Dan Kowalski, Economist and Director, CoBank Knowledge Exchange
Dan Kowalski, Economist and Director, CoBank Knowledge Exchange

California is in the midst of one of the worst droughts in its history, putting farmers and ranchers in an increasingly stressful position. Now entering a fourth consecutive year of drought, farmers face tough choices in managing available sources of water. CoBank’s analysis suggests that farmers will most likely opt to protect their permanent plantings, such as citrus and nut crops, leaving annual field crops such as corn and rice in the proverbial dust. Overall, we project the drought to cost California’s agricultural industry upwards of $2 billion this year.

To put the situation into perspective: The California Department of Water Resources notes that the water year ending September 30, 2014, was the third driest of the past 119 years, as well as the warmest year on record. Further, the three water years spanning 2012-14 rank as California’s driest three-year period on record.

Farmers and ranchers are increasingly turning to groundwater in lieu of dwindling surface water allocations. Economists at the University of California-Davis project that growers will make up for roughly 71% of reduced surface water allocations through groundwater sources.

However it is generally assumed that groundwater is, at best, a stop-gap measure for the state’s agricultural producers. Faced with limited surface water allocations, then, growers have four options:

  1. Purchase additional water from senior rights holders, with prices ranging as high as $2,000 per acre-foot last year;
  2. Fallow acreage, and redirect available water to the most profitable crops – last year growers were estimated to have fallowed as many as 425,000 acres, and that number could rise to 600,000 in 2015;
  3. Shift their operation’s crop mix to favor less water-intensive crops, e.g., from sugar beets to potatoes or processing tomatoes; or,
  4. Install more efficient irrigation systems and equipment.

Of these four choices, some are longer-term, more capital-intensive choices than others, as is the case with new irrigation equipment. For smaller producers with fewer acres and resources at their disposal, fallowing acreage or making capital investments might not be a viable option.

In CoBank’s recent analysis of the ongoing drought in California, the bank’s Knowledge Exchange Division concluded that – as was the case at the end of 2014 – farmers and ranchers are still on something of a knife-edge in respect to the drought’s effect on their operations. Most growers and agribusinesses will remain in the black in 2015, with some outliers showing modest losses. Obviously, overall financial stress on the sector will worsen if the drought continues into 2016.

While damages caused by the drought in 2015 will be worse than they were a year ago, losses are not yet expected to reach catastrophic levels. The situation does present an ongoing war of attrition with the state’s water supply, however, as water tables will continue to fall with each successive year of drought, and each year bringing additional financial stress to the producer.

That said, many farmers and ranchers have at least some degree of flexibility available to them in dealing with reduced water availability. By opting to protect their permanent plantings, farmers will also protect their bottom lines, since nut, grape and citrus crops are among the most profitable in the state. Farmers will likely choose to fallow acreage that would typically be planted to field crops to divert available water to these permanent plantings –with corn, wheat, cotton, rice, hay, pasture, and beans expected to bear the brunt of these moves.

For livestock producers – especially those in the dairy sector – the continued deterioration of pasture conditions and reduced feed and forage availability will hit particularly hard. California dairy producers typically import 50 percent of their feed sources during non-drought years, but feed imports increase to 60 to 70 percent during drought years. With milk prices down as much as 40 percent from 2014 levels, 2015 could be a particularly painful year for dairy producers.

Last year’s drought is estimated to have caused about $1.5 billion in direct agricultural losses (i.e., foregone revenues and higher costs). With each successive year of drought, the losses get bigger, so this year’s losses will probably amount to somewhere in the range of $1.8 billion to 2.0 billion – a 4-5 percent haircut from the $46 billion to $48 billion in total revenues that the state’s farmers, ranchers, and agribusinesses would otherwise have earned.