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Global Competition Imperils Many California Farmers

By Jock O'Connell And James R. King

This article appeared in the Sunday Forum section of the Sacramento Bee on May 19, 2002.

The chief source of agrarian anxiety in California involves the question of whether irrigation water supplies will run dry before the last green acre of farmland is consumed by suburbia's sprawl.

It's an understandable concern. After all, without land and water, farmers anywhere would be in trouble. It's also an issue that fully merits the attention of the state's political leaders. If production agriculture - currently a $27 billion industry in the Golden State - falters, scores of communities throughout rural California may learn they do not enjoy an inalienable right to life.

However distressing the contest over land and water may be for the folks down on the farm, it does not represent the most acute threat facing the state's agricultural economy. Instead, that distinction goes to the swiftly emerging competition from foreign growers that are able to offer the world's consumers (including Americans) most of the same crops produced here in California at prices California farmers cannot hope to match.

To survive, let along flourish, in the global economy, California agriculture will have to devise new strategies to overcome a fundamental handicap: The playing field of international trade will never be entirely level simply because the cost of farming in California is so much higher.

The worldwide system for producing, processing and distributing food products is being transformed. Local markets are being merged into a single global market. Accordingly, as U.S. Agriculture Secretary Ann Veneman has repeatedly warned: "We can no longer think of our agriculture as being confined to what takes place within our borders. It is part of a larger, worldwide interconnected system." Veneman's admonition applies not only to national policymakers. It should be heeded as well by those responsible for charting the future of agriculture at the state and local level.

Over the last decade, the lure of higher profits to be had from growing high-value specialty crops has led farmers in virtually every corner of the Earth to abandon grains in favor of the fruits, nuts and vegetables that have long been the hallmark of agriculture in the Golden State.

California growers of a wide variety of specialty crops have already seen their profits eroded by the downward pressure imports have exerted on prices. According to a 2001 report from the California Farm Bureau, "Prices for many of the state's 250-plus commodities have collapsed due to foreign imports, including raisins and other dried fruit, olives, garlic, honey, apples, apricots, peaches, oranges, pears and tomatoes."

While the sheer proliferation of competitors in the specialty crop sector will challenge the ability of California growers to earn a living, in certain cases the challenge seems especially formidable.

For example, in his new book, "Integrating China into the Global Economy," Nicholas Lardy of the Brookings Institution notes that, because of its low costs for land and labor, "China has a strong comparative advantage in the production of many fruits, vegetables and flowers. Indeed China could become a major or even dominant supplier in world markets for walnuts, apples, citrus, strawberries, grapes, asparagus, processed tomatoes and many other crops." That's not comforting news for California growers keenly aware of the escalating costs of producing those same crops in the Central Valley.

Still, the news from overseas is not uniformly grim. On the positive side, the worldwide market for high-quality specialty crops is sharply increasing as more and more people attain a measure of affluence. Many of these newly prosperous consumers are becoming more discriminating, demanding quality that is both high and consistent. They are also asking whether the food they are buying is actually safe to eat.

According to Mary Chambliss, the acting administrator of the U.S. Foreign Agricultural Service, "The urban population in developing countries is expected to double to nearly 4 billion by 2020. With this urbanization will come increased demand for meat and other high-value food products."

In India and China, the size of a genuine middle-class is expected to easily exceed the entire population of the United States by 2010.

What kinds of steps should California growers of fruits, vegetables and other specialty crops take if they wish to exploit these huge markets? Equally, what strategies should California food producers adopt to stymie competition from lower-cost producers from abroad?

One thing is immediately and abundantly obvious: The federal government will be of little help. The massive farm bill signed by President Bush this past week provides no comfort to specialty crop growers. Nor is the U.S. trade representative likely to be any more responsive to the pleas of specialty crop growers. In both cases, the alignment of political clout in Washington ensures that the interests of Midwestern grain and soybean farmers will always prevail over the needs of fruits, nuts and vegetable growers.

Nor will the customary response of American industry - increasing productivity by bringing new technologies to bear - provide relief to California's farmers. Instead, it merely exacerbates the problem by glutting the market and thus driving prices down, a pattern known to agricultural economists as the "technology treadmill."

So how is a grower of specialty crops in a high-cost business climate like California supposed to survive in a market populated by increasing numbers of lower-cost competitors? The obvious answer is to stop trying to compete on the basis of price. That does not mean getting out of farming entirely because California specialty crop growers can offer something that no one else can: food that is produced here in the Golden State.

Succeeding in an intensely competitive global food market will require a concerted effort to identify California-grown produce with the healthy, prosperous lifestyle the world associates with California.

Earlier this year, Gov. Gray Davis launched the Buy California campaign to get the state's consumers to buy more produce grown by California farmers. However, as economists and sociologists will both point out, such programs cannot succeed if they merely ask consumers to ignore prices when shopping.

Instead, if it is to achieve the desired effect, the Buy California campaign must persuade consumers that food products from California are demonstrably fresher, more nutritious and safer to eat than food produced elsewhere.

In effect, California should establish a gold standard for specialty crops and processed food products. A Grown in California label or certificate should assure consumers around the world that the product bearing the label satisfies the most exacting expectations they might have about quality, nutritional value and food safety. Only in that way will California growers be able to demand the higher prices they need to remain profitable.

There are other competitive strategies that should be considered. For now, though, our primary point is that the threat posed by foreign competition is sufficiently grave to merit a good deal more attention than it has been receiving in policymaking circles. Contrary to the upbeat impressions left by relentlessly syrupy public television programs like "Central Valley Chronicles" and "California Heartland," it would not take very much (nor, indeed, very long) to topple production agriculture from its pride of place in the Central Valley economy.

The business of farming is a financial high-wire act that is even more precarious when specialty crops are involved. The linchpin of the production system is credit. It is also its Achilles' heel.

Regrettably, the creditworthiness of an increasing percentage of California farmers is being questioned by banks and other lending institutions that would have no trouble finding more profitable and less risky ways of investing their capital.

The implications both for individual farmers and for the Central Valley as a whole are fairly momentous. Clearly, the issues presented by foreign competition and global food markets need to be taken more seriously in Sacramento, if only to avoid the supreme irony of seeing today's bitter debates over water supplies and rural land use finally resolved not by compromise but by the removal of agriculture from the demand side of the equation.

For information on Jock O'Connell, click on Jock O'Connell

James R. King, who was president of the Sacramento consulting firm Applied Development Economics at the time this article was published, died in 2003.