RESEARCH & IDEAS

HBS Cases: Who ControlsWater?Published: April 18, 2012Author: Maggie Starvish

In a recent field study seminar, ProfessorForest L. Reinhardt discussed the case "WoolfFarming & Processing," which illustrates howaccess to watera basic building block ofagricultureis affected by everything fromcomplex government-mandated requirements toa 3-inch endangered bait fish.

Although much of the globe is awash in it,the allocation of water for human consumptionis anything but easy. As the planet's populationgrows, urbanizes, and is subjected to climatechange, many experts foresee a global watercrisis (and resulting food shortages andincreasing prices) looming over the next 40years.

"The basic problem fromthe farmers' point of view isthat the water is in thewrong place at the wrongtime."The 2009 case "Woolf Farming &

Processing" illustrates many of these challengesthrough the eyes of Stuart Wolf, a centralCalifornia family farmer who must grow cropseven as the available water supply to hisoperation is curtailed by drought conditions,court decisions, and quotas imposed bygovernment agencies.

The case examines how water, a basicbuilding block of agriculture, is affected by acomplex web of political, environmental, andagricultural pressures, and the effects thoseimpacts have on business, society, and globalfood production.

"Like all good cases it's a good story, andlike all good cases it also tells you somethingmore general about important problems," saidForest L. Reinhardt, the John D. BlackProfessor of Business Administration atHarvard Business School.

Reinhardt led a discussion of the caserecently in the MBA field study seminarInnovation in Business, Energy, andEnvironment, held in Harvard's Innovation Lab.The case was prepared by HBS Professor David

E. Bell, Laura Winig, and Mary Shelman (HBSMBA'87), director of the Agribusiness Programat HBS.

A family farmWoolf Farming & Processing, established in

1974, is located in the southern part ofCalifornia's Central Valley, one of the mostfertile areas in the country. The valley has beenheavily farmed since the the 1850s, and throughthe years sharp rises in agricultural productionand population quickly depleted the local watersupplies.

In response, the state and federalgovernments stepped in and created a waterinfrastructure of dams and aqueducts thatReinhardt said was "overcommitted the day itwas built." The last project was completed inthe 1960s, when California had a much smallerpopulation, with much smaller bank accounts.Woolf Farming & Processingalong withthousands of other farmersrelies on this aginginfrastructure. Stuart Woolf and his father, Jack,before him had invested heavily in watermanagement technologies because they wereaware of its weaknesses.

"The basic problem from the farmers' pointof view is that the water is in the wrong place atthe wrong time," said Reinhardt.

It's also one of the reasons why a sustaineddrought in the late 2000s laid 450,000 acres ofCentral Valley farmland fallow, which pushedlocal unemployment rates as high as 40 percent,drove protesters into the streets, and led Woolfto cut his crop back dramatically, at one pointgrinding up 90,000 water-hungry almond trees.

Throughout the discussion, Reinhardtworked with students to sort out a complextangle of interdependent contributing factors.

Environmental and legal issues muddy thewater, for example. In the mid-2000s efforts tosave a 3-inch fish called the delta smelt fromextinction led to a ruling by a US district courtjudge that significantly limited the amount ofwater that could be pumped to farms out of theSacramento-San Joaquin River delta. Thetheory behind the ruling was that the smelt weresensitive to salinity levels, which rose as waterlevels lowered.

The Endangered Species Act is another

factor working against the farmers."The Endangered Species Act is an

interesting piece of legislation," said Reinhardt."The federal government has to do everything itcan to reduce the probability of extinction. It'sexplicitly prohibited in the statute frombalancing costs and benefitsIt doesn't evenmatter if you have little prospect of saving thefish. You still have to spend any amount ofmoney you can to protect it."

It's easy to count the damages to the farmer,he added, but very difficult to value the damagecaused by the extinction of the smelt.

"The environmentalists argue that if you letthe bureaucrats do cost-benefit analysis, the fishwill lose every single time," he said. "Andyou'll have extinction after extinction afterextinction."

But the farmers benefit from other politicaldecisions. Because of government subsidies, theprice some pay for whatever water they do getis a fraction of its actual cost.

Possible solutionsReinhardt shifted the conversation to

discussing solutions, such as assigning propertyrights to water.

"In a way the history of Europeans andAsians on this continent has been the story ofenvironmental abundance converted to scarcitythrough systems of open property access, whichthen lead to the creation of private propertyrights because that's the only way of solving theproblem," he said.

Solving the problem by treating water likeany other commodity sparked lively discussion.

"If the world trade systemfounders it's going tofounder in food.""Farmers would probably have a price of

water that would be significantly higher than itis right now so they probably would not plantthirsty crops," remarked one student. "Themarket would sort out the farmers and theenvironmentalists somewhere in themiddlethe environmentalists would save thespecies they really wanted to save."

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"With a completely free market with norestrictions, I can at least imagine an outcomewhere there is a winner," said another student.However, the losers in such a free market wouldnot survive.

Yet a market that guarantees people will getthe water they need to support basic humansurvival is not the perfect solution either. "Youstill have the problem of the huge year-to-yearvolatility of water available," said one student.

"You absolutely have a massivehydrological risk," replied Reinhardt, a riskcurrently borne by the farmers, since theenvironmental flow of water is inelastic becauseof the Endangered Species Act.

"The farmers would still have risk," hecontinued. "But it would be price risk instead ofquantity riskIf there's a market, clearly theprice is going to be higher than the price thatsome farmers are going to be able to afford."

This could be a good thing for Woolf

Farming & Processing because it couldpurchase, on the cheap, neighboring farms thatdidn't invest in water conservation technologies.Stuart Woolf might then be better positioned tomeet his own objective, as stated in the case: "tobe a part of a food system that would feed agrowing world population with fewerresources."

World food prices are a definite concern."The inflation-adjusted price of food has beenfalling over time," said Reinhardt. "People usedto spend 50 percent of their income on food."For residents of wealthy nations, that numberhas dropped to 2 percent. "Most people don'tthink about whether that decline will continueor not," he added. If it does not, "the world isgoing to be a very, very different placeIf theworld trade system founders it's going tofounder in food."

Other options were also discussed: movingout of California and buying land in more

politically, geographically, and economicallyfriendly countries; planting less thirsty crops;and giving up farming altogether and switchingto the solar energy business, for instance.

In the end, the class did not come up with aclear solutionbecause there isn't one.

Societies persuade institutions to solve oneset of problems. If the institutions aresuccessful, more prosperity is created, whichleads to the obsolescence of the very institutionsthat created the prosperity. Eventually there'sthe need to create institutions to manage thenew disparity. "It's an old story, "Reinhardtsaid. "And that's the position in which we findourselves in California."

About the authorMaggie Starvish is a writer based in

Somerville, Massachusetts.

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HBS Cases: Who Controls Water?A family farmPossible solutionsAbout the author