Rebecca Arrington

Charles Holt

Economics professor designs auction to reduce irrigation

By Charlotte Crystal

The loud, rapid-fire patter of an auctioneer is a familiar sound to farmers who buy calves, sell tobacco or replace worn-out tractors at auction. However, bidding to pull acreage out of irrigation in Georgia’s Flint River basin was silent in the electronic auction in March held by the State Environmental Protection Division to cope with a fourth year of drought.

The challenge was to design an auction to pull enough land out of irrigation to significantly cut surface water demand at a reasonable price, said Charles Holt, a U.Va. professor of economics who designed the auction with two collaborators at Georgia State University and other officials from the Flint River Water Planning and Policy Center in Albany, Ga., and the state environmental protection department.

Georgia’s EPD wanted to know how much money each farmer would accept, per acre, not to irrigate his land this year. The farmers’ bids were secret to avoid price-fixing, which would have raised the state’s cost of the program.

“We’re pleased with how it went,” Holt said. “The EPD had very few revisions in the bids after the last two rounds, so they stopped after the fifth round. Besides, the coffee and doughnuts we brought in that morning were all gone, it was after lunch time and everyone was hungry.”

About a year ago, two Georgia State economists contacted Holt, an expert in experimental economics and game theory, to brainstorm a solution to South Georgia’s problem: How to pull enough land out of irrigation for less than $10 million to ease the pressure on the Flint River basin’s water supply. Could they do this voluntarily? Or would the state have to force farmers to stop irrigating their soybean, cotton and peanut crops until surface-water levels could recover — whenever that might be?

The researchers didn’t have much to go on since, to the best of everyone’s knowledge, no such auction had ever been conducted. Their goal was to allocate limited water resources efficiently, using free-market principles, an understanding of bidding behavior and Web-based communications technology to allow bidding from different locations.

The researchers conducted several trial auctions, using students as farmers holding irrigation permits and paying cash for their bids as the trials unfolded. Officials from Georgia’s EPD observed the trial auctions and chose the design they thought would work best. In January, the researchers ran a full-scale trial run in South Georgia using students at eight different sites.

The result of the experts’ joint efforts was the electronic auction, conducted March 17 throughout the Flint River basin after the EPD director had formally declared a “severe drought” on March 1. Nearly 200 farmers gathered at eight sites to submit bids via computers to state EPD officials in Atlanta.

During the auction, EPD officials watched the bids pop up on their computer screen in real time as software crunched the numbers on individual bids, total acreage involved and estimated total cost. State officials conducted five rounds of bidding in which farmers dropped their bids in successive rounds until the officials had the results they wanted: enough acres were being offered at a price the state could afford.

In the end, the EPD accepted offers from 194 farmers to hold 33,000 acres out of irrigation through the end of 2001. Accepted bids ranged from $30 per acre to $200 per acre, with an average of $135.70 per acre. The state’s total cost will be $4.5 million and farmers are expected to receive payments this month, the EPD reported.

The result of the auction will be reduced demand on surface water in the Flint River and its perennial tributaries, streams flowing year round, by about 130 million gallons of water per day, according to the EPD.

The EPD did not include farmers using groundwater wells for irrigation in the auction because the agency has not determined the impact of groundwater use on the Flint River basin.

After more than three years of lower-than-average rainfall, water levels in southwest Georgia’s lakes, rivers and streams are dangerously low. These low water levels threaten the viability of more than 85 species of fish in the region’s lakes and rivers and have damaged the habitat of other animals that depend on the same water sources. The drought also has led to restrictions on watering lawns and washing cars and has hurt Georgia’s tourist and recreational industries.

Also, Florida’s Panhandle, which lies downstream from Georgia, depends on water flowing from the Apalachicola, Chattahoochee and Flint rivers for its own water needs, including drinking water, wildlife habitat and crop irrigation.

The irrigation-permit auction came about through the Flint River Drought Protection Act passed by the Georgia General Assembly in 2000, which directed the state’s EPD to conduct an electronic auction to temporarily pull land out of irrigation and preserve dwindling supplies of surface water.

The Legislature appropriated $10 million to cover the costs of the program. The $5.5 million left after this year’s auction will stay in a state account to cover any future drought declared in the Flint River basin, according to the EPD.