Down on the Farm

By Jock O'Connell

This article appeared in the January 2003 edition of the California Journal.

Water has been the subject of bruising political and legal battles in California dating back into the 19th century, when a visiting Mark Twain is said to have observed that, in these parts, "whiskey is for drinking; water is for fighting over."

Today, California's water wars are bogged down in a stalemate featuring three principal combatants: urban water districts struggling to slake the thirst of a fast-growing population; environmentalists intent on preserving both pristine canyons and imperiled species; and agriculture, the $30 billion industry that consumes upwards of 80 percent of the state's developed water supply.

What may finally break the current deadlock is not a transcendent political or technological solution, but a set of global economic trends that could put most of California's farmers out of business and drive the state's food processors overseas, leaving California with a water surplus.

This is not a far-fetched prospect. Lacking the huge subsidies the federal government has long lavished on Midwestern grain growers, California's fruit and vegetable farmers have always led a more precarious existence, one more directly subject to market forces and climate. Even so, they have flourished as a group and continue to grow more than farmers in any other state. Times are changing, though. California farmers are now facing an unprecedented challenge from foreign growers capable of producing most of the same crops produced in California but at much, much lower costs. In short, the emerging global economy is dealing California agriculture a very uncompetitive hand.

In its 2001 white paper on agricultural policy in the new century, the U.S. Department of Agriculture advised the nation's farmers: "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."

That's putting it mildly. In every corner of the world, traditional markets for food and fiber are being rapidly and radically transformed. Increasingly more efficient transportation and communications systems, coupled with moves to liberalize trade and investment rules, are fast eroding the significance of borders and distance. That peaches grown in Greece are now being processed and packed into individual serving containers at a plant in Thailand for sale to North American consumers merely hints at the monumental changes that are engulfing the world's food market.

Unfortunately, the implications of these changes have yet to have a perceptible bearing on how California's political leadership views farming. In Sacramento, as in most other state capitals throughout the country, it is simply impolitic to speak ill of agriculture. No elected official, for example, would dare question those recurrent boasts that agriculture is the state's leading industry, even though that has not been true since before Pearl Harbor was bombed. While California is still the nation's leading farming state, total farm receipts here account only about 2 percent of California's $1.3 trillion gross state product.

Despite this relatively modest share of the state's economic output, agricultural interests exert considerable political clout on an exceedingly broad range of public policy issues, including environmental regulations, land-use restrictions, tax codes, rural development strategies, labor practices and immigration reform. But it is California agriculture's enormous thirst for irrigation water that has helped run up the bill taxpayers have paid over the past century for the construction of an intricate network of massive dams, reservoirs and aqueducts.

Now taxpayers both in California and throughout the nation are being asked to spend billions more to guarantee that all of California's water needs are met for a generation or two to come. Under the circumstances, the indelicate question should be raised: Are we really going to need all that water?

Political rhetoric and glossy farm lobby brochures typically portray California's agricultural economy as robust. That, regrettably, is a lie that only serves to make it more difficult for the industry and its political patrons to acknowledge, let alone grapple with, some very depressing economic realities. For the fact is that, by virtually every measure, life down on a typical Golden State farm has been going from worse to cursed in recent years.

"While much of the state and nation has enjoyed a booming economy the past few years, agriculture has gone bust," Bill Pauli, president of the California Farm Bureau Federation told a meeting in Washington, D.C., in May 2001. "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 went on to remark before alluding to U.S. Department of Agriculture projections indicating that farm income for most California growers was not expected to improve in the near future.

Alas, nothing has fundamentally changed.

In testimony before Congress last summer, 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 70 years."

Along with agricultural operations in other states, California's 87,500 farms are being squeezed between rising production costs and stagnant or declining crop prices. But in many ways the plight of growers in the Golden State is unique. With the exception of cotton and rice, none of the estimated 350 commercial crops raised in California qualify for federal subsidies or price supports. So, unlike Midwestern grain and soybean producers, the growers of the fruits, vegetables, nuts and other specialty crops for which California is renowned lay exposed to a market that is seldom merciful.

Nor is the lack of a federally-weaved safety net the only problem facing California farmers. A surging and sprawling population will only aggravate the already intense competition for both water and land. Meanwhile, energy costs are apt to remain artificially high for many years under the terms of the long-term contracts negotiated with electricity suppliers during the state's energy crisis. Labor costs will continue to rise, and opposition to the use of pesticides and herbicides is unlikely to grow any less emphatic. Even tighter border controls designed to thwart terrorists could contribute to agriculture's woes by causing crippling labor shortages in the fields and at food processing plants throughout the state.

To be sure, California's farmers have weathered previous downturns. This time around, though, there's a new and especially ominous dimension to their plight - one that will severely challenge their resilience and resourcefulness. For in the competition for markets both here and abroad, the state's farmers are now vying more intensively than ever against foreign growers who can produce the same high-value specialty crops as California, but who farm in countries where the costs are far lower and where business operations are invariably less extensively regulated.

There is no doubt that trade agreements have and will continue to expand export opportunities for California food products. But trade is a two-way proposition that sometimes yields nasty consequences for some. 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." California's cotton and rice growers, for example, are seeing crop prices some 30 percent below a decade ago. Similarly, recent imports from Colombia and other Latin American countries have depressed prices to California's fresh flower growers.

