V. 18 no. 5 • May/June 2015 Special Issue: The Economics of the for Food and Agriculture Introduction by Daniel A. Sumner

he extreme drought that has field crop land in the Central Valley Also in this issue gripped California over the past (including irrigated pastures), will Tseveral years is causing oner- be idled in 2015. This too may be an Putting California’s Latest ous adjustments in the natural and underestimate. USDA reported on June Drought in Context human environments. Agriculture, 30, that 2015 California acreage of Ellen Hanak which uses much of the state’s water, “principal crops,” (defined as field crops and Jeffrey Mount ...... 2 is at the center of many of these ardu- such as hay, grains, oilseeds, cotton ous responses. The 2015 impacts of the and potatoes) is about 900,000 acres Agricultural Irrigation in This continuing drought are still underway, below the 2013 total of about four mil- Drought: Where Is the Water but in this special ARE Update issue, lion acres. Over this period, tree nut we project responses and consequences and tomato acreage increased by about and Where Is It Going? within agriculture and more broadly. 180,000 acres. So, even accounting for Josué Medellín-Azuara, In this issue, Hanak and Mount put the steady shift to tree nuts and some Duncan MacEwan, Jay R. Lund, this drought in the context of Califor- other higher revenue per acre (and per Richard E. Howitt, and nia’s history and put agriculture in the acre-foot) crops, there is a strong indica- Daniel A. Sumner...... 6 context of water institutions, manage- tion of severely accelerated reductions ment, and distribution throughout in field crop acreage in California. Economic Impact of the 2015 the state. Next, Medellin-Azuara and The economic toll of the drought Drought on Farm Revenue and co-authors develop detailed, and albeit is fewer jobs and smaller value of Employment preliminary, assessments of 2015 irriga- output and economic contribution Richard E. Howitt, Josué tion water distribution. They estimate that would have otherwise occurred. Medellín-Azuara, Duncan a cut to agriculture of about 8.8 mil- Based on 564,000 idled acres, Howitt MacEwan, Jay R. Lund, and lion acre-feet, or about 30% of what et al. estimates farm revenue losses of Daniel A. Sumner ...... 9 might be available in a normal year. $1.8 billion, economy-wide revenue (This number may be an underestimate losses of $2.7 billion, and 18,600 fewer California’s Severe Drought Has given recent events.) During , jobs due to the agricultural drought. Only Marginal Impacts on Food farms increase groundwater pumping. That these economic impacts are not Prices The authors estimate that farmers and even larger is a testament to the extraor- Daniel A. Sumner ...... 12 ranchers will replace about 6.2 million dinary efforts and innovations by farm- acre-feet of lost surface water deliveries ers, and others in California agriculture. with costly increases in groundwater Idling land, shifting water across crops, pumping, where possible in 2015. and using each acre-foot more eco- Another painful response to drought nomically all have led to smaller losses is to leave land idle. The authors esti- of revenue and jobs, and only very mate about 564,000 more acres, mostly small price increases for consumers. Putting California’s Latest Drought in Context Ellen Hanak and Jeffrey Mount

managing water scarcity and recurring million acre-feet of precipitation annu- droughts. In addition, we describe the ally. Roughly two-thirds of that water California’s latest drought has focused characteristics of this latest drought returns to the atmosphere through attention on water management and identify some of the early lessons evaporation and transpiration by plants practices and policies. This article learned, pointing both to promising and trees, with the remaining flow- describes how the system has ways to adapt to water scarcity and ing down rivers and into aquifers. adapted to managing water scarcity and recurring droughts. It identifies to areas of continued vulnerability. However, this abundant water some of the early lessons learned, is not distributed equally in space including promising ways to adapt to California’s Water in Context or time. Almost three-quarters of water scarcity and areas of continued California’s water supply infrastruc- the precipitation that falls on Cali- vulnerability. ture and system of water laws and fornia occurs north of Sacramento, rights reflect decades of adaptation to while three-quarters of water use is a unique climate. Though rarely appre- to the south, with the highest uses ciated during a drought, California is in dry agricultural regions of the San alifornia remains in the grip actually a water-rich state, receiving Joaquin Valley and Tulare Basin. of a major drought. Four con- a statewide average of more than 200 California also has the distinction of secutive years of below aver- C Figure 1. An Extensive Conveyance and Storage Network age to critically dry conditions have affected all aspects of water use in the state, with agriculture and the envi- ronment hit the hardest. The drought has also brought considerable atten- tion to water management practices and policies, with abundant calls for reforms and for the construction of new water supply infrastructure. Droughts, like any other natural disaster, can be a catalyst for change, and this drought has been no excep- tion. In 2014 the California Legislature passed the most comprehensive ground- water legislation in state history—the Sustainable Groundwater Management Act. In that same year, the voters passed a new bond bill that provides $7.5 billion for expanding water supplies, promoting conservation, and improv- ing ecosystems. And the Governor has issued several emergency declarations that contain unprecedented require- ments for water conservation in the urban sector. As this drought continues, there will likely be many new proposals. This article provides an overview of California’s water management and use Source: California Department of Water Resources and the way the system has adapted to

2 Giannini Foundation of Agricultural Economics • University of California having the most variable climate in Figure 2. Some Key Water and Economy Trends North America, with dramatic year- to-year variations in precipitation. 400 State GDP per Unit of Water Used: 4 Times Higher To adapt to this variable climate, 350 in the mid-20th century, Californians developed one of the world’s most vast, 300 complex networks of water storage and 250 State GDP per Capita: 2 Times Higher conveyance facilities (Figure 1). More 200 than 1,400 surface reservoirs have the capacity to store more than 40 mil- 150 1967=100 lion acre-feet of water—approximately 100 Water Use per Capita: equal to the average annual water use Half as High 50 by cities and farms. In addition, more than 500 groundwater basins store 0

