California ag economy should be near bottom

And, the bottom is identified when the rebound begins.

UC economist Sumner told the 2003 Spring Outlook Forum in Sacramento, Calif., sponsored by AIC and the California Chapter of the American Society of Farm Managers and Rural Appraisers that there is "light at the end of the tunnel" for "several commodities." He did not name them.

Even though the bottom of the trough may be near, he predicted the economic challenges facing the state’s No. 1 industry will not go away anytime soon and "more adjustments" will occur. Nevertheless, he said the "long term prospects for California agriculture are sound."

Gross California farm income has been flat for a decade, which is not bad compared to other less-diversified states. California ag income does not jump around like other less diversified states and typically there are several bright spots to keep it at least stable. Unfortunately, over the last few years "almost everything has been in the tank," Sumner said. That was punctuated by a drop in net f arm income to about $3.5 billion in 2001 from highs of around $6 billion in the mid-1990s.

And, he does not expect 2002 net farm income figures to be released soon to show any increase over 2001 and likely a decrease.

Costs to rise

Sumner predicted farm costs will continue to rise. Labor, not energy, is the biggest contributor to that rise. That will continue via political pressure. While actual wages to farm workers are expected to increase, Sumner said other factors will drive labor costs even higher for farmers. Public policy decisions will increase labor costs to farmers that will not end up in workers’ pockets.

Federal crop subsidies will continue to underpin major California crops like cotton and rice. The 2002 Farm Bill also helped non-program crops when it allowed farmers to update crop bases, added Sumner. This will take pressure off non-program crops because it gives growers incentives to maintain program crops and yields rather than switching into non-program crops, many of which are already suffering from too much acreage and production for the market.

The 2002 Farm Bill is a "clear commitment" that the federal government "does not have a problem" continuing farm program subsidy payments into the foreseeable future. While a budget deficit could alter that commitment, Sumner said the "coalition supporting farm programs is pretty darn solid" as evidenced by the passage of a $3 billion disaster assistance program this year.

With roughly 50 percent of the income from cotton and rice production coming from the federal farm program, continuation of those federal support programs is important to California’s overall agricultural economy.

Raisin problems

Another major segment of California agriculture, grapes, is highly regionalized and segmented. One of those sectors, raisins, has experienced three years of "terrible prices" and nothing will change this season, predicted Sumner.

The wine grape industry oversupply bubble has burst in the southern and central portion of the San Joaquin Valley where the ratio of bearing to non-bearing vineyards dropped dramatically from 1997 to 2001.

It is also down in the Central Coast wine grape growing region, but not as dramatic as in the Central Valley.

However, just the opposite has happened in the North Coast where the ratio of non-bearing to bearing is actually higher.

"Does that mean the ball if ready to burst in the North Coast? It has not yet, but prices are moderating," said Sumner.

California’s dairy industry has been the most robust segment over the past decade. It now represents 20 percent of the state’s total ag economy. However, prices have plummeted of late "no one is making money at the dairy prices we see today. Projections are that prices will rise in the second half of the year — some say 10 percent — others say that is too optimistic," said Sumner.

Unlike many segments of California agriculture, the dairy industry is a part of a much larger national industry. Cooperatives dominate the dairy industry nationwide, and Sumner said dairymen are proposing a voluntary assessment to collect fund to pay dairymen to reduce milk production.

Questions approach

"Voluntary supply control efforts have a long history of not working," but because the dairy industry is so dominated by cooperatives, Sumner said advocates of the voluntary program believe they can get 70 to 80 percent of producers nationwide to support such an assessment and successfully reduce milk production and force prices higher.

A federal dairy deficiency program is in place, but it is written to exclude California. It is limited to the production of only the first 100 cows in a dairy. For any dairy with more than 450 cows, it is a net loser program and that covers most California dairies.

Sumner called the program one that would allow small dairies outside of California to "get out of business more slowly." If the voluntary program works and prices increase, payments in the federal deficiency program would go down and speed up the demise of small dairies.

Eighty percent of what California produces remains in the domestic market. The rest is exported, and exports have fallen from 1997 highs contributing to the overall economic malaise.

Cotton, almonds, prunes, rice, walnuts and pistachios rely more heavily on exports than some of the state’s other commodities. The value of the dollar compared to world currencies influence export sales, but trade policy also influences it.

More open markets

Sumner said most segments of California benefited from past free trade agreements, and he predicted there would be gradual opening of more markets for California products through emerging free pacts with other nations and hemispheres.

"The Bush administration is pushing to open markets," said Sumner.

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