Globalization and the Perils of Farming in California's Central Valley

By Jock O'Connell

This article appeared in the Opinion section of the Sacramento Bee on Sunday, July 29, 2001, under the title "Ag industry at risk -- despite rosy image."

A curious rite is customarily observed whenever the future of the Central Valley is considered in a public forum. Whether it be a legislative hearing to address state water policy, a meeting of county supervisors to review tax incentives aimed at luring more "New Economy" businesses or yet another visionary report looking ahead ten or twenty years, nothing specific may be discussed before the significance of agriculture to the region is first acknowledged.

This obligatory adulation need not be elaborate (nor even particularly accurate). A brief tribute to agriculture as "the state's leading industry" normally suffices, as it did in a 1999 report presented by the Public Policy Institute of California. Occasionally, the genuflection is performed with unreserved optimism, as it was when the Great Valley Center's 2001 Economic Forecast for California's Central Valley divined that: "The agricultural base of the valley will remain at the heart of the region's the foreseeable future."

Such ritualistic blarney is no doubt intended to appease the sensibilities of the valley's political powers. Agriculture is king -- always has, always will be -- and all public policy affecting the region must reflect that.

So it's a real pity no one seems to be listening very closely to the region's farmers, who are just about the only ones not taking their future in the Central Valley for granted.

Bill Pauli, the president of the California Farm Bureau Federation (CFBF) paints a portrait of California agriculture grimly at odds with the customary hosannas. "While much of the state and nation has enjoyed a booming economy the past few years, agriculture has gone bust," Pauli told a meeting in Washington, D.C. in May.

"Many farmers have fallen on hard times. For many commodities, returns to farmers have fallen below the cost of production. Some prices are at 20-year lows," Pauli noted before warning that U.S. Department of Agriculture projections indicate that farm income for most California growers is not expected to improve in the near future.

These views are echoed by Dan Sumner, director of the University of California's Agricultural Issues Center, who told a meeting of California farmers and agribusiness executives earlier this year: "This is about the most widespread case of low farm prices than anything I've seen." While there were a few exceptions such as premium winegrapes and beef, "commodity prices are generally low across the board and we don't know when a turn-around is coming," Sumner added.

In testimony before Congress this spring, representatives of the American Farm Bureau Federation declared that the U.S. fruit and vegetable industry (much of it centered in California) "is suffering through the worst economic hardships in seventy years."

Perhaps the clearest indication of how bad things have gotten down on the farm is that the notoriously conservative Farm Bureau now supports the lifting of trade embargoes on Cuba, Libya, North Korea, Sudan, and Iran.

The tillers of the soil are notorious bemoaners whose recitations of woes are best served up with a bushel basket of salt. Still, it is hard to discount that the problems facing Central Valley farmers. Indeed, there are several disturbing trends at work that would seem to lend credence to U.C. Davis economist Steven Blank's controversial view that food production in a high-cost economy like California cannot be sustained much longer.

Financially, most Central Valley's farmers are caught in an inexorable squeeze between rising production costs and declining crop prices. With surging population growth, the supply of irrigation water is apt to remain problematic, even in non-drought years. The bill for electricity needed to run a modern farming operation will stay high under the terms of the long-term contracts the state has negotiated with energy suppliers.

Meanwhile, labor costs are increasing, urban sprawl is steadily consuming farm land, and opposition to the use of pesticides and herbicides is unlikely to grow any less intense. At the same time that credit is becoming tighter, the transition to high-value specialty crops and the use of expensive new technologies -- developments much celebrated by the region's publicists -- have ratcheted up the costs of farming and increased the financial peril facing farmers.

The economic hammer hits first and hardest on smaller farming operations. But large corporate farms are not immune to the economic forces undermining the viability of agriculture in California. If anything, corporate farms are more apt to make hard business choices than families trying to preserve a tradition or a way of life.