1983 2010 at least three times that amount. 1967 1969 1971 1973 1975 1977 1979 1981 1985 1987 1989 1991 1995 1997 2007 2009 1993 1999 2001 2003 2005 Snowpack—principally in the Sierra Nevada—typically provides temporary Source: Ellen Hanak et al., 2012. “Water and the California Economy,” PPIC, updated to 2010 with data from the Department of Water Resources, the Department of Finance, and the U.S. seasonal storage of as much as a third Bureau of Economic Analysis. of the water used annually. Thousands Notes: State GDP (gross domestic product) is adjusted for inflation. of miles of aqueducts move water from Water use estimates are for applied use in the agricultural and urban sectors. the northernmost watersheds of the to those who claimed the right first. salinity standards for agricultural and state to farming centers in the Central (In California, those with property urban water uses. However, regula- Valley, and San Francisco Bay Area, and directly adjacent to rivers have a special tory decisions in some watersheds Southern California urban centers. The type of seniority known as a riparian have resulted in supply reductions state also augments supply by divert- right, a type of right more commonly for farms and cities in recent years; ing more than a quarter of the annual found in the wetter, eastern U.S.) farmers depen- runoff of the Colorado River, supply- The seniority-based water rights dent on water shipped through the ing farms in the Imperial Valley and system is one of the many adapta- delta are among those affected. urban uses in Southern California. tions the state has made to manage its variable climate. When there is A History of Adapting Who Uses How Much? insufficient water to meet all water to Water Scarcity Water use in California—as accounted rights, the State Water Resources Since the early 1970’s, the state has for by the California Department of Control Board curtails diversions by added nearly 20 million people to its Water Resources—is concentrated those with more junior water rights. population. During this time, there in the environmental and agricul- During the current drought, the has been only limited expansion in tural sectors. Roughly 40% of water Board has found it necessary to curtail water supply infrastructure, and yet use is assigned to agriculture, 50% water rights established as far back the state’s economy has continued is assigned to the environment, with as 1903 and may well go back even to grow. From 1967–2005, statewide the remaining 10% for urban uses. further before this summer is over. per capita water use declined by half, (These figures are for the period 1998- In contrast to common understand- real state GDP doubled, and the eco- 2010, the last year for which statewide ing, most environmental water is not nomic value of each unit of water water use estimates are available; this in direct competition with human uses. increased fourfold (Figure 2). These is the same source used to produce For example, most water in Wild and trends—temporarily slowed by the the other commonly cited breakdown Scenic Rivers—which accounts for recent recession—reflect increased for water directly used by people: over half of environmental water— efficiency of water use in all sectors. 80% by farms and 20% by cities.) flows down North Coast rivers where Although agricultural water use Urban and agricultural water use is there are no alternative uses. And a likely peaked in the early 1980s, pro- governed by the state’s seniority-based large share of required outflow from ductivity growth and shifts toward water-rights system, established soon the Sacramento-San Joaquin Delta— higher-value activities have spurred after statehood. As in other western another category counted as environ- continued increases in the eco- states, priority of use generally goes mental water—is needed to maintain nomic value of crop and livestock

Giannini Foundation of Agricultural Economics • University of California 3 local agencies, and long-term water pur- Figure 3. Schematic of Groundwater in the Central Valley chase agreements from some farmers. Sierra Nevada In this drought, attention has River focused on bringing down outdoor Coast Ranges Fresh-water Recharge water use, which still accounts for roughly half of total urban use (and Pumping Wells more in hotter, inland areas)— thanks in part to the continued Corcoran Clay prevalence of thirsty, cool-season Unconfined Aquifer System (confining layer) Clay Lenses turf grass in urban landscapes. Confined Aquifer System Bedrock Farming in California is inherently more vulnerable to droughts because Marine it requires large volumes of water for Deposits irrigation, and some portfolio tools Old Saline Water are less effective in the farm sector. Source: U.S. Geological Service Improving irrigation efficiency stretches production, which now generate over California and to the health of river and on-farm supplies and enhances crop $22 billion in GDP and over $48 bil- stream ecosystems. These losses ampli- productivity, but it generally does not lion in revenues (2012$)—roughly fied the effects of low amounts of create basin-wide water savings because double the size in the late 1960s. precipitation. it does not lower net crop water use. Urban use (including all residen- The consecutive dry years, coupled (Indeed, more efficient irrigation tech- tial, commercial, and industrial water) with unusual warmth, led to reduc- nology often increases net water use per plateaued later, once utilities began to tions in available surface water, with acre by facilitating productivity gains.) significantly promote water use effi- dramatic declines in year-to-year New storage is also a more limited ciency in the 1990s. Daily per capita storage in the state’s large reservoir option for farmers. Although some urban use fell from a peak of 247 gal- systems. As outlined in the compan- have invested in relatively economi- lons in 1995 to 199 gallons in 2010, ion articles in this issue, these short- cal groundwater storage, agriculture enabling California to accommodate ages hit the agricultural sector par- cannot generally support the cost of continued population growth with- ticularly, requiring extensive use of new surface storage. However, the out expanding total urban supply. groundwater and fallowing of land. growth of a statewide water market since the early 1990s has significantly What Makes This Drought Unique? Drought Adaptation Using improved agriculture’s adaptation The latest drought, which began in Portfolio Approaches capacity. The market enables farm- 2012, is not without precedent. Cli- California’s cities—and particularly ers growing higher-revenue crops to mate scientists have noted that the the large metropolitan areas—have purchase water from those with more aggregate amounts of precipitation weathered the drought better than the reliable supplies and lower-revenue fall within the range of normal vari- agricultural sector. This stems in part cropping opportunities. During this ability. Rather, the drought’s hallmark from some key lessons learned during drought, water trading has made it has been its warmth. Statewide and a major drought from 1987 to 1992, possible to keep orchards alive in regional temperatures have dramati- when urban areas were hit very hard. some areas that would otherwise have cally exceeded historic highs going Following that drought, cities received little or no water deliveries. back to the late 1800’s. Warm tem- made major investments in portfolio peratures increase the length of the approaches to water. In addition to Remaining Hurdles growing season while also reducing increasing water use efficiency through Although improvements in the eco- soil moisture due to evaporation. new technology and improved pricing nomic efficiency of water use and Unusually warm temperatures dur- approaches, urban utilities diversified diversification of supply portfo- ing the winter led to a higher their supplies. This included develop- lios have helped limit the impact proportion of rain to snow, resulting in ment of nontraditional sources like of periodic droughts and growing record low snowpacks in 2015. Water recycled wastewater, new local surface water scarcity in California, several stored in both the soil and snow is criti- and groundwater storage, new interties issues remain to be addressed. cal to managing water demand in for emergency water sharing among

