California ag faces further economic losses as drought persists

Despite nearly normal rainfall and snowpack for 2015-16 rainy season, California farmers and agribusinesses face losses.

May 27, 2016

3 Min Read
California ag faces further economic losses as drought persists

Despite nearly normal rainfall and snowpack during the 2015-16 rainy season, California farmers and agribusinesses could face up to $1.5 billion in losses due to persistent drought conditions, according to a new report from CoBank. The drought’s lingering effects will lead to another round of water restrictions for producers for the remainder of the growing year and beyond.

While northern California saw the most precipitation during the rainy season, much of the state is still blanketed by severe drought, especially in the central and southern regions. Government agencies in the state will again need to enforce water restrictions, allocating less than 60% of the state’s contracted water supplies. These restrictions will result in a 5-7% loss in net cash income for farmers, ranchers and agribusinesses across the state, according to the report.

“Although California’s cities, rural communities and farmland are less parched today than they were a year ago, water remains in short supply,” said Leonard Sahling, vice president with CoBank’s Knowledge Exchange Division. “While, for some areas, water allocations will be more than double last year’s amounts, growers will still fallow up to 350,000 acres this year.”

In addition to fallowing land, growers have several other options to offset water restrictions and drought effects, including increasing their use of groundwater stores, purchasing additional water from senior rights holders, increasing the use of crop insurance to mitigate risk and lost income and shifting their crop mix in favor of crops that require less water.

“Some sectors will feel the effects of these water restrictions more so than others,” Sahling said. “Crops that yield the highest returns on investment, like permanent plantings of tree crops and vines, should be impacted the least. At the same time, we expect a large reduction in acreage for field crops that require significant amounts of water, including corn, wheat, cotton and alfalfa.”

For cattle and dairy farms, the biggest drought-related risk stems from potentially higher feed costs. “Fallowing decisions will affect the price and availability of locally grown feed ingredients,” Sahling said. “However, grain and feed prices have declined across the nation, mitigating this risk.”

Despite a projected reduction in farm income, Sahling said California’s agriculture sector remains strong enough to manage through another year of drought.

“Looking beyond this year, the outlook for California agriculture will depend on how much moisture the state receives, continued availability of groundwater and future regulations that impact access to surface and groundwater,” Sahling said.

CoBank is a $118 billion cooperative bank serving vital industries across rural America. The bank provides loans, leases, export financing and other financial services to agribusinesses and rural power, water and communications providers in all 50 states. The bank also provides wholesale loans and other financial services to affiliated Farm Credit associations serving more than 75,000 farmers, ranchers and other rural borrowers in 23 states around the country.

CoBank is a member of the Farm Credit System, a nationwide network of banks and retail lending associations chartered to support the borrowing needs of U.S. agriculture, rural infrastructure and rural communities. Headquartered outside Denver, Colo., CoBank serves customers from regional banking centers across the U.S. and also maintains an international representative office in Singapore.

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