California Drought Threatens to Destabilize Agriculture Markets

Wed, Feb 26, 2014 - 9:33am

by Steven Slezak, an analyst at Global Risk Insights

Food availability, affordability, and quality drive food security problems in the world. The drought in California threatens to exacerbate food security problems in all three issue areas.

The state of California is deep into the third year of a record drought. An excellent map from the University of Nebraska shows that nearly 91% of the state is undergoing “severe to exceptional” drought. Seventeen communities scattered across the state are expected to run out of water by mid-May. Last year was California’s driest since it became a state in 1850. This year looks to be the driest in over 400 years, according to climatologists at the University of California Berkeley.

Scientists say more is in store. Bill Patzert, a climatologist at NASA’s Jet Propulsion Laboratory believes a 20-year drought cycle began in 2000. Scott Stine, a professor of environmental studies at Cal State East Bay, told the San Jose Mercury News, “We continue to run California as if the longest drought we are ever going to encounter is about seven years. We’re living in a dream world.”

So what’s the big deal? As they say, this time it’s different. The ongoing California drought provides a disturbing glimpse of future water shortages and their impact on agricultural production and food security.

California’s agricultural heartland is the Central Valley, a vast area comprising 22,500 square miles (58,000 square kilometers) of the world’s most productive agricultural land. State-wide farm production was $44.7 billion in 2012, making California the largest agriculture producer in the US. The Central Valley represents about 72% of this production. California is also the country’s largest agriculture exporter, selling 39% of annual production overseas. The USDA estimates that the value of US agricultural exports in 2011 was $136 billion, meaning California alone accounts for about 12% of all US farm exports.

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As a result of the drought, Central Valley farms have left fallow 500,000 acres (202,000 hectares), roughly 8% of the region’s total. Agriculture production is shifting from low margin fruit and produce such as cantaloupe to more profitable commodities like tree nuts and tomatoes. The drought’s impact on overall agriculture production could amount to losses of $1.6 billion for farms and approach $5 billion for California agribusiness in general.

We’re From the Government, and We’re Here to Help – If You’re a Fish

The political response has been predictable and unhelpful. California Governor Jerry Brown declared a drought emergency in January to open taps of federal relief dollars. For the first time in its 54-year history, the State Water Project will not provide any water to the 750,000 acres (300,000 hectares) of farmland it services. “The nation’s largest state-built water and power development and conveyance system,” according to its website, will not convey resources contracted by agriculture.

Neither will the federal government’s Central Valley Project deliver agriculture water this year. Though the project was, in its own words, “originally conceived…to protect the Central Valley from crippling water shortages,” it will not prevent water shortages from crippling farms—with the possible loss of over 100,000 local jobs.

Water destined to benefit endangered fish species, such as the Delta Smelt (a short-lived, 6-cm long, reproduction-challenged member of the Osmeridae family), will remain at 100% allocation. Their population is so low that the State of California says “it is exceptionally difficult to determine the actual number of Delta smelt.”

Food Security Likely to Be Affected

How all this is playing out in California is disturbing enough. But the drought’s impact on food supplies will be felt far beyond the Golden State.

The drought in California threatens to exacerbate food supply shortages in other parts of the world as higher US prices shift production and supply towards satisfying US demand. Supply shortfalls will be met by higher prices, and markets are beginning to reflect this. Just one example: the February 2014 Live Cattle futures contract on the Chicago Mercantile Exchange has appreciated 9.5% since mid-November. The possibility of global food price inflation cannot easily be dismissed.

We can also expect to see greater volumes of food being imported to the US this year, in response to higher prices. To the extent global supplies and production will respond to American market price signals, food diverted for US buyers will not be available for consumption by others.

In the face of growing global demand for food, higher prices and reduced supply do not bode well for the 842 million people who already do not have enough to eat. Four million live in California, and a half million of them reside in the Central Valley.

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