4 Giannini Foundation of Agricultural Economics • University of California Groundwater Management rose by nearly 20% in the southern Cen- health issue in the state. The effective- Groundwater is still California’s best tral Valley, reaching 40% of irrigated ness of efforts to improve conveyance, hedge against drought. But since the crop acreage, and this acreage con- build new storage, resolve groundwater 1960’s, California’s water supply has tinues to expand during the drought. overdraft, and expand water markets been augmented by approximately two This expansion, while generating more will all be reduced if water manage- million acre-feet per year by ground- “cash per drop,” also reduces flexibility ment in the delta is not resolved. water overdraft. This has greatly to cope with droughts in regions that diminished the utility of ground- are particularly susceptible to supply Suggested Citation: water as a drought supply. Figure 3 cutbacks. It also increases pressure on Hanak, Ellen and Jeffrey Mount. "Putting overtaxed groundwater basins (and California’s Latest Drought in Context." shows the structure of the ground- ARE Update 18(5):2-5. University of water basin in the Central Valley. provides an added incentive for farm- California Giannini Foundation of Agricultural Economics. As the companion article by Medel- ers to accelerate groundwater manage- lín-Azuara and others points out, in ment to protect their investments). 2014 and 2015, farmers will have Declining Environmental Conditions Ellen Hanak is a Senior Fellow and Director pumped at least 11 million acre-feet of The continued decline in populations of the Water Policy Center in the Public Policy additional groundwater to make up for of native fish, wetland and riparian Institute of California. She can be contacted by lost surface supplies, with prospects species poses a major challenge for email at [email protected]. Jeffrey Mount is an emeritus professor in the Department of Earth for much more if the drought contin- managing water scarcity. These declines ues. Although the 2014 Sustainable and Planetary Sciences and founding director of affect water supply operations across the Center for Watershed Sciences at UC Davis. Groundwater Management Act requires the state, as water managers struggle to Currently, he is a senior fellow at the PPIC Water that groundwater basins be brought manage the trade-offs between healthy Policy Center and can be contacted by email at into balance, the reform will be phased ecosystems and reliable supplies. The [email protected]. in over 25 years. To address grow- trade-offs are particularly acute during ing water scarcity in the agricultural severe droughts such as this one. For additional information, the sector, early adoption and accelerated authors recommend: implementation will be beneficial. Summary Hanak, E., J. Lund, A. Dinar, B. Gray, The Delta Conundrum The latest drought has highlighted R. Howitt, J. Mount, P. Moyle, and both the strengths and the weak- B. Thompson, 2011. “Managing The Sacramento-San Joaquin Delta nesses of California’s water supply California’s Water: From Conflict remains the weak link in California’s to Reconciliation.” Public Policy systems. Long-term improvements water supply grid. Approximately Institute of California. www.ppic. in the economic efficiency of water org/main/publication.asp?i=944. 15% of the state’s farm and urban sup- use and investments in portfolio plies comes from the delta. Increasing Hanak, E. et al., 2012. “Water and the approaches to diversify supply and California Economy.” Public Policy regulatory pressures and the fragility reduce demand have yielded sig- Institute of California. www.ppic. of the levee network make supplies org/main/publication.asp?i=1015. nificant benefits. This drought will from the delta increasingly unreliable. Hanak, E., J. Lund, J. Mount et al., 2015. likely accelerate these trends, result- Efforts to craft a solution have proven “California’s Water.” Public Policy ing in lasting improvements. politically difficult and costly. Yet the Institute of California. www.ppic. However, state and local agencies org/main/publication.asp?i=1130. unsustainable status quo in the delta will also need to invest in resolving is harmful to all parties. Resolving the some significant challenges. Although delta conflicts and improving supply recent legislation holds promise for reliability are key to managing water improving groundwater management, scarcity in the Bay Area, the San Joa- the state would benefit from speeding quin Valley, and Southern California. up implementation where possible. The Changing Crop Types shift to perennial, high-value crops in To tap favorable world market con- the Central Valley makes improving ditions, farmers have been shifting groundwater management even more towards higher-value orchard crops urgent. Finally, the Sacramento-San (e.g., almonds, pistachios, wine grapes). Joaquin Delta remains the most chal- From 2000 to 2010, orchard acreage lenging water supply and ecosystem

Giannini Foundation of Agricultural Economics • University of California 5 Agricultural Irrigation in This Drought: Where is the Water and Where Is It Going? Josué Medellín-Azuara, Duncan MacEwan, Jay Lund, Richard E. Howitt, and Daniel A. Sumner

Resources (DWR) this year indicated make planting decisions based on slightly higher precipitation in the these expected water deliveries. In the midst of its fourth year of drought, Sacramento Valley compared to last In the early spring of 2015, ERA California now faces an estimated year (75% versus 56% of the aver- Economics conducted a survey of irri- reduction in surface-water availability age by June 18), and reservoirs were gation districts to assess the expected of 8.8 million acre-feet (maf) out of around 50% of historical average stor- water deliveries for the irrigation season. 29 maf in agricultural applied water statewide. However, groundwater, the age by this time of the year. However, The total water shortage is expected buffer water supply during drought, the reservoirs in the San Joaquin to be close to 8.8 million acre-feet is replacing about 6.2 maf of surface Valley and Tulare Lake Basin are near (maf) statewide. Farmers and irriga- water via additional pumping. This all-time lows and precipitation was tion districts are able to partially offset increased groundwater pumping is only 45% of the historical average. some of the surface water shortage in addition to the 1.5 maf of annual The drought impacts are especially by pumping additional groundwater. average groundwater overdraft in severe because California’s population Additional groundwater pumping in the Central Valley. The net reduction and share of permanent crops have 2015 is expected to be 6.2 maf, resulting of 2.6 maf in the total supply in 2015 both increased. Furthermore, the lack in a net water shortage of 2.6 maf. The may result in about 564,000 acres of water in 2015, together with impacts map in Figure 2 shows a breakdown fallowed statewide, or about 120,000 of additional groundwater pumping of net water shortages by basin. more acres than last year’s fallowing that occurred in 2014, may lower the The region most affected by water estimates. water table levels enough to decrease availability is the Tulare Lake Basin, pumping capacity in some areas. which includes parts of Fresno, Tulare, alifornia’s historical climate is Every year, the state and federal Kings, and Kern counties. This area prone to deep and long-lasting water projects announce deliveries to has the lowest precipitation and relies droughts. Even in normal years, water districts. Likewise, local water heavily on water imports from other C districts across the state inform their basins and groundwater pumping, yet it most of the precipitation occurs during the winter in the northern, eastern member farmers about expected provides more than 50% of all agricul- and coastal parts of the state, whereas water allocations. Growers, in turn, tural revenues in the Central Valley. The most of the water demand occurs in Figure 1. Water Sources for the Central Valley in a “Normal” Year the summer in the southern Central Valley and the largely urbanized areas 100 on the coast. As a consequence, Cali- 90 fornia has one of the most engineered 80 water supply systems in the world that includes dozens of surface-water 70 reservoirs, aqueducts, pumping stations 60 and other infrastructure, with the Sac- Groundwater 50 ramento-San Joaquin Delta as the hub. Local Diversions Water sources for agriculture in 40 the Central Valley include the Cen- 30 State Water Project tral Valley Project, the State Water

Percent Allocation from Water Source Water from Allocation Percent 20 Project, local stream diversions, and groundwater pumping. Figure 1 10 shows the approximate breakdown 0 of water supply for an average year. Sacramento, Delta San Joaquin Tulare Lake and East of Delta River Water condition reports from Basin Source: Author’s calculations using CA Department of Water Resources land and water use data the California Department of Water