Today's global market features multiple threats to California agriculture. Of these, some of the most prominent are: Japanese and European Union resistance to abandoning policies that heavily subsidize domestic farmers while imposing barriers to food imports from the U.S.; unprecedented competition from farmers in countries such as Brazil, South Africa, Turkey, Australia, Chile, and Argentina; international diplomatic pressure to further open the American market to food shipments from the world's poorest regions; and the relentless globalization of food procurement and processing by companies such as Nestle, Dole and Archer Daniels Midland. Not only are these multinationals turning more and more to foreign sources for processed food products, they are investing substantially in developing the productive capacity of growers in low-cost countries.

Then there is China. The full impact of China's formal accession to the World Trade Organization remains to be seen, of course. Still, California growers, who once relished the prospect of easier access to 1.3 billion Chinese consumers, are now sounding a different note. Addressing the World Ag Expo in Tulare this past February, Shawn Stevenson, chairman of California Farm Bureau Federation's Trade Advisory Committee, described China's entry into the WTO as a "double-edged sword" for the simple reason that the Chinese "are huge producers of a lot of the same commodities that we grow here in California."

To his audience, the implications were as clear as they were disheartening. Stevenson did not have to point out that Chinese farmers are able to grow these crops much more cheaply than Californians can. Nor did he have to explain that China's emergence as a major supplier to the global food market would likely depress crop prices even further and thus make competition, let alone survival, all the more difficult for growers in high-cost California.

According to an internal Farm Bureau memorandum obtained by the San Francisco Chronicle last May: "With its large number of farms, ample resources and central planning, China is a continued threat as a major exporter of agricultural products at levels that could be harmful to the U.S. and California specifically." That threat is already being felt. For example, despite transportation costs and a nearly 400 percent tariff, fresh Chinese garlic is being sold in California at prices considerably lower than the local cost of growing garlic.

But it is not merely cheap food imports from China and other nations into the United States that threaten the economic viability of California agriculture. To the extent low-cost foreign growers and food processors vie for sizable shares of California's overseas markets, the state's $6.6 billion farm export trade will be imperiled with predictably unhappy consequences for the state's agricultural sector. Indeed, with China having already displaced the U.S. as the leading supplier to Japan's lucrative market for fresh fruits and vegetables, the prospect of losing other major export markets in Asia and Europe to foreign competition should be making California farmers exceedingly nervous.

Yet, even among those few farm leaders and government officials willing to concede privately that production agriculture as we know it may eventually cease to be economically viable in California, the decline is expected to be so gradual as to leave ample time for the necessary policy and personal adjustments. That may be wishful thinking. While farmers in the otherwise arid fields of California need for water, they have an even more critical need of the financing required to carry them from planting to harvest.

Prompted by federal and state regulators, lending institutions have grown more and more wary when financing agricultural debt. That message has been a recurring theme of recent meetings of the California Chapter of the American Society of Farm Managers and Rural Appraisers, including one last April where a speaker pointedly observed that farm lenders were not taking any business with "hair on it." Worse, the value of the assets used to collateralize farm loans has been coming under greater scrutiny as farmland throughout the state continues to be adversely affected by lower commodity prices and increased production costs. (Ironically, the one factor currently buoying farmland values in California is the steadily increasing demand for acreage intended for residential and commercial development.)

It is far from clear how long risk-averse financial institutions will continue to support precariously perched California farmers when attractive rates of return and greater security can easily be found in other investment opportunities here and abroad.

There is, then, a very real danger that loan money will dry up long before the water does. Indeed, given the financial industry's well-documented herd instinct, the departure of one major lender could trigger a stampede of the sort financial markets worldwide have grown accustomed to seeing in recent years. If that occurs, the condition of most California farms would deteriorate briskly. In such an admittedly worst-case scenario, agriculture's need for water would suddenly plummet.

Yet, even if California's agricultural economy enjoys a more decorous recessional, the resulting shift in the state's water consumption patterns should be enough to fundamentally alter the political balance that has long characterized California's water wars. Indeed, in the not too distant future, the Golden State could wind up with much more water than its 21st century population and industry could ever use.

Such an eventuality would almost certainly lead to a bizarre public policy blame-game aimed at ferreting out those responsible for squandering billions of federal and state tax dollars to ensure a steady supply of water to an industry with such poor prospects for long-term survival. No doubt some ingenious spin doctor will earn a handsome fee by defending those expenditures on the grounds that they helped foster development of a new and valuable export commodity for California - water.

In a broader context, though, the inability or unwillingness of public officials and farm industry leaders to gaze beyond the shoreline provides a striking example of what can happen when policy-makers allow themselves to become ensnared in the comfortable confines of a body of predigested facts, tenets and assumptions generally known as conventional wisdom. Unfortunately, in a world where the pace of change itself seems to be constantly accelerating, notions that took months if not years to gain widespread acceptance are invariably out of date before policy decisions are rendered. That's one reason major public policy moves quite often have a perverse effect on the problems they were designed to address.

In the case at hand, the penalty for ill-timed policy-making looks to be especially dire for those communities throughout California's agricultural regions who continue to fashion economic development schemes that reflexively assume agriculture's continued vitality. No one, it seems, wants to think long and hard about what they will do when the farmers pack it in and the food processors depart. Yet, when that ultimately happens, the unpleasant reality is that communities that have failed to reckon with a future after agriculture will swiftly find that they have no inalienable right to life.

Copyright ©2003 by J. A. O’Connell