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March 4, 1977

B read and Water
Will 1977 become the new drought
benchmark for California, replacing
1924 as the driest year on record?
With the southward migration of a
high-pressure ridge and the advent
of rain in late February, the current
year may not break the record. But
even if normal weather returns, the
drought of the past two years guarantees a period of water rationing
and economic hardship for many
Californians, particularly for those
who till the soil and tend the livestock.
In a normal year, California uses
about 37 million acre feet of water
(imagine roughly one-third of the
State a foot deep in water). A good
85 percent of this is claimed by the
agricultural sector, with about half
coming from ground water and half
from surface water. The groundwater situation is not critical, even
though the water table dropped 4.5
feet last year in contrast to an average 1.5-foot decline.
What is critical, however, is the thin
Sierra snow pack and the halfempty reservoirs which usually supply the life blood of the state's
agricultural sector-the sparkling
irrigation water which allows California to produce a major share of
the nation's fruits and vegetables.
In most northern areas of the state,
rainfall has been a mere shadow of
its former self-only one-fifth of
normal at Shasta,for example, even
with the recent rains. And water
levels in the major reservoirs are
only 53 percent of normal for this

time of year. All of this translates
into the recent announcements by
State and Federal irrigation districts
that water deliveries to agriculture
would be cut back 60 and 75 percent, respectively, during 1977.

Water in the Southland
What does this mean to the farmer
and the consumer? Let's first put
the problem in geographical perspective. Despite the drought, everything below the Tehachapis (the
mountains just north
Los Angeles) and everything west of the
coastal ranges from the Salinas Valley south are in relatively good
shape. This is because the southern
part of the state derives a major
portion of its water from the Colorado River, while the coastal valleys
rel.y almost exclusively on ground
water for irrigation. Thus, the crops
grown in these areas (such as cauliflower, broccoli, Brussels sprouts,
celery, lettuce, cucumbers, spinach,
artichokes and tomatoes) seem to
be surviving well. Where water levels have fallen, farmers will face
increased pumping costs and
ranchers using non-irrigated pastures will have to buy hay for their
animals. But on the whole, there
should be no serious effects from
the lack of rainfall in southern and
coastal California.

of

The real problem lies in the agricultural spinal cord of the State-the
great Central Valley, consisting of
the Sacramento Valley in the north
and the San Joaquin Valley in the
south. It is here that the severe
(continued on page 2)

in this nevvsletter do not
reflect til::: \1'12\/\/5 of tile nlanagernent of ttle
Feeler-atKeSer\/e BanI, (Jf Sari FrancIsc{).1 1lor of the Board
of Cov'ernors of the Federal Reserve System.

-. -.--. - -.
..

---_. _---_.

water cutbacks by State and Federal
water projects will be most intensely felt. But here again, those areas
with ground water available are in
better shape than others. For example, the eastern side of the San
Joaquin Valley can make up for a
good part of the surface-water cutback by simply pumping more
ground water.
Unfortunately, that ground water is
becoming increasingly expensive to
acquire because more energy is
required to pump water from lower
depths (especially with the continued decline in the water table) and
because each unit of energy is becoming increasingly expensive. The
Public Utilities Commission allows a
fuel-rate adjustment every six
months; thus, Central Valley electricity prices increased 22 percent
on January 5 and are likely to rise by
another 10 percent at midyear.
Moreover, each 1 0-percent decline
in the water table requires roughly
10 percent more energy to pump a
given amount of water. Meanwhile,
with many farmers deepening old
wells and digging new ones, there is
a six-month wait for well-digger
services. All of this means increased
costs and reduced net income even
for those lucky farmers who have
enough water to maintain production.

Crisis in the SanJoaquin
The worst situation is found on the
west side of the San Joaquin Valley.
Those farms that had wells when
the State Water Project came to the
west side in the 1960's soon abandoned them for the cheaper surface water. Today, most of those
2

_. _-----_.

_-------------

wells are useless-too shallow, rusted out, or simply lost somewhere
beneath the furrowed earth. So for
many, there is simply no short-run
way of offsetting the State's 60percent cutback.
Nonetheless, a 60-percent decline
in water supplies will not mean a
full 60-percent decline in farm output on the west side. Very careful
water management and a switch to
less water-intensive crops should
soften the cutback. Probably the
highest priority wi! be given to the
survival of vines and tree crops,
which represent large investments
that would take a number of years
to replace. Second, the usual
double-cropping of grains probably
will be supplanted by a large increase in summer fallow. Aside
from grains, likely candidates for
reduction include sugar beets, leafy
vegetables, alfalfa, melons and tomatoes. However, in view of this
year's 1 6-percent rise in processingtomato prices, many observers feel
that other areas, including the
Imperial and coastal valleys, will
more than make up for any San
Joaquin Valley cutbacks.
The drought also means increased
uncertainty for cotton. Farmers had
planned to expand cotton acreage
prior to the water-cutback announcements, but now they will
probably switch to a water-saving
planting method which skips every
third row and reduces yields by 25
percent. Total cotton output could
go either way. Meanwhile, in the
Sacramento Valley, the biggest
cropping change will be a severe
reduction in the planting of rice-a