6 Giannini Foundation of Agricultural Economics • University of California net water reduction of 2.6 maf in 2015 Figure 2. Estimated Net Water Shortage by Region in the Central Valley will be 60% higher than 2014 (Table 1). for the 2014–2015 Water Year We used the changes in irrigation water supplies and the Statewide Agri- Legend cultural Production Model (SWAP) to Shortage (Thousand Acre-Feet/Year) estimate the crop mix and fallowing 400 due to the 2015 drought. The SWAP 461–886 model is an economic model, which simulates the response of farmers to 887–1304 changes in water supply. The model Hydrologic Regions includes detailed information on crop 0 20 40 80 acreages, values, and regional access to ground and surface water supplies. We linked the SWAP model to DWR’s groundwater-surface water simu- lation model, C2VSim. The C2VSim model estimates the groundwater levels and pumping capacities and feeds this information to the SWAP model. Declin- ing groundwater levels increase the energy required to pump groundwater, and in turn the cost of using ground- water for irrigation. The SWAP model simulates the response by farmers to this increased cost of groundwater pumping. With net shortages of 2.6 maf for 2015, the SWAP model estimates fallowing nearly 564,000 acres state- wide—562,000 of which would occur in the Central Valley. Other areas include the Central Coast, the South Coast and inland Southern California, Source: Howitt et al., 2015. “Preliminary Analysis: 2015 Drought Economic Impact Study.” Center for Watershed Sciences, UC Davis. which are less affected by decreased precipitation, have access to ground- Table 1. Irrigation Water Reductions in the 2015 Compared to “Normal” water, or import water from other Surface Water Additional basins such as the Colorado River. Region Net Change Change Groundwater (maf/year) Figure 3 shows a breakdown of (maf/year) Use (maf/year) estimated fallowing due to the 2015 Sacramento Valley, -2.2 1.3 -0.9 drought. The bulk of the fallowing Delta and East of Delta occurs in feed and grain crops, in addi- San Joaquin Valley -1.9 1.4 -0.5 tion to some field crops south of the Tulare Lake Basin -4.8 3.5 -1.3 delta. Fallowing of vegetables, orchards, and vineyards will be minimal, yet the Central Valley Total -8.8 6.2 -2.6 Tulare Lake Basin may fallow some of Central Coast -0.0 0.0 -0.0 these higher revenue per acre crops. We have conducted retrospective South Coast -0.0 0.0 -0.0 analyses of previous droughts and found Colorado River Region -0.0 0.0 -0.0 that the SWAP model accurately esti- mates fallowing due to water shortages. Statewide Total -8.8 6.2 -2.6 In addition, we can use multispectral Source: Howitt et al., 2015. “Preliminary Analysis: 2015 Drought Economic Impact Study.” Center for Watershed Sciences, UC Davis. satellite imagery to estimate the total

Giannini Foundation of Agricultural Economics • University of California 7 Figure 3. Idled Land in 2015 by Region and Crop Group Josué Medellín-Azuara is a research fellow and Jay Lund is a professor, both in the civil and 120,000 environmental engineering department and the Center for Watershed Sciences at UC Davis. They can be contacted by email at 100,000 [email protected] and jrlund @ucdavis. edu, respectively. Richard Howitt is a professor emeritus and Daniel Sumner is the Frank H. 80,000 Buck Distiguished Professor, both in the agricultural and resource economics department at UC Davis. They can be contacted by email at 60,000 [email protected] and dasumner@ ucdavis.edu. Duncan MacEwan is a principal at Idle Land (Acres) ERA Economics who can be reached at duncan@ 40,000 eraeconomics.com.

20,000 For additional information, the authors recommend: 0 Harou, J., J. Medellin-Azuara, Sacramento, Delta San Joaquin Tulare Lake Other T.J. Zhu, S.K. Tanaka, J.R. Lund, S. and East of Delta River Basin Regions Stine, M.A. Olivares, and -20,000 M.W. Jenkins, 2010. “Optimized Vegetables Orchards and Vines Other Field Grain Feed Crops Water Management for a Prolonged, Source: Howitt et al., 2015. “Preliminary Analysis: 2015 Drought Economic Impact Severe Drought in California.” Study.” Center for Watershed Sciences, UC Davis. Water Resources Research 46:1-12. Howitt, R., D. MacEwan, J. Medellin- idle land area using measures such as to groundwater are likely to fallow Azuara, J.R. Lund, D.A. Sumner, the Normalized Difference Vegetation significant acreage. We estimate that 2015. “Preliminary Analysis: Index (NDVI). The NDVI estimates total nearly 55% of this fallowing is occur- 2015 Drought Economic Impact idle land area, whereas SWAP estimates ring in the Tulare Lake Basin. Study.” Center for Watershed Sciences, UC Davis. fallow land due to water shortage. One-third of the fallowing will Howitt, R., J. Medellin-Azuara, In May 2014, predicted fallowing be in the Sacramento Valley, the D. MacEwan, J.R. Lund, using SWAP was 410,000 acres in the delta, and east of the delta. State- D.A. Sumner, 2014. “Economic Central Valley. We compared 2014 and wide, about 87% of the fallowing Analysis of the 2014 Drought for 2011 NDVI measures and found there will be in feed crops such as alfalfa, California Agriculture.” Center for Watershed Sciences, UC Davis. were an additional 450,000 acres of idle corn and irrigated pasture, as well Howitt, R., J. Medellin-Azuara, land in 2014 compared to 2011. Similar as grains and other field crops. D. MacEwan, J.R. Lund, 2012. estimates by NASA Ames found around Coastal areas and inland South- “Calibrating Disaggregate Economic 500,000 acres of idle land. We note ern California agriculture are likely Models of Agricultural Production that SWAP estimates are directly based to have marginal reductions in irri- and Water Management.” Environmental Modelling & Software on water changes, whereas satellite- gated land area. In some cases, there 38: 244-258. DOI http://dx.doi. based estimates measure all idle land. will be a slight increase in the pro- org/10.1016/j.envsoft.2012.06.013. Patterns of idle land are consistent duction of some crops due to small between SWAP and the vegetation changes in commodity prices. index methods, and support the overall conclusion that the bulk of the fallow- Suggested Citation: ing occurs in the Tulare Lake Basin. Medellín-Azuara, Josué, Duncan MacEwan, Jay R. Lund, Richard E. Howitt, Daniel A. Sumner. "Agricultural Irrigation in Conclusions This Drought: Where is the Water and Our preliminary assessment of the Where Is It Going?" ARE Update 18(5):6- 8. University of California Giannini economic impacts of the 2015 drought Foundation of Agricultural Economics. finds about 2.6 maf less net water available for irrigation. Areas in the Central Valley that rely on surface water imports and have limited access

