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FRBSF WEEKLY LETTEA April 7, 1989 Droughts and California Agriculture During the drought last year, agricultural producers in California avoided much of the trouble that plagued farmers inthe Midwest. In fact, last year's drought actually proved to be a boon to California farmers. Because of the availability of irrigation water, farmers in California were able to maintain normal levels of production and enjoy higher prices for many of their crops. Cash receipts from livestock and crops received by farmers in California rose 9.1 percent through November 1988 compared to cash receipts in the first eleven months of 1987. This increase was more than double the gains of midwestern farmers, who had to resort to major sales out of inventories to maintain gross receipts. Much of the West, including California, requires irrigation to grow crops even in years with average rainfall. Thus, despite below normal precipitation last year, adequate levels of stored water made it possible to maintain normal water supplies to farmers. Earlier this year, however, reservoirs were seriously depleted, and severe cuts in irrigation supplies to agricultural producers were planned. More recently, substantial rainfall has alleviated drought conditions in most parts of the State, and although some areas face rationing, the draconian cutbacks thought necessary at the beginning of March have become unnecessary. In any event, as discussed in this Letter, even relatively severe droughts in California, such as that experienced in 1976-77, have considerably smaller effects on production and cash receipts than do droughts in other parts of the country. The role of irrigation Reliance on irrigation helps explain why California farmers fared much better than did their midwestern counterparts during the most recent drought. In the Midwest, only two percent of agricultural land is irrigated. Consequently, midwestern farmers must have abundant precipitation during the spring planting season and timely rains during the summer for strong crops. When these conditions did not materialize last year, yields for the Midwest's major crops dropped sharply. Yields fell 21 percent for soybeans and 31 percent for corn from year-earlier levels. In contrast, nearly 80 percent of the commercial farmland in California is irrigated. Precipitation comes mainly in the winter months and is accumulated in reservoirs and mountain snow packs. In addition, ground water in many areas can be used to supplement these surface water suppl ies. Although last year's precipitation levels were below normal in California, there was no significant change in water usage by agricu Itural users. This year, however, concern over shortages of stored water prompted plans to cut water deliveries sharply. As recently as March 1, water supply indiCators in California pointed to another year of drought. Precipitation ,was just 65 percent of normal, compared to 85 percent of normal last year. Dry ground conditions also contributed to the discouraging outlook. Despite a rise in the water content of the mountain snow pack over 1988, the run-off forecast for April to June called for just 60 percent of the average level. Finally, California reservoirs on March 1 held just 65 percent of average levels, compared to 90 percent of normal last year. Only reservoirs in coastal southern California held above-average levels. These indicators prompt~d the state's two Ia.rgest providers of water to announce severe cutbacks in water deliveries, something they were able to avoid in the previous two years. The Federal Bureau of Reclamation's Central Valley Project announced tha.t it would cut supplies to most farm customers by 50 percent this year. And the State Water Project expected to reduce water supplies to farmers by 60 percent. Together, these sources typically provide about 30 percent of California's total water needs, 85 percent of which is allocated to agriculture. Since these announcements, a series of storms have hit California. Between March 1 and March 20, the state received double its normal March rainfall, boosting precipitation levels for the year to over 80 percent of average, Cuts in agricultural water suppliep ma~ ?tiJlbe requic¢d in some water districts; btit the magnitude of the cuts has decreased sharply, Both the Central Valley Project and the State Water Project now expect cuts to agriculture of no more than 25 perc~nt Despite thi~improvedoutIook,far~ers still \tVil.1 need to adapt to cutbacks in water supplies, Cqmpared.to midwestern. farmers,. Cal ifornia farmers enjoy several. advantages;. Bec;:auseINater supplies are knownprioc to the planting season, California, farmers can te'lkestepstoadju~tto reducedsurface water. First,.they can compensate withincrea~€lq ,Pumping.pf ground vyater. Ground water ·i sfairly abundant in mpst areas,althpugh it generall:yismoree)(pensive to q.pplythan surface water. Estimates oUhe add itionaJ c;:ostsof obtaining groundwater vary widely depending on the depth of the well and efficiency of the pumping system.V\ihere water is close ~o .the. surface the additional costs .canbe. minimal; hovyever, the. costs can be up to four time~. weater than. surfaqe water sources when grouf)d sources are deep and difficult todravy out Second, Californiafq.rmers can changeth e mix of crops under. cljltiyation,UnJike midwestern. farmers, Ce'lliforpiafarmers enjoy climate and soilconditionsthatallpwthemtosvyitch to less thirstYcropsqLiic~ly ,and relatively inexpensiv.ely. Les~ons.fronli 976.... 