables over time and across regions and commodities. Do vegetables get more expensive when transportation is costly? America's vegetable markets rely on a massive shipping network, and with rising gas prices and efficient new vehicles, this question will remain important in the coming years. This issue speaks to the availability of affordable produce to consumers living far from farming communities. It is of special interest to California agriculture, which is a major exporter of all of the commodities in our data.

This project is using a rich dataset on the prices of a number of agricultural commodities in a range of wholesale markets around the United States. This data is being collected and combined from several formats, including microfilm an d paper in the Giannini Library, scanned records in USDA archives, and for recent years, a publicly available digital database. Combining these sources for final analysis is an ongoing detailed process.

Analysis is ongoing as new data sources are integrated into the existing dataset. Thus far, the analysis shows that transport costs are important in vegetable markets, accounting for as much as 20% of wholesale prices for perishable items like tomatoes and lettuce in importing markets. Adjusting for inflation, these price differences have actually been quite stable over time. Increases in gas prices don't seem to translate into higher vegetable prices on average, in part because our measures thus far are very noisy. For a dollar increase in the price of gasoline, we measure the price of celery going up 15% on average in distant markets. The price of potatoes only goes up by 1.6% on average. So while importing markets do face higher vegetable prices, the changing cost of shipping may not be changing this relationship in a significant way.

Analyzing and Designing Policies for Managing Groundwater for Agriculture

  • C.-Y. Cynthia Lin Lawell


Specific Objectives of the Project
1. Analyze the efficiency of the subsidization of efficient irrigation technology.
2. Determine the socially optimal amount of water to pump each year, taking into account the nonrenewable nature of the resource and spatial externalities.
3. Design policies to induce the socially optimal pumping.

Project Report/Summary of Results
In western Kansas, the prior appropriation doctrine gives producers rights to extract groundwater for crop production. This property rights system may distort the incentive for rights-holders to optimize dynamically, leading to a deviation from the economically efficient extraction path. We develop an empirical model to test whether groundwater users faced with the prior appropriation doctrine are behaving in a manner consistent a dynamic model of nonrenewable resource extraction, and apply it to data from western Kansas. We find that despite the incentives given to groundwater users to pump their maximum allowable amount in each year by the prior appropriation doctrine, farmers extract water consistent with a dynamic model of resource extraction. We also find evidence that the original appropriations were allocated in a manner consistent with notions of allocative efficiency.

Encouraging the use of more efficient irrigation technology is often viewed as an effective, politically feasible method to reduce the consumptive use of water for agricultural production. Despite its widespread recommendation, it is not clear that increasing irrigation efficiency will lead to water conservation in practice. To analyze the efficiency of the subsidization of efficient irrigation technology, we evaluate the effect on groundwater extraction of a widespread conversion from traditional center pivot irrigation systems to higher efficiency dropped-nozzle center pivot systems that has occurred in western Kansas. State and national cost-share programs subsidized the conversion. On average, the intended reduction in water use did not occur; the shift to more efficient irrigation technology has increased groundwater extraction, in part due to shifting crop patterns.

Immigration Reform and Agricultural Competitiveness

  • Philip Martin


Specific Objectives of the Project
Over half of California’s farm workers are unauthorized, prompting proposals for a 3-pronged immigration reform, viz,
• enforcement measures to discourage the entry and employment of unauthorized foreigners,
• legalization for most of the 11 million unauthorized foreigners in the US, and
• new guest worker programs.
Agriculture is treated differently in immigration reform proposals. It is subject to the same enforcement measures, but unauthorized farm workers would have a unique path to legal status and the farm guest worker program is different from other programs that admit foreigners to fill low-skill jobs. This project uses research, education, and dissemination to assess the implications of current immigration patterns for the state’s agricultural competitiveness and the potential impacts of reform proposals.

