Drought Bites Deeper, but Agriculture Remains Strong

In a new report out today, U.C. Davis presents its annual summary of the drought’s effect on California’s economy. The highlights:

• Total economic impacts have reached $2.7 billion over the past year (about a half-million dollars more than the prior 12 months)
• Job losses have reached 22,000 (including indirect losses)
• 542,000 acres of farmland have been fallowed

Despite those numbers, the agriculture industry continues to produce robustly. And there’s context for the $2.7 billion sum of economic impacts: That’s equal to about 5 percent of annual agricultural production, and only about one-tenth of 1 percent of California’s total annual economic output.

“Overall, the (Central) valley has got more jobs than a year ago,” Jeff Michael, a University of the Pacific economist who was not involved in the study, told The Sacramento Bee. “That’s not to say there aren’t losses, but from a macro viewpoint, we’re doing pretty well.”

Much of that agricultural production has come as a result of significantly increased water-transfer activity. Basically, water is being traded where it is most needed – and where the rising price remains affordable. That price has increased from $500 per acre-foot to $650, on average. That’s a lot of money for farm water.

In one illustration of this trend, the authors of the report state that a significant amount of tomato growing has shifted north. More landowners in the Sacramento Valley– where water is relatively attainable – are growing tomatoes, a comparatively high-value annual crop. Far fewer tomatoes are being grown in the San Joaquin Valley, which is hard-hit by water shortages.

Heavy groundwater pumping is also sustaining the agriculture industry. Parts of the San Joaquin Valley have nearly exhausted their groundwater reserves, which will take many years to replenish.

“In addition,” the report states, “farmers statewide have been moving from field crops to higher-value almonds and walnuts, with more than 200,000 acres of new orchards planted since 2010.”

This is an important development that has been reported before but bears emphasis. Water scarcity and higher water prices drive farmers to grow crops that are more valuable. That’s simple economics.

But it also shifts more of the state’s cropland to permanent crops (i.e. trees) that require pretty much the same amount of water every year, even during the worst droughts. Trees cannot be fallowed during drought. This “hardens” water demand, which makes the state’s water resources less flexible during scarcity. Put another way, water assigned to growing walnut trees cannot be shifted to help a city that runs short of water, or the trees will die.

Sweeping Water Rate Increases Coming Next Year

The Fitch bond rating agency recently polled 46 California water providers to assess their economic condition. It found that 78 percent plan to increase water rates in 2016, or have already done so.

The median expected increase is 5 percent, although the greatest is 31 percent.

“The persistence of this drought has begun to outstrip the tools utilities typically use to manage the state’s hydrological cycles,” said Kathryn Masterson, senior director at Fitch.

Illustrating that point, many utilities plan to take a hit internally rather than passing all costs on to ratepayers. The survey found that 52 percent of water utilities expect to offset lower revenues by cutting operating expenditures, 46 percent will dip into financial reserves, and 37 percent will divert from their planned capital spending. These choices may have undesirable impacts on utilities down the road.

Photo courtesy by UC Davis Center for Watershed Sciences.