8 Giannini Foundation of Agricultural Economics • University of California Economic Impact of the 2015 Drought on Farm Revenue and Employment Richard E. Howitt, Josué Medellín-Azuara, Duncan MacEwan, Jay R. Lund, and Daniel A. Sumner

We estimated an 8.8 million acre- delta, will face revenue losses of over foot (maf) loss in surface water avail- $200 million in feed and grain crops We estimate that a net water shortage ability could be partially offset by while maintaining most vegetable and of 2.6 million-acre feet could cause increased groundwater pumping of orchard production. More recent data 564,000 acres to be fallowed and 6.2 maf statewide. We used the SWAP on water availability and planted acre- result in a loss of $850 million in crop production value. The surface water model to estimate the additional fal- age are likely to raise these estimates. shortage of 8.8 million acre-feet will lowing of 564,000 acres, and a decrease The northern San Joaquin Valley, be replaced by about 6.2 million in crop revenue of about $850 million. from south of the delta to just north acre-feet of increased groundwater Additional losses for cattle and calves of Fresno County, has relatively small pumping, at a cost of about $600 ($100 million) and dairies ($250 mil- losses and even revenue increases for million. We estimate the dairy and lion), due to reduced winter pasture some crops due to slightly higher crop cattle industries will lose $350 million and higher cost of forage crops, are also prices for vegetables, orchards, and in revenues. We estimate the direct expected. The combination of these vines. Other areas, like the Central and economic cost of the 2015 drought will losses lowers revenue by about $1.2 bil- South Coast, may also see slight revenue be $1.8 billion, with a loss of 8,550 lion, compared to a normal water year. increases. As shown in Figure 1, we direct farm jobs. Including spillover We estimate groundwater pumping estimate that the Tulare Lake Basin will effects, statewide losses are close to costs could increase by $600 million face severe revenue losses totaling about $2.7 billion in output and 18,600 full- in 2015 as a result of higher pumping $620 million across all crop categories. time and part-time jobs. volumes and lower groundwater levels. Jobs and Broader Economic Crop Revenue Losses Impacts of the Agricultural Drought Crop revenue declines vary by region Based on crop fallowing, about 8,550 and crop category. Figure 1 shows direct full-time and part-time jobs uring California’s periodic disaggregated losses. Based on data could be lost, 7,670 in crops and nearly droughts, water shortages lead to through late May, our SWAP model 980 in livestock and dairies. This esti- fallowing and significant reduc- D estimates that the Sacramento Valley, mate incorporates the fact that about tions in output from California agri- extending from Shasta County to the two seasonal jobs equal one full-time culture. Adaptation methods include changing the typical crop mix by using Figure 1. Chnages in Revenue by Crop Category and Region water for crops with higher revenue per Sacramento, Delta San Joaquin Tulare Lake Other unit of water, substituting groundwa- and East of Delta River Basin Regions ter for surface water, water transfers, 50 and additional use of technology.

Estimated changes in water supplies 0 were based on a survey of water districts conducted in the spring of 2015, public announcements of water deliveries from -50 federal and state water projects, and information on groundwater tables from -100 the California Department of Water Resources (DWR) C2VSim model. We -150 used the Statewide Agricultural Produc- AnnualChange Revenues in ($Millions) tion Model (SWAP) to estimate the eco- nomic impacts of the 2015 drought. Our -200 preliminary estimates of the impacts Vegetables Orchards and Vines Other Field Grains Feed Crops of the drought on cropping patterns Source: Howitt et al., 2015. “Preliminary Analysis: 2015 Drought Economic Impact Study.” were reported in Howitt et al. (2015). Center for Watershed Sciences, UC Davis.

Giannini Foundation of Agricultural Economics • University of California 9 self-employment income, other prop- Figure 2. Change in Monthly Average Agricultural Jobs by Season and Commodity Category erty income (e.g., corporate income, rent) and indirect business taxes. 10,000 Irrigation Season Preliminary estimates in Howitt et al. 8,000 (2015) show that indirect and induced Non-Irrigation Season 6,000 effects from the 8,550 direct job losses and their spillover effects result in a 4,000 loss of about 18,600 jobs in California 2,000 in total. Likewise, direct agricultural 0 revenue losses of about $1.8 billion gen- All Animal Oilseeds, Vegetables, Fruit, Other erate a loss of $2.7 billion in state value -2,000 Agriculture Production Grains Melons Tree Nuts Crops of output across the whole economy. -4,000 We estimate a loss of farm value added -6,000 of $420 million and an overall loss of Contract Labor, Other Support Change in MonthlyChange in Jobs Agricultural Average -8,000 $1.25 billion in California value added. Source: Data from the California Employment Development Department Understanding Drought Losses equivalent job. Most employment losses effects also ripple through the economy, in the Context of a Growing occur in the Tulare Lake Basin. Changes reducing economic activity and jobs Agriculture in field crops and grains account for further. The sum of direct, indirect, and Despite the recurrence of droughts, nearly 6,840 of the direct job losses. induced effects is often referred to as California’s $45 billion agricultural Impact analysis allows us to trace the total or multiplier effect of an eco- economy has grown in recent decades, expenditure patterns in a regional nomic event on the region’s economy. as it has shifted to commodities gen- economy caused by an economic event. Howitt et al. (2015) uses this type erating more revenue per acre and per When agricultural crop revenues of analysis to show the direct and total acre-foot. This includes an increasing are reduced due to water shortages, effects of the agricultural drought in the proportion of cropland devoted to tree expenditures on agricultural-related California economy. Multiplier effects and vine crops. Many of the expand- sectors such as fertilizers, agrochemi- on employment, sector output, and ing crop groups in California, includ- cals, or farm consulting services are value added are examined. Employ- ing orchards, berries and vegetables, also reduced. These indirect economic ment represents full-time and part-time are more labor intensive than the more impacts cause the direct on-farm jobs; sector output refers to sales from mechanized field crop categories. impacts to ripple through the economy. agriculture and all other sectors in the Impacts of the drought in the context Moreover, those households that rely economy; and value added is a measure of changes in overall farm employment on agriculture and agriculture-related of net gain in economic value after net- merit careful examination. For example, sectors for income spend less on con- ting out any double counting across Howitt et al. (2014) estimated that the sumer goods and services; these induced sectors. Value added includes salaries, drought would cause a loss of about 7,500 direct farm jobs—almost 2% of Figure 3. Changes in San Joaquin Valley Agricultural Jobs by Crop Category about 400,000 farm jobs in California. During the Irrigation Season from 2013 to 2014 Recently released annual data show 2,000 that farm jobs in California (includ- 1,000 ing those hired by farms directly and 0 those hired by labor contractors) rose Oilseeds, Vegetables, Fruit, Other -1,000 Animal by about 4,000 jobs, or about 1% from Tree Nuts Production Grains Melons Crops 2013 to 2014 (California Employ- -2,000 All Agriculture ment and Development Department). -3,000 This result does not contradict losses -4,000 due to drought and reinforces the -5,000 point that labor-intensive agricul- Change in MonthlyChange in Jobs Average ture has, in fact, been growing, and -6,000 Contract Labor, Other Support job growth would have been larger, Source: Author calculations using data from the California Employment Development Department but for the continuing drought.

