I looked it up because I thought there was no way that it could be true, you must've missed some important detail. But no, the article says exactly what you said it does.
What a perfect example of the intersection of the free market and the tragedy of the commons.
Privatization, regulation, collectivization, adaptive fees / "market pricing" - these are solutions proposed to situations which resemble the tragedy of the commons, in order that we can avoid the worst case scenario associated with continued individually-incentivized over-exploitation.
The term refers to situations where these incentives operating on a common good line up in a way which is potentially self-destructive to the system - not strictly to situations where they've already destroyed the system.
edit: proper link
It simply isn't possible for things to happen the way you describe them.
Prices are a function of supply and demand. When you say "nut trees require a lot of water, and thus nut prices are going up in the current drought" this implies that supply of nuts went down during the drought. Otherwise, consumers would have no reason to care about the amount of water required to produce nuts.
Given this, "CA farmers are increasing nut trees acreage" must be an incomplete picture. Even if some farmers are increasing acreage, there must be others who are decreasing by even more, otherwise prices would be going down, not up.
That was not the claim. The claim was that an decrease in supply of one input (water) could drive market conditions which lead to an increase in consumption (in the course of production) of another input (land use).
I don't think it's that much of a stretch to think that instability in market prices for a good may cause odd market behavior that has consequences in related areas.
Sure.
> When you say "nut trees require a lot of water, and thus nut prices are going up in the current drought" this implies that supply of nuts went down during the drought.
No, it doesn't. It could equally (in a real market with humans instead of an ideal market with rational actors -- particularly, in a market in which the perfect information assumption of rational choice theory does not hold) mean that demand for nuts increased because purchasers (not necessarily consumers -- nuts are purchased by lots of processed-food makers) expected supply to decrease in the drought, and there was a desire to stock up before that occurred.
> if some farmers are increasing acreage, there must be others who are decreasing by even more, otherwise prices would be going down, not up.
Even if we assume that the price increase must be supply driven (rather than demand driven based on price expectations based on beliefs about future supply), this is wrong, because it assumes that production per acre is constant, rather than, e.g., declining in a drought. If production on the same land use drops in a drought, then you could have reduced supply driving prices up without reducing land use -- depending on elasticity, this could conceivably even increase the total revenue of almonds sold -- leading to increased incentives to bring more acreage into production.
>Even if we assume that the price increase must be supply driven...
That doesn't matter to me, I was arguing against a specific mechanism. I never said there was no reason that more acreage might be used. I said that the reasoning of the poster was wrong.
depending on elasticity, this could conceivably even increase the total revenue of almonds sold
It really couldn't. If you are, as you say, assuming prices are driven by supply and demand, and there are no demand shocks, then total revenue must go down. That is econ 101.
If that's what you learned in that class, you should ask for a refund. If the demand curve is relatively steep (i.e. not elastic), then a supply shock (e.g. a drought) could change price drastically while changing quantity very little. This is not an uncommon situation, especially with respect to food commodities.
[EDIT:] Haha whoops! I certainly didn't intend to tell you anything about your own field. I think that in this case you might be missing important details about the situation on the ground. Irrigation water isn't auctioned off to the highest-bidding farmer. Rather, different farmers have rights to various amounts of water, and those rights are ordered so that some farmers will get nothing in a drought while others will get the same amount they get every year. So, while the industry as a whole has not profited from the supply shock we're discussing, the "lucky" farmers with senior water rights certainly have.
Consider the limit as demand becomes (locally) infinitely inelastic. Then a shift of input costs of X will cause the price to change by X. Total volume (call it Y) of goods sold stays the same and total revenue increases by YX. Total revenues net of costs remain the same since total costs increased by YX.
The main point here is that markets don't do weird counterintuitive things, at least in a partial equilibrium analysis. Shocks to the costs of inputs always result in less production and less profit.
[Reply to edit] No offense taken, I shouldn't have said "econ 101" in the first place since it could be interpreted as disparaging. What I meant is that once we accept the assumptions of partial equilibrium analysis, it really constrains what can happen, and it can be shown by simple well known theory. And you were right, I wrote "revenue" when I should have written "profit".
I'm sure that what you are saying about water rights is true, but I'm simply arguing that the increased "cost" of water must move the supply curve of nuts up (at every point) not down. This shift of the supply curve might cause some people to stop growing and others to start, there is nothing in the theory that contradicts that. But everything in this thread still fits into partial equilibrium analysis.
