California drought has regional, national, and global impact

{38d25264-bafe-4b83-a934-64291ec8512f}_sidebar_photo_article_apr2015Andrew Broaddus, Wells Fargo Agricultural Advisor

Since the beginning of April and the return of planting season, it has been almost impossible to read, watch, or listen to national news without hearing increasingly detailed stories about the continuing drought in California. With the drought now into its fourth year, California’s farms and agribusiness companies have masterfully dealt with reduced water supplies and increasing challenges each year. Interestingly, the past 10 years have been some of the best on record for many sectors of California’s farm economy, marked by high commodity prices and rising land values. This has resulted in stronger balance sheets, providing many farmers the resources necessary to invest in new irrigation technologies, increased on-farm water supplies, and systems linked together to allow for the most efficient use of available water. Drip and micro-sprinkler irrigation have become common across many crop sectors, reducing the amount of water required to produce crops. And, expert farm managers are increasingly focused on getting the most value possible from each acre foot of water utilized.

For weeks now, we have been treated to analysis and opinion ranging from the quantity of water necessary to produce various food products, California’s importance to the U.S. fresh-food supply, and an assumed connection that food export translates to water export. A new term has even become common in many news reports —”water shaming” — in reference to the amount of water required to produce a unit of many crops. In response, Farm and Agribusiness industry groups have rallied to present another side of the story to an increasingly skeptical public which now faces widespread and required restrictions for municipal water.

The physical impact of the drought can be seen in myriad ways throughout California. Some major crop acreage is expected to be at the lowest level in recent memory as a result of water shortage or the ability to sell water. Two large commodity crops in particular — cotton and rice — may have the smallest acreage planted since the mid-20th century. Orchard removals continue throughout the state, due to lack of water or a decision to divert water to other locations. And, orchard operators with reduced water supplies are even choosing to remove older or less productive orchards in order to free up water supplies for other uses. Nearly every crop sector is shrinking or stagnant due to a smaller water supply and farmers rationing their existing water supplies according to the anticipated value of each crop. All of this has a ripple effect across regional economies as food-processing companies face contracting supplies, and agribusiness service and materials suppliers see reduced demand. Meanwhile, some of the rural regions of California are suffering from increased unemployment levels and a general feeling of uncertainty.

Beyond the physical impact of the drought, government politics are playing an increasingly important role in the usage of limited water supplies within California. In January of 2014, Governor Jerry Brown announced a drought emergency order and directed state officials to take all necessary actions to prepare for drought conditions. In September of 2014, the California Legislature passed legislation known as the Sustainable Groundwater Management Act to ensure the achievable goal of reliable groundwater management. Further, the California Water Resources Board is taking action to analyze and control the use of all types of water rights throughout the state, and federal and state courts remain engaged in maintaining water supplies to environmental uses. While this activity is thought by many to be the role of government during an emergency, the lack of precedent as to what government involvement means on a detailed level is creating a high degree of uncertainty for many agribusiness water users.

California’s water supply system is highly complex. Control and management of water supplies lies with entities ranging from individual land owners, to local water districts, to state and federal government agencies. This fragmented structure makes change implementation difficult, and consensus on action challenging. While the drought remains a statewide issue, the impact is felt on a highly localized basis. Each farm operator deals with a specific water supply issue, along with different levels of risk and opportunity related to their own individual use of available water supplies. However, the impacts of these highly microeconomic factors then extend across local, state, national, and international markets as food is processed, transported, distributed, marketed, and consumed.

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andy-broaddusAndy Broaddus, a Wells Fargo Agricultural Services Advisor, focuses on crop production and food processing in California, Oregon, and Washington. His particular areas of expertise include wine grapes, processing tomatoes, rice, prunes, canning peaches, walnuts, almonds, and pears.

Having joined Wells Fargo in 1987, Andy has more than 25 years of financial experience and has worked in the Wells Fargo’s Agricultural Services group since 2000. Prior, he held a number of positions including Loan Examiner, Small Business Loan Officer, Commercial Relationship Manager, and Small Business Senior Credit Officer.

Andy holds a Bachelor of Science degree in Agricultural & Managerial Economics from the University of California at Davis, and is also a graduate of the Western Agricultural Credit School. Additionally, he has completed a variety of coursework through the American Society of Farm Managers and Rural Appraisers, the Agribusiness Institute at Santa Clara University, and the Risk Management Association. Andy was raised in Mendocino County, California on a family farm/ranch that produced pears, prunes, and timber along with sheep.