As if the plague of domestic locusts were not enough, the fast emerging global economy will pit California's farmers against growers in lower-cost and less extensively regulated countries in the competition for markets -- both here and abroad. Moreover, the worldwide market for food and fiber is becoming dominated by the same agribusiness giants that have come to control food production, processing and marketing here in the United States. Ultimately, food and fiber from basic grains to the fanciest arugula will likely come to be traded through the same kind of global supply chains that have come to characterize the electronics industry.

Citing "a combination of low commodity prices, rising production costs, increased government regulations, foreign imports and other challenges," the California Farm Bureau convened a Farm Crisis Task Force last winter to identify ways of helping the state's farmers survive.

At the group's first meeting in January, participants were troubled by "skyrocketing prices for other inputs including natural gas, diesel, petroleum-based pesticides and fertilizers, farm labor, machinery, livestock feed and land rent." Concerns were also voiced about federal crop insurance programs that are inadequate for California farmers and ranchers, imports, foreign trade barriers, trends toward greater consolidation in the food industry, and controversies over biotechnology and genetic modification.

Then there is the credit crunch and declining land values. Prompted by federal and state regulators, lending institutions have grown more wary when financing agricultural debt. For farmers, there is more paperwork, closer outside scrutiny, and far less certainty about securing needed credit.

The value of the land a farmer owns helps determine the farmer's credit-line. Unfortunately, the latest news on farm values is almost uniformly glum. The California Chapter of the American Society of Farm Managers and Rural Appraisers, which met in Sacramento in May for its annual outlook forum, noted that low commodity prices, soaring energy costs and lack of water have been taking a significant toll on agricultural property values. Farm and ranch property appraisers reported that they were seeing continued price softening for agricultural real estate throughout the state—especially for older tree- fruit and nut orchards, as well as some vineyards.

Valley farmers have weathered previous downturns. This time around, though, there is a new dimension to their plight that will fundamentally alter the enterprise of agriculture in the Central Valley and around the world -- the emergence of a global system for supplying food and fiber.

Commercial accords such as the North American Free Trade Agreement and the proposed Free Trade Area of the Americas do promise to expand the markets for California food products. But trade is a two-way proposition, as the a recent California Farm Bureau report indicates: "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."

One reason for the import surge has been the strong dollar, which makes foreign goods cheaper and U.S. products more expensive on the world market. Since 1995, the dollar has appreciated by some forty percent against the currencies of our principal agricultural trade competitors. But members of the Farm Crisis Task Force have also complained that California farmers and ranchers face greater regulatory restrictions than any other farm producer in the United States and the world. "The higher regulatory costs," they claim, "give competitors a significant price advantage." The dollar may eventually weaken, but no one seriously expects the regulatory burden on Central Valley farmers to lighten.

The American Farm Bureau attributes the current malaise in many segments of the industry to increased imports under the North American Free Trade Agreement. (Imports of fresh vegetables from Mexico have increased by 60 percent since 1994, NAFTA's first year, while overall ag imports from Mexico and Canada jumped from $8.2 billion to $13.7 billion between 1994 and 2000.)

The farm lobby also blames European Union policies that provide "substantial subsidies, direct supports, and other hidden government assistance while not only preventing entry of our products into their markets but by gaining an economic advantage in the international markets we compete." The American Farm Bureau further alleges that "the top five exporters of fruit to the United States have very low labor costs" and are generally exempt from "a long list of local, state and federal regulations" with which American farmers must comply.

For their part, California farm trade officials are quick to finger the $200 million in subsidies the European Union pays to Greek peach farmers as the culprit in the impending demise of the state's cling peach industry. In recent years, Greek shippers have flooded the U.S. market with canned peaches at prices below what California growers can afford to offer.

Other crops have suffered as well. Major apple plantings in China have led to a flood of apple juice concentrate into the U.S. market. As a result, apple juice prices here have reportedly fallen to levels below the cost of harvesting. When combined with fresh market imports from New Zealand, Chile and South Africa, the depressed juice prices send domestic apple growers reeling.