10 Giannini Foundation of Agricultural Economics • University of California Figure 2 shows that while agricul- Figure 4. Change in Agricultural Employment from the Previous Year, by Season tural jobs grew in aggregate, that growth 16,000 was in the fall and winter months of the Non-irrigation Season 2013–2014 water year, in what is con- 14,000 sidered the non-irrigation season. The Irrigation Season 12,000 jobs associated with the main irrigated crop production period in the Central 10,000 Valley, from April to September, showed 8,000 no change in employment. Figure 3 shows that where irrigation availabil- 6,000 ity declined most in the San Joaquin 4,000 Valley, irrigation-season jobs fell in total—especially for contract workers. 2,000

Figure 4 puts the 2014 employment MonthlyChange in Jobs Agricultural Average 0 data into perspective. Agricultural jobs 2010 2011 2012 2013 2014 have grown in California in each of Source: Author calculations using data from the California Employment Development Department the last five years from 2010 to 2014, overdraft of groundwater, a fast-growing especially in the non-irrigation season. proportion of permanent crops, and the Richard Howitt is a professor emeritus in the ARE Growth was faster in the two pre- use of irrigation systems that minimize department at UC Davis. Josué Medellín-Azuara is a research fellow and Jay Lund is a professor, drought years and 2014 was the second recharge reduce the ability to cope with both in the civil and environmental engineering lowest. Much of the non-irrigation future droughts. Innovations in legal department and the Center for Watershed season employment occurs in coastal and regulatory institutions and in irriga- Sciences at UC Davis. Duncan MacEwan is a principal at ERA Economics. Daniel Sumner regions with year-round employment tion incentives are needed to reduce is the Frank H. Buck Distinguished Professor in berries and vegetables—crops that overdraft and renew efforts to recharge in the ARE department at UC Davis. They can be contacted by email at howitt@primal. are minimally affected by the drought. underground aquifers for future use. ucdavis.edu, [email protected], jrlund @ Irrigation season employment, which The 2015 agricultural drought will ucdavis.edu, Duncan@eraeconomics. com, and is important in the Central Valley and be costly for farmers, workers, and [email protected]. respectively. is affected by drought, failed to grow the California economy. We estimate in 2014—the only time in this five- losses of 18,600 jobs and $2.7 billion For additional information, the year period—after substantial growth in output. California agriculture is authors recommend: in every year except 2011. These diverse and the effects of drought differ Howitt R., D. MacEwan, J. Medellin- Azuara, J.R. Lund, and D.A. Sumner, data are consistent with substantial by region and crop category. The larg- 2015. “Preliminary Analysis: 2015 drought-induced job losses for some of est losses are in field crops and in the Drought Economic Impact Study.” the most vulnerable workers in Cali- Central Valley. Regions with smaller Center for Watershed Sciences fornia in 2014 and again in 2015. irrigation water cutbacks, such as the UC Davis, California. https:// watershed.ucdavis.edu/files/content/ Central Coast, have relied on groundwa- news/2015Drought_PrelimAnalysis.pdf. Conclusions ter to maintain production. Where these Howitt R., J. Medellin-Azuara, Droughts in California pose substan- regions tend to grow labor-intensive D. MacEwan D, J. Lund, and tial challenges for agriculture. Yet the crops, employment has continued to D.A. Sumner, 2014. “Economic water system supporting agriculture expand. But, of course, this does not Analysis of the 2014 Drought for California Agriculture.” Center for has proven resilient in past droughts. relieve much stress in those regions with Watershed Sciences, UC Davis, The current drought is causing large severe losses in output and employment. California. https://watershed. economic losses but given innova- ucdavis.edu/2014-drought-report. tive responses by farmers and others, Suggested Citation: Medellín-Azuara, J., R.E. Howitt, those losses have been manageable Howitt, Richard E., Josué Medellín-Azuara, D. MacEwan, D.A. Sumner and Duncan MacEwan, Jay R. Lund, and Daniel J. Lund, 2015. “Drought Killing and California agriculture is posi- A. Sumner. "Economic Impact Drought Farm Jobs - Even As They Grow.” tioned to weather this drought. on Farm Revenue, Employment and Center for Watershed Sciences, UC Groundwater has again been instru- Economic Activity." ARE Update 18(5):9- Davis, California Water Blog, Davis 11. University of California Giannini mental in replacing much of the loss of California. http://californiawaterblog. Foundation of Agricultural Economics. com/2015/06/08/california-drought- surface-water deliveries during the killing-farm-jobs-even-as-they-grow/ drought. With that said, continuous

Giannini Foundation of Agricultural Economics • University of California 11 California’s Severe Drought Has Only Marginal Impacts on Food Prices Daniel A. Sumner

