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Drought’s Economic Impact on Farmers

Farmers have been resilient in the face of drought conditions for the last four years. But each year of drought becomes more difficult. We talk to Richard Howitt, professor emeritus of agricultural and resource economics at U.C. Davis about what farmers are doing to weather the drought.

Written byTara Lohan Published on Feb. 26, 2016 Read time Approx. 6 minutes
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Earlier this month a report from California’s agriculture department found that even despite severe drought conditions, California’s farmers had record sales of $53.5 billion in 2014.

“With the punishing drought entering its fifth year, the figures are sure to stoke tensions between farmers on one side and, on the other, city-dwellers and environmentalists, who complain they are being forced to make greater sacrifices than growers,” wrote the Associated Press in an article about the report.

But understanding the economic impacts of the drought on California farmers goes beyond just sales numbers as Richard Howitt knows. Howitt is a professor emeritus of agricultural and resource economics at University of California Davis, and was the lead author of a report published in August 2015 that examined the economic impacts of California’s drought on agriculture.

The report analyzed water availability to determine economic impacts and found that the drought hit certain areas much harder than others. An expected 8.7 million acre-foot (10.7 cubic-kilometer) shortage of groundwater was likely to be offset by 6 million acre-feet of groundwater pumping, and the difference made up by fallowing around 542,000 acres (219,000 hectares) of land, mostly in the Tulare Basin.

Howitt and his colleagues estimated direct agricultural losses at about $1.84 billion and 10,000 seasonal jobs. The agricultural sector as a whole in 2014 added jobs, but drought losses tended to be more heavily concentrated in certain areas and at certain times of year.

Water Deeply recently spoke with Howitt to understand the economic impacts on the agricultural community during the drought and the role of water markets in providing potential solutions.

Water Deeply: A recent report you contributed to on the economic impacts of the drought on agriculture in California said that farmers had been particularly resilient in this drought – what does resiliency look like in this picture?

Richard Howitt: Resiliency looks like having substantial cuts to your surface water supplies, decreasing levels of groundwater and still managing by shifting crops around and so on to come up with really good net returns.

If you [go to] towns with lots of farmworkers in them, you can see the suffering; but the industry as a whole has been remarkably resilient.

Water Deeply: Has drawing on groundwater supplies been the biggest thing that has kept farmers going?

Howitt: Absolutely the biggest thing is groundwater, without a question.

Water Deeply: What else have farmers been able to do to increase their resiliency? You mentioned moving crops around – how has that been a factor?

Howitt: Most of the tomato processing takes place in the San Joaquin Valley; generally they’ve moved south, but the last two years they’ve moved north. Processors had more contracts for tomatoes in the north than they do in the south and ate the higher transport costs because they had a great reliability of water supply. The net result was, I think in 2014, we had the highest tomato harvest ever.

There were two factors: They moved it to an area where there was more water, and if you’ve got water, a drought is a great time to grow tomatoes because you don’t have rain interfering with your harvest or anything.

Water Deeply: What happens to this resiliency if the drought continues for another year or several years?

Howitt: We’re chipping away at this resiliency. People with more shallow wells, less reliable groundwater will have further trouble this year if we don’t get substantially more rain, which we probably won’t. And we will see the same fall-off and difference in regional impacts that we’d seen last year and the year before and even more so. The haves and the have nots in terms of groundwater will be much more distinct.

Water Deeply: What are you looking at in order to measure the economic impact on farmers?

Howitt: We’re basically trying to see how farmers will react to these shortages, where they’ll shift crops, where they will cut. Of course they are good businessmen so they will cut where they have the least impact on profit.

They fallow because they have to and they fallow on the crops that produce the least value per acre of water, not the land. And then they concentrate on those perennial ones, the ones with high revenues and contracted quantities like tomatoes or peas or some other vegetables.

Water Deeply: How has an increase in permanent crops like nut trees impacted farmers – has it been a good move because of the prices or difficult because of water pressures?

Howitt: It’s been both. Walnuts, for instance, were at an all-time high price and they’ve now come down about 20 percent. Farmers have been planting it like mad but it takes three years for it to come on line and produce product. In the meantime the young trees use less water than the mature trees, so that’s a good idea. And they are of course tempted by the high prices, which have now, of course come down as new supplies come on – and other market forces due to the strong dollar and the falloff in China and Europe.

Water Deeply: What has been the picture with employment. I know there have been job losses from the drought, but the agriculture industry in California as a whole is adding jobs. How does that even out?

Howitt: If you break out the employment by season and by location and ask yourself where were things hurt most by the drought, it would be in the San Joaquin Valley because they’ve got the lowest water supplies in the summer and sure enough you’ll see employment drop down there substantially. But the average conceals the individual impacts.

Water Deeply: Is there anything else that farmers can do to optimize the water they are using?

Howitt: They are very good at making the best use of the water they’ve got but they have to take this idea of groundwater control really seriously now and there are two things which I think can improve things. One is moving rapidly toward some kind of managed groundwater in the districts where it’s gotten very low. And second, is I’d like to see more expansion of the markets to sell water.

Water Deeply: How does the market work now if a farmer wants to sell water?

Howitt: It’s a really ad hoc process. There is no eBay for water. There is no CarFax for water. It’s like it used to be in the old days when you’d ask somebody if they knew someone who had a good secondhand car.

There are a few big buyers and sellers. But the small guy who wants to jump in, he really doesn’t have the information at hand to do that.

Water Deeply: What would be a way to make the system better?

Howitt: There needs to be some idea of how much people have to sell and ideally it would be nice to know what the going prices were. What’s been proposed is some kind of a clearinghouse through which the major water purchases and sales would be put up on an information board and tell people what the going rate was. That in and of itself would be very useful.

There are a couple of bills now in the state legislature in this direction and we’ll see where they go. I think the most effective thing would be if you could offer farmers some degree of assurance of the ability to transfer water and not be stopped by environmental court cases.

Water Deeply: How similar is that to what’s been done in Australia?

Howitt: Australia is a bit different because they changed their water rights. They scrapped all their water rights and decoupled it from land. They made a lot of good moves and some bad ones. They are trying to buy back environmental water.

We published a paper with the Public Policy Institute of California on why we don’t think we need a total overhaul of the existing California water rights. You’d get 101 takings cases if you tried to change people’s water rights.

Water Deeply: How do you think this year will be for farmers?

Howitt: It’s just a little too early to tell what the water year is we’re getting into but it doesn’t look great for the minute.

Top image: A group of farmworkers return from work to a Mendota, Calif., mobile home park where the majority of residents are farmworkers in May 2014. In small farming towns, many farmworkers live in fear of losing their jobs as California continues to feel the effects of extreme drought conditions. (Jae C. Hong. Associated Press)