quarter-billion dollar earner but
also a very heavy water user.
Along the eastern edge of the entire Central Valley, ragged herds of
cattle and sad-eyed ranchers roam
through the parched Sierra foothills. The drought, coming on top
of a two-year decline in cattle
prices, means that ranchers' unit
costs have risen some sixty dollars
above revenues per head. In these
circumstances, buying hay (especially at $75 to $100 a ton) and
hauling water simply do nOot
pay.
According to some industry observers, perhaps a third or more of
the State's ranchers have thrown in
the towel in the past several years.
Agricultural extension agents report that banks have been quite
reasonable in carrying farmers who
face trouble paying off loans. The
only major credit difficulties have
been in the livestock sector, where
the value of livestock collateral in
some caseshas fallen to 60 percent
of total debt. Total loan demand
probably will increase this year.
Loans for machinery and equipment (except pumps) may drop
sharply, but th is shou Id be more
than offset by an increase in loans
for operating expenses. Becauseof
drought, storm and strike trouble
last year, a number of farmers entered 1977 in much less liquid positions than usual.

farm, food impact
What does all this mean for the
farmer and the consumer? The California Department of Food and
Agriculture has calculated potential
declines in farm income for several
3

possible moisture scenarios, the
most likely being a $1.2-billion
decline-amounting to about 14
percent of 1976'sgross farm income
of $8.9 biilion. The bulk of the
lossesprobably would be suffered
by growers in the irrigated lands of
the San Joaquin Valley.
Compared to the farmer, the consumer has little to complain about.
With both a sugar and a rice glut in
world markets, neither sugar nor
rice prices should be much affected
by California's production cutbacks
in those crops. Many of the vegetable crops which feed the nation
so bounteously are grown either in
the Imperial Valley or in coastal
valleys, all of which face no
irrigated-water shortage. California's grain output is but a drop in
the national bucket, and her grain
reductions should have littte price
effect in a generally surplus situation. Beef prices are almost sure to
go up this year, but because of
other factors, not the drought.
The u.S. Department of Agriculture
has increased the upper end of its
forecast of retail food-price increasesby one percentage pointmaking a range of 3 to 5 percentin response to all the nation's
weather problems, including the
Florida freeze and both the Midwestern and Western droughts.
However, the California drought by
itself may push up the consumer
price index by no more than a tenth
of a percentage-point. Urban consumers may rejoice, but not too
loudly, for their rural brethren remain hard-pressed.
Michael Gorham

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BANKBNG D ATA-TWE L F TH FEDERALRIESIERVE STRICT
DI
(Dollar amounts in millions)
Selected Assetsand liabilities
large Commercial Banks

Amount
Outstanding
2/16/77

Loans (gross, adjusted) and investments*
Loans (gross, adjusted)-total
Security loans
Commercial and industrial
Real estate
Consumer instalment
U.S. Treasury securities
Other securities
Deposits (less cash items)-total*
Demand deposits (adjusted)
U.S. Government deposits
Time deposits-total*
States and political subdivisions
Savingsdeposits
Other time depositst
Large negotiable CD's

92,299
70,368
1,449
22,860
21,901
12,400
8,858
13,073
91,738
25,954
394
64,022
5,828
30,939
25,287
8,855

Weekly Averages
of Daily Figures

Week ended
2/16/77

Member Bank Reserve Position
ExcessReserves(+)/Deficiency H
Borrowings
Net free(+)/Net borrowed H
federal funds- Seven large Banks
Interbank Federal fund transactions
Net purchases (+)/Net sales H
Transactions with U.S. security dealers
Net loans (+)/Net borrowings H

Change
from
2/09/77
+
+
+
+
+
+

+

-

-

28
132
105
31
93
32
25
129
247
421
143
115
18
0
83
185

Change from
year ago
Dollar
Percent
+
+
+
+
+
+
+
+

+

+
-

+ 5.37
+ 8.40
+ 93.98
- 1.99
+ 11.77
+ 15.62
- 11.03
+ 2.77
+ 5.42
+ 11.04
- 37.76
+ 4.35
- 14.33
+ 26.01
- 7.98
- 27.90

4,707
5,453
702
464
2,306
1,675
1,098
352
4,715
2,580
239
2,669
975
6,386
2,193
3,426

Week ended
2/09/77

Comparable
year-ago period

23
2
25

+
+

62
2
60

+

+

539

+

921

+ 1,989

+

196

+

146

+

+

48
8
40

175

*Includes items not shown separately. tlndividuals, partnerships and corporations.
Editorial comments may be addressed to the editor (William Burke) or to the author . . . .
Information on this and other publications can be obtained by calling or writing the Public
Information Section, Federal Reserve Bank of San Francisco, P.O. Box 7702, San francisco 94120.
Phone (415) 544-2184.