The Simple Economics of Farm grown in the Central Valley have been Production and Retail Food Prices more subject to government mandated Flexibility and resourcefulness by California farmers have minimized Food price changes follow from farm water cuts than crops grown in regions drought-induced supply reductions commodity supply and demand condi- with a higher reliance on groundwater for tree, vine and vegetable crops, tions. So if the drought reduces farm or local deliveries. for which California has large market supplies and raises farm costs, then Crops such as fresh vegetables, ber- shares and for which retail prices prices of food products derived from ries, avocados, and high-priced wine- would be sensitive to California those farm commodities must rise. grapes are grown mostly in regions that disruptions. Water is being shifted How much each food product price have faced fewer mandated cuts in away from field crops that enter the rises due to the drought depends on water supplies. Crops such as tree nuts food supply indirectly and for which several common sense determinants: and tree fruit, lower-priced winegrapes, California is not a dominant producer. and field crops tend to be grown in the These facts mean that even a severe • The magnitude of the supply reduc- Central Valley where they have been drought is having only slight impacts tion or farm cost increases for the subject to more surface water cutbacks on supplies to consumers and thus commodities used in each of the food (Table 1). only slight impacts on consumer food products. Second, when droughts occur, farm- prices. Of course, the longer the • The share of the relevant commodity drought lasts, the larger the impacts. ers have strong incentives to shift water supply that is affected by the to crops with higher net revenue per drought. acre-foot of water in order to minimize • The relative shares of the farm cost economic losses. Forage crops such as and other post-farm processing and hay, corn silage, irrigated pasture, grain marketing costs in the retail price of crops, and other field crops have much he severe drought that California the related food product. lower revenue per acre and require has been experiencing for several • The availability of substitutes for the more acre-feet of water than tree and Tyears has idled hundreds of thou- food products affected. vine crops or vegetables (Table 1). sands of acres of cropland, reduced During a drought year, multi-crop The magnitudes of each of these crop yields, cut the cattle herd on pas- farms have strong incentives to reallo- determinants is different for each farm tures throughout the state, and reduced cate their water to crops that generate commodity affected by the drought, and farm production value by billions of more potential profit or at least mini- we will discuss each in turn for major dollars. Nonetheless, despite the fact mize losses—including losses of capital commodities. that California is the most important invested in orchards and vineyards. A farm state in the —lead- farm growing say, grapes and wheat, California Commodity Supply ing the nation in production of major will naturally leave the wheat field unir- commodities such as milk, tree nuts Reductions and Cost Increases rigated to save water and keep vines and many fruits and vegetables, and Caused by the Drought alive and productive. And, farms that supplying about half of U.S. fresh As the previous articles in this ARE have the physical and legal ability to produce—most consumers have seen Update issue document, the Cali- shift water to others, will naturally be no sign of the drought in the cost of fornia drought is likely to reduce more willing to transfer water away food. This article lays out the facts and acreage by close to 10%. But, almost from low revenue per acre field crops economic logic for why this is true. all that reduction in acreage is and toward other farms, either nearby The previous articles in this issue occurring in the Central Valley and or, often, much further south, that use have sketched the severity of this among the major forage, grain and water for tree nuts, fruits, or vegetables. drought and what it has meant for irri- other field crops, for two reasons. Geography and irrigation infrastruc- gation water costs and availability, crop First, in normal years, Central Valley ture reinforces the tendency for concen- planting patterns, and production. This agriculture relies on surface water deliv- trating supply reductions on field crops. article takes the story through to food eries from major government-owned or The primary regions for growing fresh consumers. regulated projects. That means crops vegetables and berries in California

12 Giannini Foundation of Agricultural Economics • University of California include the central and southern coastal Table 1. Revenue per Acre and Growing Region for Selected California Commodities, valleys and Imperial County. Imperial 2013 County receives irrigation water from the All American Canal and the Colo- Commodity Revenue/Acre California Growing Region rado River system, thus insulating the Almonds $6,867 Central Valley region from this California drought. Cattle and Calves (Beef) -- Foothill and Mountain The coastal valleys have had low pre- Grapes $6,812 Central Valley & Coastal cipitation but rely primarily on local Hay, Including Alfalfa $1,090 Central Valley, Mountain and Imperial groundwater aquifers that have not Lettuce $8,459* Coastal and Imperial been under as much pressure during Milk -- Central Valley this drought as those in the Central Peaches $6,050 Central Valley Valley. Rice $1,408 Sacramento Valley Table 1 lists lettuce as the represen- Strawberries $53,030 Coastal tative fresh vegetable crop, but the Cen- Tomatoes, Processing $3,532 Central Valley tral Coast is also home to most produc- tion of crops such as celery, broccoli, Wheat $663 Central Valley Source: USDA, “California Agricultural Statistics, Crop Year 2013.” and spinach. The Central Coast, from *Single crop only. Land often has multiple crops per year. Santa Cruz County down the coast to Ventura County, also produces most of regulation, farms will tend to use avail- fornia supply falls significantly, say for the strawberries and raspberries. The able water on tree, vine, and a few other wheat, rice or hay, the amount in the high revenue per acre and per acre-foot crops while shifting water away from U.S. or relevant global market falls by a of water for crops such as strawberries field crops. much smaller percentage. Two caveats and lettuce also provide great incentives The drought affects California pro- affect the interpretation of these pro- to apply the irrigation water needed to duction of livestock commodities duction shares. sustain production. mainly through impacts on forage crop First, for some important crops, the Irrigation water per acre varies output. Poultry, egg, dairy, and finished relevant markets are global. For exam- widely by crop and region, from around beef production relies mostly on grains ple, Table 2 indicates that about two- one acre-foot per acre for winter and shipped in from other states. But, Cali- thirds of California almonds and about spring vegetables grown in cool coastal fornia-produced hay, silage, and irri- half of California rice are exported. regions with ample humidity, up to per- gated pasture are important for cattle. Global market share is crucial. For haps five acre-feet per acre for some Hay and silage, mostly produced in Cal- almonds, California also has a large trees and alfalfa in the hot and dry ifornia, comprise about 20% of Califor- share of the global market so if supply southern San Joaquin Valley. Of course, nia milk production costs. Therefore, a were to fall (as has not happened much crop yields are also high where irriga- 50% increase in costs of hay and silage during this drought), price would tion use is high. due to the drought would increase milk indeed rise. Water costs per acre-foot also vary production costs at the farm by a bit Exports are also important for dairy widely from lows of $20 to $50 per less than 10%. products, processing tomatoes, and rice. acre-foot for surface water in the north, Markets for each of these commodities in places where water has been plentiful Market Shares and faces particular conditions. In the case or where groundwater tables are near Effects on Farm Prices of milk and tomatoes, California ships the surface. Regular pumping costs or Many observers point to the large share processed products into competitive delivery costs can exceed $1,000 per of California produce in the nation’s national and global markets. For rice, acre-foot in some regions and during supply. Table 2 indicates California’s California is a tiny part of global mar- drought periods. (During this drought, large share of U.S. production for tree, kets, but produces a specialized style of limited amounts of water have been vine, and vegetable crops. These are the rice for which California production transferred at even higher prices, espe- crops for which the current drought shortfalls do affect price somewhat. cially when farmers needed to keep is not causing large supply cuts. Finally, in the case of wine, imports trees and vines alive or pay urban prices California has smaller market shares matter as well as exports. While Califor- for very high revenue crops.) In gen- for livestock and field crops where Cali- nia dominates U.S. wine production, eral, however, it is clear that where fornia supply reductions are large. the market is quite competitive— physically feasible and allowed by These facts mean that even when Cali- especially in the case of wine from

Giannini Foundation of Agricultural Economics • University of California 13 of melons or lettuce, or from table Table 2. Share of U.S. Production and Export Ratio of Production for Selected California Commodities, 2013 grapes to some other fruit if relative prices change. CA Share of U.S. Production Export Ratio of Commodity Percent Production Summary of Retail Price Impacts Almonds 99 0.67 of the Drought Cattle and Calves (Beef) 5 0.09 A simple pair of equations summarizes Grapes 89 0.20 the expected percent change in Hay, Alfalfa and Other 6 0.21 retail price caused by a change in Lettuce 78 0.10 quantity supplied of the associated Milk 21 0.30 California farm commodities. First Peaches 72 0.11 consider the farm price impact:

