Drought hurts local economies - counties in California - U.S. Dept. of Agriculture, Economic Research Service report

Agricultural Outlook, July, 1991

Continuing water shortages in California are confronting farmers with additional cuts in the supply of water needed for irrigation (see previous article). As the declining supply and the increase price of water shrink farm output and squeeze profits, overall economic activity slows down in communities where the agricultural sector is a significant part of the economic base.

The initial job losses in agriculture and agriculture-related enterprises lead to increasing financial stress and layoffs in other area businesses as local spending declines.

The continuing drought in California is severely affecting cotton and rice production this season. That's partly because all of the state's cotton and rice acres require irrigation and because cotton and rice producer incomes are partially protected by federal program payments even if production is cut.

So participating farmers can cut output, still receive much of their usual commodity program payments, and conserve on water use. However, participating cotton and rice growers who cut output will not receive marketing loans for the foregone production. And these loans can be a substantial portion of their Federal support.

Two counties in the Central Valley were chosen to illustrate the employment and income effects of a cut in the production of these two commodities: Kings County in the Tulare Lake basin of the south, where the predominant crop is cotton, and Colusa County in the Sacramento River basis of the north, where rice is half of farm output.

In these counties, the ongoing drought could cause employment to drop as much as 6 percent this growing season and depress county income by up to 4 percent, according to USDA research. At the state level drought-related cuts in cotton and rice production may lower business activity by 0.01 percent, but employment losses would be less than 0.1 percent.

Cotton production dominates the farm sector in Kings County. Water for irrigated agriculture in Kings County ordinarily comes from the California State Water Project and the Central Valley Project of the U.S. Bureau of Reclamation, along with local surface water largely from the Kings River, and ground-water. This year, the Kings River ill not provide sufficient water for agricultural uses, the fifth consecutive year river flow has been inadequate.

In Colusa County, rice is the single most important crop. Irrigated agriculture in the county receives water from the Central Valley Project, direct diversions from the Sacramento River, and the ground-water Most of the rice acreage is irrigated with water that is pumped either directly from the river or from a supply canal that lies relatively close to the river.

In return for allowing the Bureau of Reclamation to control the flow of the Sacramento River, senior water right holders signed contracts with the Central Valley Project that limited their water supply cuts to 25 percent of the usual allotment. This maximum reduction is in force this year.

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What's Behind

The Results?

Input-output analysis was used to measure the impacts of the drought on California and on the two county economies. The model used for this analysis was constructed by the U.S. Forest Service to help assess local and regional impacts of various economic shocks.

In providing estimates of income and employment effects of economic shocks, such as changes in cotton or rice output or changes in farm cash receipts, the model takes into account local industrial structure, interindustry linkages, and trade flows to areas outside the local economy.

For this analysis, most cotton and rice producers were assumed to participate in Federal commodity programs. When irrigation water is in short supply or becomes prohibitively expensive, cotton and rice growers are most likely to elect the 50/92 option. This option allows participants to plant as little as 50 percent of their payment acres and receive 92 percent of their normal deficiency payment.

In Colusa County, 100 percent of rice acres are assumed to be participating in the commodity programs under the 50/92 provision. However, in Kings County, the cotton program base acreage is less than the 5-year average planted acreage, suggesting that some cotton acres are not enrolled in government programs (perhaps because of the $50,000 payment limitation). For this reason, the analysis assumes some nonprogram acres this season for Kings County.

Assumption such as these are needed to anchor this type of analysis. While growers' actual behavior may deviate from the assumptions and change the magnitude of the income and employment effects, the distribution of the impacts between the farm and nonfarm sectors will be the same.

Farm Jobs Lost

In Farm Counties

Farming and farm-related activities comprise over one-third of Kings County's economy. Cotton production alone makes up over 10 percent of economic activity and 40 percent of agricultural sales. Assuming the drought cuts cotton acreage by 25 percent, and taking into account the direct, indirect, and induced effects of the implies loss in output, total county business activity would be expected to drop 3.5 percent.