Historic Drought Conditions Drying Out California Economy

For several years, the news has been filled with stories about California’s historic drought conditions. However, few truly understand the full impact of these conditions. After all, most stories revolve around water restrictions, closing golf courses, and reduced almond output. Yet, in reality, the drought, now in its fourth year, might cause $2.7 billion in damage to the California economy in 2015.

For several years, the news has been filled with stories about California’s historic drought conditions. However, few truly understand the full impact of these conditions. After all, most stories revolve around water restrictions, closing golf courses, and reduced almond output. Yet, in reality, the drought, now in its fourth year, might cause $2.7 billion in damage to the California economy in 2015.

The figure determined by researchers at the University of California, Davis, and reported by Think Progress, casts a sobering new light on a situation that frequently garners little more than a shrug from investors. While $2.7 billion may be a relatively small drop in California’s enormous state economy, it represents a six percent drop in California’s agricultural sector and two percent of its annual gross economic output.

Thus far, farmers have been able to mitigate the damage caused by a loss of precipitation and irrigation water by pumping groundwater. However, this has begun to lead to geological problems, as reports have begun sprouting around the California countryside regarding farming lands collapsing into the void created by an absence of groundwater. Nevertheless, despite these measures, approximately 564,000 acres remained unplanted in 2015; a 33 percent increase in unused land that will result in the loss of approximately 18,600 jobs in 2015. In 2014, the drought cost 17,100 jobs.

Unfortunately, nobody yet has an ideal solution to counteract the climate issues leading to the drought, which is expected to last for several more years. Some farmers have shifted their operations to less drought-affected areas. Others have voluntarily curbed their own water use in exchange for the state agreeing not to cut their water usage at key times of the season when water will be most essential for growing.  It remains unclear what effect these efforts will have, if any, on overall water consumption and whether further restrictions will be required later.

Of course, crop losses and farming cuts have not been limited to California. Crop losses in Washington are expected to shave $1.2 billion from that state’s agricultural output in 2015. Groceries around the nation have slowly ticked higher as the “breadbasket” of California has been most deeply affected by the drought, between 2.5 and 3.5 percent. The nation has also turned to importing more of its fruits and vegetables, deepening America’s overall trade deficit. The drought has also affected cattle operations in Texas and Oklahoma, causing a 12.4 percent increase in beef prices in 2014.

The only silver lining, and one of which investors should take particular note, has been the California wine industry. The drought has had a positive effect on the wine grape harvests, leading to several years of the finest vintages for many of California’s Napa valley vintners, according to the Institute of Wine.