CA farmers are increasing nut trees acreage because nut trees require a lot of water, and thus nut prices are going up in the current drought, and thus the farmers are rushing to increase the production of such profitable product. (Heard on NPR)
Taken by itself, this contradicts neoclassical economics, no matter how charitably you read it. If it were implied there were more complex mechanisms whereby acreage increased even while total production decreased (as neoclassical economics implies it must), then the statement could not use the words "because" and "thus" in the way it did.
You and others have implied that I was wrong because the conclusion that nut tree acreage increased is still possible, but I never said it wasn't. I think it's perfectly fine, and important, to critique an argument as opposed to a conclusion. If I let this slide, then should I also nod and smile when someone argues that people should buy local since it makes everyone richer?
That doesn't make sense. Consumers have no reason to care why prices change. Do you really think that when there is a drought, consumers increase the amount of nuts that they consume at a given price, because they find the price reasonable due to the drought?
It's a mistake to rely on simple supply-and-demand to analyse this situation because laws of supply and demand are generally considered in an atmosphere of perfect competition, and ceteris parabus - all other factors being held equal other than the water cost, in this case.
It's a bigger mistake to assume consumers behave in ways that make no sense, in order to justify someone else's verbal argument (which made no reference to why consumers would act a certain way, and probably didn't even consider the issue).
Consumers have no reason to care why prices change.
In a world of pure supply and demand considerations that would be true. but as I've pointed out, we don't live in that world. We live in a world where many consumers are experiencing the same drought as the nut growers, and are aware of the impact it could have on prices, either because they live in the same place as where the nuts are grown or because they like to read the news.
Do you really think that when there is a drought, consumers increase the amount of nuts that they consume at a given price, because they find the price reasonable due to the drought?
No, and I didn't say that they did. I said they "accept that nut prices go up." Someone who enjoys nuts will limit their consumption if prices go up so much that the nuts are no longer affordable, but if they only go up a bit that person may consume the same amount of nuts they did before at a higher price because there isn't a suitable substitute. In other words, consumer preferences can result in inelasticity of demand.
It's a bigger mistake to assume consumers behave in ways that make no sense, in order to justify someone else's verbal argument (which made no reference to why consumers would act a certain way, and probably didn't even consider the issue).
Except a) this is an issue I happen to already be familiar with and b) I find consumers' behavior quite rational when I consider the totality of the circumstances.
None of this explains how knowledge of supply shocks would change a consumer's intrinsic demand for nuts.
>In other words, consumer preferences can result in inelasticity of demand.
Earlier you said As long as nut prices are going up faster than nut costs, so will nut acreage
No matter how inelastic demand is, it is impossible for prices to increase faster than costs. In the limit of infinitely inelastic demand, prices increase at the same rate as costs (all costs are passed on to the consumer).
No matter how inelastic demand is, it is impossible for prices to increase faster than costs. In the limit of infinitely inelastic demand, prices increase at the same rate as costs (all costs are passed on to the consumer).
That only obtains under perfect competition, as I already said. I'm not trying to convince you that this behavior falls out of basic economic laws, I'm saying you're looking at it in the wrong context. Please look up the terms perfect competition and monopolistic competition, or we will just be talking past each other.
As for imperfect competition (which I'm also familiar with, I have a PhD in economics), I see you mentioned it above but I still don't know why. Even if not sellers were a monopoly or oligopoly, everything I said above would apply, at least in very broad terms. You could probably come up with some demand function such that increasing input costs of a monopolistic producer resulted in an increase in production, but I don't see why you would think that actually applied here.
The world often doesn't.
Further up the thread is the citation that the thing you insist can't happen... is happening. Might be time to adjust your economic theories.
> I have a model of economics which makes sense to me
> Here is a case in the real world that breaks my model
> The real world must be wrong.
It makes economics resemble religious ideology rather than an attempt to understand and predict real-world behaviors.
Farmers and ranchers don't just use muni water sources. Yes, water is common when you look at the water table, but muni water districts tend to use reservoirs and farmers must use water rights (which are built into the California Constitution, BTW).
Nut farmers may be in a position to use more water (I doubt all of them are), but that doesn't mean that all California farmers are able to do the same. California rice farmers, for example, (farming rice in an arid near-desert should almost be a crime) have been netting more money by leasing their water rights than working their crops for years now.[1]
[1] http://www.mercurynews.com/drought/ci_26181042/high-bidding-...
If you think that Glenn, Butte, and Tehama counties are deserts I strongly urge you to visit them, especially in the early spring. There's just water everywhere.