Project Report/Summary of Results
Immigration Reform: Effects on California Agricultural Competitiveness, is a three-pronged research, conference, and newsletter effort to understand how current migration patterns and proposed reforms would affect agricultural competitiveness, farm workers, and communities. Major outcomes included:
• Analysis of how current immigration patterns affect crop choices and the potential impacts of immigration reforms, such as a $1 to $2 an hour housing allowance for legal guest workers that would be offset by a $1 to $2 an hour reduction in the special minimum wage for guest workers
• Conferences that brought researchers together with policy makers and advocates to discuss immigration’s impacts in particular commodities and communities and to enable researchers to learn about policy options being discussed.
• Rural Migration News summarized and analyzed significant developments each quarter in farm labor, immigration, and agricultural communities ( Rural Migration News, which has earned a reputation for accurate and reliable analysis, is read by 1,500 researchers and extension specialists, students, and policy makers and the media, and is often cited in academic journals.

Grocery Brand Competition with Implications for Pass Through

  • Jeffrey Perloff


Do changes in food commodity prices have asymmetric effects on retail grocery prices? For years, farmers, consumer advocates and others have argued that grocery store prices rise rapidly in response to increases in commodity prices, but do not fall equally rapidly when commodity prices drop. We examine pricing in both stores that have regular sales and those that use everyday low pricing and rarely have sa les. For both types of stores, we find very little evidence for asymmetric price adjustment. We believe that some earlier studies found asymmetric adjustments because they did not use narrowly defined products, control for all the main factor prices, and u se state-of-the-arts estimation procedures.

Nonlinear Effects of Weather of California Agriculture

  • Wolfram Schlenker

The Effect of Ethanol Production on Gasoline Prices

  • Aaron Smith


Ethanol made from corn comprises 10% of U.S. gasoline, up from 3% in 2003. This dramatic increase was spurred by recent policy initiatives such as the Renewable Fuel Standard and state‐level blend mandates and supported by direct subsidies such as the Volumetric Ethanol Excise Tax Credit. Some proponents of ethanol have argued that ethanol production greatly lowers gasoline prices, with one industry group claiming it reduced gasoline prices by 89 cents in 2010 and $1.09 in 2011. The 2010 figure has been cited in numerous speeches by Secretary of Agriculture Thomas Vilsack. We show that these estimates were generated by implausible economic assumptions and spurious statistical correlat ions. To support this last point, we use the same statistical models and find that ethanol production "decreases" natural gas prices, but "increases" unemployment in both the United States and Europe. We even show that ethanol production "increases" the ages of our children. Overall, we see no compelling reason to believe that the effect of ethanol use on gasoline prices has been more than $0.10 per gallon. In California, ethanol has an even smaller negative effect on gasoline prices, partly because it is relatively expensive to ship ethanol from the Midwest to California and partly because the LCFS encourages imports from Brazil of ethanol made from sugarcane.

Economic Analysis of Food Safety Regulation

  • Daniel Sumner


Specific Objectives of the Project

Model producer provision of food safety, with empirical applications to the fresh produce and shell egg industries that are important in California. The applications include estimating effects on nutrition through reduced consumption of fresh products in response to heightened safety concerns. Lacking econometric estimates, we are likely to design and conduct experiments to ge nerate needed data.

Simulate the effects of the Food Safety Modernization Act of 2011 (FSMA) on imports of fresh tomatoes.

Summary of Results

Using the funding from the grant, John Bovay was able to finish his strong dissertation on "Regulation of Production Practices and Product Attributes: Farm Animal Welfare and Food Safety". This consisted of three essays on the regulation of food safety and one on the economic and political factors that drove California voter support for a referendum on standar ds for the housing of egg-laying hens. We have published one and expect to publish two additional peer-reviewed articles based on material in John Bovay's dissertation. One will be about the effects of the Food Safety Modernization Act, and the other about factors that drove voter support for legislation on the housing of egg-laying hens in California

Fixing the Climate Trade-off: Uncertainty and Distribution

  • Christian Traeger


The main part of the project analyzed the impact of growth uncertainty on optimal mitigation policy. Ceteris paribus, faster growth implies richer future generations and, at the same time, more emissions and higher damages in the climate dependent sectors of the economy.