Rice 25 0.47 %change Pfarm = Strawberries 88 0.08 (1/e) Sc(%change QCalfarm) Tomatoes, Processing 96 0.31 where %change P is the farm Wheat 2 0.14 farm price of the commodity, e is the own Sources: USDA, “California Agricultural Statistics, Crop Year 2013,” and UC Agricultural Issues Center, “2013 California Export Data.” price elasticity of farm demand for the commodity, which measures Central Valley grapes that are most farm, the percentage impact for retail how much quantity demanded falls likely to be affected by drought. consumers is generally muted—and when price rises, Sc is the share of more muted for processed products California production in the market Marketing Costs and Retail and those subject to costly and spe- supply, and %change QCalfarm is Demand Conditions cialized marketing and transport. how much the quantity produced Of course, farm price changes are not Flexibility by retailers and consum- in California will fall due to the the only driver of retail prices. Costs ers also moderates price impacts. Given drought. To simplify the calculation, added along the marketing chain to the that drought has slowly evolving in this equation I assume farms do final consumer often add as much or impacts with substantial warning, not add to production in response to more than farm costs. For example, the wholesale and retail buyers have ample the drought-induced higher price. farm share of retail cost for strawber- time to plan ahead and source products The relationship between the change ries or lettuce is 30% but only about from where they are most available. in farm price and percentage change in 7% for bread. These relationships Finally, many consumers are willing to the retail prices is given by the simple mean that even if prices rise at the substitute across products such as types proportionality:

Table 3. Expected Effects of the California Drought on Retail Prices of Cheese, %change Pretail = Sr(%change Pfarm), Lettuce, and Rice where Pretail is the price of the Cheese Lettuce Rice Wine retail commodity, and Sr is the Farm Share of Retail Price 0.3 0.3 0.3 0.1 farm commodity share in the retail price of the product. Putting these Own-price Elasticity of Retail Demand -0.3 -0.5 -0.5 -0.5 two equations together tells us California Share of how the drought is likely to affect 0.2 0.8 0.5 0.5 Relevant U.S. Market the retail price of each item. Percent Change in Quantity Using these relationships, we will -5% -3% -33% -1% Supplied by California Farms consider price impacts for four retail Percent Change in Retail Price 1% 1.5% 10% 0.1% products for which California supply plays an important role in the national Sources: Author estimates based on data from USDA, California Agricultural Statistics, Crop Year 2013; USDA ERS, “Price Spreads from Farm to Consumer.” www.ers.usda.gov/data-prod- market: cheese, lettuce, rice, and wine. ucts/price-spreads-from-farm-to-consumer.aspx#2565; Abigail M. Okrent and Julian M. Alston, Table 3 shows the parameters and re- “Demand for Food in the United States: A Review of Literature, Evaluation of Previous Estimates, and Presentation of New Estimates of Demand,” Giannini Foundation Monograph 48,“April 2011, sults for each product. http://giannini.ucop.edu/monograph.htm; and personal communication from Dr. James Lapsley, June 25, 2015.

14 Giannini Foundation of Agricultural Economics • University of California California produces about 20% of the U.S. milk supply, which can be processed into cheese. The farm share of the retail price for cheese is about 30%. That is, the price of milk before it has been processed into cheese makes up 30% of the cheese retail price. The own-price elasticity of demand for milk, a measure of the responsiveness of quantity demanded to a given change in price, is -0.3. Given the reduced hay and forage supplies to the dairy industry and associated higher prices, we estimate that California milk pro- duction may decrease by 5% due to the drought. Plugging these parameters Despite drought, produce from California will remain plentiful for consumers. into the equation tells us that the retail Copyright 2013 The Regents of the University of California price of cheese would increase by 1%. California is the dominant supplier grape production costs and the limited of fresh produce in the U.S. during supply flexibility for a perennial crop. Daniel Sumner is the Frank H. Buck Distinguished much of the year, and its share of the These parameters imply the drought is Professor in the agricultural and resource economics department and the director of the U.S. lettuce market is about 80%. Given likely to cause an increase in the retail Agricultural Issues Center at UC Davis. He can a 3% decrease in the quantity of let- price of California wine of about 0.10%. be reached by email at [email protected]. tuce supplied by California farms, retail price would increase by about 1.5%. Summary and Concluding Remarks For additional information, the California produces japonica rice Flexibility and resourcefulness by author recommends: for the U.S. and international markets. California farmers have minimized the Sumner, D.A., 2015. “Food Prices and California rice accounts for about half supply reductions of precisely those the California Drought.” California of the relevant U.S. market, some of tree, vine and vegetable crops for which WaterBlog. http://californiawaterblog. which uses specialized California rice California has large market shares. com/2015/04/22/food-prices- and some of which uses medium grain Crop production is being cut for field and-the-california-drought/ rice produced elsewhere. The market crops that enter the food supply indi- USDA ERS, 2015. “California Drought: Food Prices and Consumers.” www. share and demand elasticity reflect that rectly and for which California is not a ers.usda.gov/topics/in-the-news/ California rice is unique for certain uses dominant producer. These facts mean california-drought-farm-and-food- in some markets and has close substi- that even a severe drought is having impacts/california-drought-food- tutes for other uses. Because of severe only slight impacts on supplies to con- prices-and-consumers.aspx. reductions in surface water availability, sumers and thus only slight impacts on York T., and D.A. Sumner, 2015. California quantity of rice will likely fall “Why Food Prices Are Drought- consumer food prices. Of course, the Resistant: California Farmers Are by about 33%, and is therefore likely longer the drought lasts, the larger the Using a Variety of Tactics to Stay to cause a 10% increase in retail price. impacts. But for the foreseeable future, Competitive in a Global Marketplace.” As a highly processed farm product, California farms will remain reliable The Wall Street Journal. www.wsj. com/articles/why-food-prices-are- grapes account for only about 10% suppliers of tree nuts, fruits, vegetables, drought-resistant-1428876222. of the retail price of wine. We use an dairy products and much more. average elasticity of demand for wine- grapes of about -0.5. We estimate that Suggested Citation: California makes up about half of the Sumner, Daniel A. "California’s Severe Drought Has Only Marginal Impacts relevant market for U.S. wine sales, on Food Prices" ARE Update 18(5):12- with imports comprising much of the 15. University of California Giannini rest. The reduction in grape quantity of Foundation of Agricultural Economics. only 1% due to the drought reflects the relatively low share of water costs in

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