California’s Drought

Summer in Review: Did California’s Drought Actually Impact Grocery Prices? Nope.

By Tove K. Danovich (@TKDanovich).

Back in April, Governor Jerry Brown issued an executive order requiring Californians to cut their water usage by 25 percent. Notably absent from those restrictions were the state’s farmers, who represent 80 percent of all annual water usage. The exception didn’t last long. The California Water Board added restrictions to farmers in major watershed areas like the San Joaquin Valley and Sacramento River.

According to the USDA, California is the national leader in more than 80 crop and livestock commodities, including almonds, walnuts, milk, peaches, grapes and artichokes. When news broke in April about the water restrictions, anxiety over how the drought would hurt national supply suffused headlines and Google search results. Headlines were mixed: “Why Food Prices Are Drought-Resistant” “Worsening Drought Means Higher Food Prices,” “California drought likely to push food prices higher.”

Which headline was right? It turns out that the predictors of price stability were right.

But why?

The newspapers agreed with what some experts, like Daniel Sumner, predicted in the spring. An agricultural economist and director of the University of California, Davis, Agricultural Issues Center, Sumner wrote, “The food crops for which California has a large market share and California production can affect prices … typically generate high revenue per unit of water.” Instead of letting expensive almond trees wither away, farmers are diverting water from commodity crops like alfalfa, cotton or rice. Though these crops are important for feeding the state’s 1.78 million dairy cows, which account for 20 percent of the nation’s milk production (the most of any state), there are many states with the right growing conditions for forage crops. If non-produce crops stopped being grown in California tomorrow, it’s unlikely that they’d have much of an affect on world commodity prices for the crops — even if there would be a slight increase in the cost of dairy. According to Sumner, “the tendency of drought to slightly raise national prices of cheese, butter and milk powder is swamped by national and global market factors that have lowered dairy product prices.”

Serious drought that entirely shuts down production of a crop is very different from the drought level in California now — where the drought only raises costs on the farm side. Though the impact of the drought varies by crop, in general farmers represent 7.9 cents of every dollar spent on food. Sumner writes that it’s possible for a 10 percent price increase on crop production may only result in 2 or 3 percent increase for the consumer.

While the drought in California is alarming and in need of direct action, you won’t (and didn’t) find the drought’s impact expressed in your food prices.

It could be a different story, however, for off-the-farm costs. A recent and now often reported study by Purdue University found the debated national minimum wage increase would raise prices by 4.3 percent. While this finding has dampened prior dramatic headlines, the issue will hardly be put to rest with the upcoming presidential election. Not to mention, small-business owners still seem uncertain of how the minimum wage will affect their costs, when, as reported in The Long Beach Press Telegram, California will be adopting the $15 minimum wage in 2018.

How will costs and food prices play out in this instance? As with the drought and food prices this summer, only time will truly tell.