Similarly, dried apricots from Turkey and canned apricots from South Africa have also been inundating the market, undermining California growers. Canned pears from South Africa have been entering the U.S. at $2 per case below U.S. prices. In one ironic twist, California growers of Brussels sprouts saw their supply contracts sliced in half last year when food processors began importing less expensive Brussels sprouts from Belgium, of all places.

The trade policies now seen to be contributing to the woes of California farmers had, of course, initially been promoted with assurances that California growers would benefit from easier access to enormous overseas markets. While some sectors have in fact seen a rise in exports, others have clearly been imperiled by cheaper imports. Over all, the state's ag exports have actually been sliding in recent years, despite market opening measures. In 1999, for example, California farm exports were some ten percent below the average for the previous four years.

The mixed blessings of free trade have not been limited to California. As Leland Swenson, president of the National Farmers Union, complained to a Congressional committee in late June: "Since the adoption of Freedom-To-Farm Act [in 1996], the optimistic forecasts of increased net U.S. agricultural exports have been wrong. In fact our agricultural surplus has declined substantially and agricultural production and competition for export markets have increased." (The law, which was intended to phase out federal price-support payments and production restraint mechanisms, is now known to farmers as the "Freedom to Fail" Act.)

Last year, California farmers were told they would see vast new export markets open up as soon as China joined the World Trade Organization. As that eventuality nears, however, the future looks more uncertain. Even now, China is among the world's largest producers of rice. Exports of cotton have furnished China with a large proportion of its foreign trade revenue. The nation also exports a wide variety of vegetables and fruits, fish and shellfish, grain, and meat products. What's more, current Chinese policy aims to further increase agricultural production, especially in high-value specialty crops like those grown in California. Much of the capital, technology and equipment needed to fulfill this policy directive will be supplied by American agribusiness companies. In particular, farm equipment makers like Caterpillar and John Deere both anticipate strong exports of farm tractors and combines to China.

It is worth emphasizing that there is a good deal more to most trade agreements than measures that facilitate the movement of goods and services across borders. Provisions designed to enhance the legal rights of foreign investors comprise a major component of trade accords such as NAFTA. They are also embodied in the rules governing membership in the World Trade Organization. By creating a more congenial atmosphere for companies to acquire interests in business operations in several countries, these protections have arguably done more to drive the process of globalization than the reduction of tariffs and the elimination of trade barriers. After all, U.S. companies now do 2.5 times as much business through the foreign subsidiaries they control than they do through direct exports.

Combined with major advancements in transportation and communications technology, trade agreements have permitted the creation of far-flung operations known as global supply chains that source goods wherever they are cheapest to produce, processing them where it is most advantageous, and then distributing them to customers throughout the world. The electronics industry has taken the lead in building such global supply chains, but a similar restructuring of the worldwide food system also underway. Figuring prominently in this transformation are large Western agribusiness firms like ConAgra, Archer Daniel Midlands, Cargill, Nestle, Del Monte, Dole, H.J. Heinz, Campbell Soup, John Deere, Monsanto, and others.

They make no secret of their intentions. In April, for example, Bloomberg News reported that Archer Daniels Midland's Chief Executive, G. Allen Andreas, aims to expand into China, in part to "help reduce his firm's reliance on the U.S. market." And just last Sunday, the Bee reported that Dole is exiting the deciduous fruit business in California, laying off 1,600 workers the San Joaquin Valley, and taking its business elsewhere because its returns here "were not acceptable."

The fundamental challenge for California growers operating in a worldwide market is that prices will be set globally but costs will still be set locally. At some point, food production in the Central Valley will cease to be economically feasible, and resources will have to be adapted to other commercial purposes.

The key issue facing agriculture in California was most concisely framed by Kerry Whitson, a Tulare County farmer, last March when he asked his colleagues at a meeting of the California Farm Bureau's Farm Crisis Task Force: "Can we continue to farm in California or do we all need to start looking for something else to do?"

It's a good, straightforward question that deserves an answer that moves beyond glib rhetoric about globalization and bold assurances about agriculture's permanence.

Copyright © 2001 by J. A. O'Connell

For other articles by Jock O'Connell, click on Essays