Food prices and the California drought

Water, a precious commodity, irrigates a field in southern San Joaquin Valley. wheat. near Bakersfield. Photo nu John R. Chacon/California Department of Water Resources

A wheat field near Bakersfield, Calif., March 2015. Photo by John Chacon/California Department of Water Resources

By Daniel A. Sumner

California’s drought has been tough on farms and especially painful for farm workers in the Central Valley. But consumers of California-produced food have been spared large price increases.

Despite the severity of the drought and California’s dominant market shares in many foods – especially fruits, vegetables and tree nuts – consumers saw only small food price effects last year and are unlikely to notice much price impact in 2015. The reasons derive from California’s geography, irrigation plumbing system, the economics that drive the distribution of irrigation water among crops and the basics of food supply and demand.

The reduction in irrigated crop acreage – about a half million acres last year and likely much more this year – has been and will be mostly field crops such as rice, cotton, hay and corn silage. These crops affect food prices only indirectly and global markets establish prices for most of these crops. California’s output is a small share, and so has little effect on prices.

View of strawberry fields, Elkhorn Sough Reserve and the Monterey Bay.

Strawberry fields on Monterey Bay, Calif., 2013. Photo by John Chacon/California Department of Water Resources

The food crops for which California has a large market share and California production can affect prices – almonds, pistachios, walnuts, fruits, grapes, berries and many vegetables – typically generate high revenue per unit of water. So, where possible, farmers continue to shift scarce and expensive water from field crops to these crops. Farmers have added incentives to shift water to their tree and vine crops to protect their long term investments in these perennial crops.

Additionally, many of the produce crops grown predominantly in California are concentrated in the state’s coastal regions where cuts in surface water deliveries have been smaller and groundwater remains available.

California dairy production will be down this year mostly because of low global dairy product prices, but also because the drought has caused higher California hay and silage prices that boost production costs. But the tendency of drought to slightly raise national prices of cheese, butter and milk powder is swamped by national and global market factors that have lowered dairy product prices.

harvesting swiss chard.

Harvesting swiss chard in coastal California, 2013. Photo by John Chacon/California Department of Water Resources

California ranchers have reduced their cattle herds because of dry pastures, but this has had little effect on beef prices because the state’s share of the North American cattle production is so small.

Even when farm prices rise, retail food prices often show little response. The farm commodity share in what consumers pay tends to small compared with other costs in the chain of marketing, labor, transportation and packaging. That means even a 10 percent higher price of a food commodity at the farm could mean a price hike of only 2 percent or 3 percent for consumers.

The impact of the California drought nationally and internationally may not be noticeable given all the other variables that determine food prices. For example, this year the strong dollar is reducing export demand, especially for dairy products and tree nuts.

The bottom line is farmers are scrambling to efficiently use what water they have –largely stored in underground aquifers – to keep food supplies available, especially for crops where substitutes from elsewhere are not readily available.

What if this drought continues? Clearly, each year of drought will force farmers to idle more cropland, eventually affecting prices for California specialty crops. Beyond that, no one has yet carefully developed a timeline of consequences for water supply, food production and food prices should the drought continue for many more years.

Daniel A. Sumner is director of the UC Agricultural Issues Center and the Frank Buck Professor in the Department of Agricultural and Resource Economics at UC Davis.

Further reading

McClurg, L. 2015. “Drought not likely to cause higher grocery billsCapital Public Radio. April 20, 2015

York T. and Sumner DA. 2015. “Why food prices are drought-resistant.” The Wall Street Journal. April 12, 2015

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13 Responses to Food prices and the California drought

  1. tsac0008 says:

    The acreage that needs to be reduced is that located in the southwestern portion of the San Joaquin Valley, the land that was only recently converted to permanent crops. The term “efficient irrigation” precludes by definition, irrigation in a desert where evapotranspiration rates are so high and natural precipitation is so low. That area should either only be dry land farmed or farmed for seasonal crops when all reservoirs are full and groundwater has been allowed to recover.

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