Term Paper Impact and Solution for California Drought Issue

Submitted By Yueru-Zhao
Words: 2191
Pages: 9

Zhao Yueru
FINC 311
Professor Sommers
January 27, 2015
Hidden under the Drought:
Financial Impact and Price Solution for California Drought Issue
In 2014, the world has focused on the state of California. Not because it has the most advanced agriculture in America, not because it owns some of the most developed industries, but because in this year, California’s warmest year on record was born. Dry weather is not a new thing to this state, but the width and profundity of effect followed by the heat and thirst still shocks the whole state and even the world. The alarm bell that calls for rapid and effective measures at that specific difficult time and more importantly in the long run is ringing.
Food market is one of the sections that experience the most significant and direct sufferings in this period. This summer is just like the Black Friday for people working in the agriculture field with unimaginably terrible rate of unemployment. One of the most remarkable cases is San Joaquin Valley, a valley called “The food basket of the World,” producing “the majority of the 12.8% of the United States' agricultural production (as measured by dollar value) that comes from California” (Wikipedia). “While many parts of the state have yet to feel any real impact - no cutbacks, no stiff rationing - that's not the case in the farm towns of the San Joaquin Valley, About 20,000 farm jobs statewide stand to be lost this year out of 400,000, the bulk of them in the valley, said Jeffrey Michael, director of the Business Forecasting Center at the University of the Pacific in Stockton”( Alexander). Although many factors like geographic locations, resources limitation, government management, historic factors and so on are all contributed to the high unemployment rate in San Joaquin Valley. Insufficient water supply which cannot keep pace with the agricultural production is the main reason especially for a relatively isolated place with single economic structure. It is not difficult to imagine what an agriculture-depending valley will be like when water becomes high cost or even unavailable resource.
Increasing unemployment rate may easy to find only in some specific places. However, changes come from food price are more general. If the supplies are less than demand due to decreasing crop quantity, the price of that crop may increase. Increase in the cost of production raises the price as well. Those two are the basic factors to explain the rising price while in reality, constitute of price are more complicated. In fact, changes in crop quantity is doubtless but how it changes depending on what type of crop is planting and how much profit can people get from it. For example, the amount of high-value products like almonds, pistachios and wine grapes may remain the same or even become bigger in drought year. This is the story of Fred Starrh's family. “The Starrh family was a prominent cotton grower for more than 70 years. The shifting global market and rising water prices prompted the family to replace more of their cotton plants with almonds. ‘I can't pay $1,000 an acre-foot (of water) to grow cotton,’ said Starrh ( Warnert). When there is limited resource, people tend to put it in a place where can generate more profit. Thus we can see more high-value products and less low-value product not just in Starrh's family but in more regions of California suffering drought. Is it a wise choice? Let us go deeper. Since everyone want to make profit, they may have the same choice on the most profitable crop. In some situations when market estimate is inaccurate and government guidance is insufficient, a lot high-value products far exceeding demand in market may lead to price falling. What is more, recently as many people concerned, the mess in California’s food market have the possibility to spread out for the fact that California is also the world's producer in some farm product. “Joel Nelsen, president of California Citrus Mutual, a nonprofit citrus growers…