Earlier Monte Carlo studies suggested that optimal mitigation decreases under long-term economic growth uncertainty. We showed that these suggestive results do not hold in a proper stochastic dynamic programming framework. Under standard preferences, optimal mitigation slightly increases under growth uncertainty.

In a more sophisticated evaluation framework, we first account for observed risk premia by increasing risk aversion, while keep the propensity to smooth consumption over time fixed at its widespread value. From the intergenerational perspective, this propensity to smooth consumption over time can be interpreted as a (relatively high) aversion to intergenerational inequity. In this scenario, long term growth uncertainty more substantially increases optimal CO2 mitigation. Second, we reduce the propensity to smooth consumption over time to better reflect the observed low risk-free rate. Then, growth uncertainty decreases optimal mitigation. However, the reduced propensity to smooth consumption over time, simultaneously makes present generations more willing to invest into a future that is richer in expectation, increasing optimal mitigation. We show that the net effect of using the more comprehensive evaluation framework is always an increase in optimal mitigation policy.

The project funding also enabled us to take a first step towards developing a model that addresses distributional aspects within generations under uncertainty. Hereto, we related our DICE based numerical integrated assessment structure to a recent analytic integrated assessment model by a group of macroeconomists (Krusell, Golosov & Hassler). The models of the latter have the advantage of an explicit energy and resources sector and a direct implementation of the decentralized equilibrium, while our DICE based model has the advantage of overcoming the very restrictive functional forms and much simplified climate dynamics. So far, we have elaborated different model layouts that combine important characteristics of both models while keeping numerical tractability. The transition of Mexican workers away from agriculture will have profound impacts for the U.S. farm sector, which historically has depended on an elastic supply of Mexican farm labor and will now have to compete with Mexican farms for a dwindling supply of labor. To adjust to a smaller supply of labor, in the future U.S. farming will need to become more mechanized, relying on fewer and more productive workers. This will impact both the U.S. farm industry and rural communities; increasing skills and wages of farm workers may help break a vicious circle of farm employment, immigration, and poverty.

Voting for GMOs in California

  • David Zilberman


Specific Objectives of the Project
Understanding factors that affect voting for the labeling of pesticides or the banning of pesticides in California.

Project Summary
This project developed a theory explaining consumer choices regarding the labeling of genetically modified (GM) food and applied it to Proposition 37. Proposition 37 originated from an attempt to stall the advances of GM food and biotechnology in the California, drawing on the perception that there is significant public suspicion against the technology and rising awareness and concern about food safety. The initial survey of the public mood in this study suggested that there was potential for proponents of the proposition to succeed. Furthermore, there is a large body of literature in economics and other fields that suggests that some consumers may be willing to pay significant premiums for non-GM food. However, in the end, the proposition failed. Two main issues seemed to carry the outcome of the vote: (1) Flaws in the writing of the proposition created suspicion of its intent. (2) More important, the claim that implementation would raise food prices for Californians by $400/year per household caught people’s attention. To some extent, this was a real experiment on willingness to pay (WTP) to avoid GM. This experiment showed that, among the majority of the populace, the WTP was low. That is, while some perceived objections are widely held, they do not run deep. Once the public realized the cost of restricting GM, they lost enthusiasm, suggesting that increased education on the benefits of GM and, more important, the cost of blocking its use might bear fruit and help to relax the policies that regulate and restrict GM in other markets.

If the public faces a serious trade-off and is exposed to sound argumentation as to why a regulatory requirement is excessive, people will vote against restrictions. This bodes well for the future of GM if its proponents can make a strong case for it, given that California has tended to support environmental causes. For example, California is one of few states that has implemented climate-change policies. Another lesson might be simply that money talks, and large contributions to political causes may sway the public, possibly even against sound policy. But the elections in 2012 demonstrated that large spending does not always guarantee a win.