Structural change in agriculture: Decline in the share of water-intensive crop industries

Excerpt from the Bank of Israel Annual Report for 2018​:


  • The use of water in agriculture has become much more efficient in recent decades, in view of the increase in the price of water for growers: the output per unit of water has increased markedly.
  • ·A change in the industry composition of agriculture—a shift from water intensive crops to those with lower water intensity, in addition to impressive technological improvements, contributed to this increase. A notable example of this is the contraction in two water intensive industries—cotton and citrus.
  • These developments indicate that other sectors as well can increase efficiency, in view of changes in relative prices of inputs or production factors, not only through technological improvements, but also through changes in their industry composition.

 

The prolonged water crisis in Israel and the growing concern of a water shortage in numerous countries worldwide, in view of global warming, heighten the need for sustainable management of water resources. As such, it is important to analyze the processes impacting on water usage in Israel as well as the effectiveness and ramifications of the water policy adopted.

 

Agriculture is a very large consumer of water, and even though the quantity of fresh water allocated to it has decreased markedly, its share in the use of such water in the economy in 2016 was still 35 percent. Therefore there is considerable importance to moderating the use of fresh water in the sector.

 

The policy to restrain the use of water in agriculture has led to a marked increase in the price of water to growers over the years. Against this background, its use became notably more efficient: although agricultural output grew quantitatively by nearly 70 percent between 1990 and 2016, the total use of water in agriculture essentially didn’t change during that period. The adoption of advanced irrigation methods (such as drip irrigation), and other technological improvements contributed markedly to the increased efficiency.

 

This box focuses on an additional development that contributed in the past two decades to an increase in the value of the crop output per unit of water: the shift from water intensive crop industries to industries with a lower water intensity. The characterization of various crops’ water intensity in the box also takes into account the marked increase in use of treated wastewater, the price of which to growers is markedly lower than the price of fresh water.

 

The figure below plots the rate of change in the share of each industry in total crop output in 1996–2016 against its water intensity in 2006. The figure indicates that in those years the industry composition in agriculture changed toward industries with lower water intensity—in general, the higher the water intensity of the industry, the smaller the growth rate of its share in total crop output. Particularly notable are two water-intensive industries—cotton and citrus—that in the past were major industries in Israeli agriculture, and whose share in total output has declined considerably.

 

The structural change described in the figure is in line with the increase in prices and the limitation on quantity of water for growers. The extent of the structural change was notable, and it contributed to increased efficiency in the use of water. It should be noted that together with the set of incentives for increased efficiency, which included a marked increase in the price of fresh water and differential pricing for various types of water in accordance with their quality, growers were offered an alternative to fresh water—mainly treated wastewater—whose volume and quality increased over time. As a result, the increased efficiency was reflected in a marked decline in the use of fresh water as well as in increased use of treated wastewater.

 

The findings may apply more generally: various sectors in the economy can increase their efficiency, particularly in response to a change in relative prices of inputs or production factors, not only via technological improvements, but also via a change in their industry composition. A distortion in such relative prices (such as reducing the price of labor by extensive import of foreign workers) is liable to impact negatively on the rate of technological improvement as well as on the industry structure.​