77 . . . ... . . To evtilua,tethelikelyiropact ofa poteptia125 percent cutbq.ckif) vyater deliveries,it isusefuf to look at how Cal ifornia farmers responded to the my.c;h more Severe c:utbacksimposedduring.the lastrnfl.jor drought in197.6-77" Evidence from th is drought revee'lls a highly. resilient .agricultural sector.in. Cal.ifornia.,A. Ithou~h farm . e)(penseS rose sharply,produ~tionacreC1ge,cash receipts, a,nd prices fpr most .commodities held steadYflt close to thei r pre,drought level~. The prinqipalchangein' farming.practices caused by the 1976-77drol,lght 'Nas a sh fft i I) thealloc cation ofacreage among crops. Fieldcropsthat require large amountH>fwaterlikesugar ~eets, cotton, and rice were replaced with vegetable crops that use lesswate-r. In 1977, harvested •. aqeq.ge fell30percenUor~ugarbeetsand27 percent.forrice,whileacreage.al.locateqto tomatoes rose 18 percent California farmers also increased production of fruits and nuts, in keepingwith a long term trend in California's agricultural output mix. In addition to reducing total acreage assigned to field crops, farmers also allocated less water per acre to field crops. Consequently, in 1977, field crop yields fell 13 percent per acre. At the same time, they allocated a larger share of their water to non-field crops, and fruit and nut crop yields dropped just two percent, while vegetable and melon crop yields actually rose eight percent Also,during the 1976-77 drought, ground water u~e increased by 50percent and accounted for nearly 60 percent of total water supplies. The availability of ground water allowed farmers to avoid reducing production acreage. In 1976, total aqeage harvested in California fell less than one percent, and in 1977, even those acres were back in production despite continued drought conditions. Because of these adjustments inproduction, cash receipt~ from crops did not decline, although their rate of growth slowed. Instead of the 13 percent average growth rate of the previous five years, receipts increased nine percent in 1976 and five percent in 1977. Increased production costs associated with pUmPing ground water, however, offset these rnodestgains in cash receipts. Afterrising 14 percent a year from 1970 to 1975, net farm income did notgrow during the 1976-77 period. Prices and farm incomes Higher production costs during drought years tend to have a direct impact on agricultural income because it is difficult for California producers to pass along the~e higher costs in the form of higher wholesale prices. Droughtinduced increases in the production of fruits and vegetables (as farmers shift away from field crops) put downward pres~ure on the prices of these comrnodities (unless consumers suddenly developa craving for them). Thus, the higher cost of pumping ground water tends to come out of farmers' incomes since the wholesale prices they recei.ve actually tend to fall. Moreover, the income generated. by the numerous specialty crops that are produced almost entirely in California also tends to fall during droughts. Prices of these specialty crops are determined primarily by California production levels. Production levels for these commodities tend to remain high even in drought years since farmers are concerned that cutbacks in the water given to tree-grown fruits and nuts, vine-grapes, and other such fruits could cause damage that would affect future crops. Consequently, output of these specialty crops is not changed much by droughts, and prices remain constant even though farmers incur higher costs pumping the ground water to grow these crops. These higher expenses come out of farmers' incomes. Conversely, the prices for crops most likely to experience drought-induced cutbacks this year in California are determined in world markets. In 1988 this worked to California's advantage, as drought conditions cut national supplies of field crops. This large drop in supplies of many commodities last year pushed prices up sharply. California farmers benefitted from these price increases particularly since they were able to maintain relatively normal production. This year, however, production is expected to rebound in other areas of the country, and prices for last year's drought-affected crops may fall from their current high levels. Water rationing in California, then, would mean that California field crop farmers could face lower prices at the same time that their production is falling and costs are rising. Livestock Livestock producers were hit harder than crop farmers during the 1976-77 drought. Dry conditions forced early liquidation of herds, making the second year of the drought worse than the first for ranchers. Feed costs rose, and although beef prices also rose, the reduced herd size constrained sales. Cash receipts from marketing meat animals fell one percent in 1976 and seven percent in 1977. The effects of the current drought on livestock producers depends largely on herd sizes. Unlike the 1976-77 experience, when herds were relatively large, at present, livestock producers are not extremely vulnerable to drought conditions. The number of cattle and calves in California is unchanged from year-earlier levels, and remains six percent below the 1986 level. Prices are expected to remain high because of reduced herds nationally. Costs may remain high, particularly to ranchers that rely on unirrigated grazing lands, but the higher beef prices still should yield strong profits in the cattle industry even with continued drought conditions. Modest impact A closer examination of the effects of the 197677 drought demonstrates that the California agricultural sector enjoys considerable insulation from the effects of a drought. There is no doubt that a drought reduces net farm income by boosting water pumping costs. But two key factors make a drought less onerous to California producers than to producers in unirrigated areas of the country. First, sufficient water is available in the form of ground water, although this method raises costs and squeezes income. Second, favorable climate and soil conditions, as well as early warning of reduced water supplies, give California farmers the ability to switch to less waterintensive crops quickly. Consequently, a drought tends to change the mix of output, rather than cause severe cutbacks in production. Ronald H. Schmidt Economist Stephen O. Dean Research Associate Opinions expressed in this newsletter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco, or of the Board of Governors of the Federal Reserve System. Editorial comments may be addressed to the editor (Barbara Bennett) or to the author.... Free copies of Federal Reserve publications can be obtained from the Public Information Department, Federal Reserve Bank of San Francisco, P.O. Box 7702, San Francisco 94120. Phone (415) 974-2246. ¥ Research Department Federal Reserve Bank of San Francisco Alaska nevada Arizona California Hawaii Oregon Utah Idaho Washington
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