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The Role of Domestic Market Price Regulations in International Trade: the Case of Dairy Policy in the United States

Government policy takes many and varied forms when applied to farm commodity markets. However, distinct policies may achieve similar effects. This paper considers the extent to which domestic market price regulations may affect imports and exports in addition to (or in absence of) the effects of explicit border measures. In particular, the paper investigates how U.S. domestic dairy policy is similar to or different from explicit state trading in commodities which also may substitute for or supplement explicit and transparent border measures.

See PDF paper here: The Role of Domestic Market Price Regulations in International Trade: the Case of Dairy Policy in the United States. Paper by Daniel A. Sumner presented at the November 1998 North American Forum: Workshop on the Role of the State in International Trade.

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Importing STEs in Korea and Japan: Evolution, Operation, and Implications

This paper describes the operations of importing state trading enterprises (STEs) of agricultural products in Korea and Japan. Since the case of Japan is similar enough to Korea, most of the paper is devoted to Korean case and a separate section explains Japan. More specifically, this paper intends to answer the following questions:

  • As result of the URAA, what arrangements were made related to the state trading of agricultural products for Korea and Japan?
  • What are the state trading agricultural products in Korea and Japan? What STEs are importing what product(s), and how much? How do these data compare to the pre-UR data? How do they use the revenues from STE operation?

See PDF paper here: Importing STEs in Korea and Japan: Evolution, Operation, and Implications. Paper by Jung-Sup Choi, Daniel A. Sumner and JooHo Song presented at the North American Forum: Workshop on the Role of the State in International Trade. November 1998.

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The Canadian Wheat Board: Its Role in North American State Trading

The main purpose of this paper is to discuss institutional aspects of the Canadian Wheat Board (CWB), its role in the domestic Canadian market, the North American conflicts over the CWB, and the likelihood of the CWB exercising strategic behavior on world markets.

See PDF paper here: The Canadian Wheat Board: Its Role in North American State Trading. Paper by Colin A. Carter and R.M.A. Loyns presented at the North American Forum: Workshop on the Role of the State in International Trade. October 1998.

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Water Transfers and Groundwater Management: An Economic Analysis

AIC Issues Brief

No. 7 September 1998

WATER TRANSFERS AND GROUNDWATER MANAGEMENT: AN ECONOMIC ANALYSIS
Marca Weinberg, Keith Knapp,
Richard Howitt, Judith Posnikoff*

Agricultural, industrial and municipal water use in California clearly depend on the state’s groundwater resources. What is less known is how water transfers and water markets-voluntary transfers of water between willing buyers and sellers-will influence the relationship between overall water use and groundwater.
Both drought and cuts in surface water use to protect riverine habitat have reduced the reliability of agricultural water supplies. In addition, cities are increasingly vocal in their demands for increased and more secure water supplies. Federal and state law changes designed to facilitate water transfers indicate that some water currently being used by farmers may well be sold to cities or to other farmers. Thus, there is need to better understand the two-way relationship between the groundwater resource and surface water shifts to other uses.
This AIC Issues Brief summarizes a case study of the potential effects on groundwater and on agricultural production of reduced surface water use resulting from water market transfers with and without groundwater management. Although inter-basin water transfers associated with water markets remain rare in California, two such projects-the Kern Water Bank and an Arvin-Edison/MWD exchange-already exist or are being planned for Kern County. Its proximity to the Los Angeles region, its location south of the Delta, and its access to both surface and groundwater supplies position Kern County for participation in such projects.
Before discussing the results, certain inputs to the model need to be specified. Annual average surface water supplies in Kern County are about 2 million acre-feet (MAF) from three major sources: the California State Water Project, the federal Central Valley Project, and the Kern River. Our model assumes that 70% of these supplies are available for irrigation and the remainder goes to the aquifer as conveyance losses. Deep percolation flows from farmland irrigation are assumed to be 20% of the amount applied and natural recharge to the aquifer is 52,000 acre-feet per year. Energy costs for groundwater pumping are estimated as $0.132 per acre-foot per foot of lift. The land surface is at an elevation of 385 feet above mean sea-level, while the bottom of the aquifer is 233 feet below sea-level.
All data are reported in 1992 dollars and on a per-acre basis. We use an interest rate of 5% where applicable.
Our model leaves out many real-world features of both the agricultural economy and the hydrologic system. However, it allows one to consider sustainability over a long horizon and provides reasonable order-of-magnitude effects of water transfers on groundwater usage and management, and on crop income in the basin.

Common property usage

This scenario shows how transfers might affect groundwater stocks and usage in a non-regulated setting. Under common property usage, decisions are constrained only by available surface and groundwater supplies. Individual growers make water-use decisions that are strictly in their own best interest, ignoring effects on others. Because each farm uses such a small share of the entire groundwater stock, decisions are made in each period to maximize profits in that period without regard to the future groundwater level.
Results of the baseline scenario without regulation or water marketing suggest that, over 50 years, groundwater levels in the study basin would drop more than 200 feet. Consequently, groundwater becomes more expensive and withdrawals are progressively reduced. Farmers’ annual net profits from producing crops decline by more than $65/acre during this period, due to increased pumping costs and reduced withdrawals that induce more expensive irrigation systems, changes in cropping patterns and possibly reduced yields.
Next, our model considers the impact of water marketing-specifically, a transfer away from the region of either 10% or 20% of the original average yearly supply of about 2 MAF. These amounts bracket the estimated yield of the proposed transfer and storage projects, allowing for offsetting increases of imported surface water in wet years. Under either the 10% or 20% transfer, growers rely more heavily on groundwater, thus further lowering the water table below the level it would otherwise be. For example, compared to the baseline, the 20% transfer lowers the water table by 37 additional feet after 20 years and by 70 additional feet after 50 years, as shown in Figure 1.a. (Results of the 10% transfer are half of the 20% figures. For that reason, only the 20% figure is given here in most cases.)
The effect of water transfers on withdrawals, shown in Figure 1.b, is more complicated. With water transfers, withdrawals increase in the early years, but at some point the extra pumping lift makes groundwater so much more expensive that eventually, in possibly 35 to 40 years, annual withdrawals become less than they would have been without the water transfer.
Net profits from crop production also fall with the transfer (Figure 1.c). At the 20% transfer level, annual net profits are reduced by 14.4 million dollars or $16 per acre per year after 20 years, and $26 per acre per year after 50 years. These figures do not include revenues from the water sales, which at a minimum would be sufficient to offset these losses.
An overall conclusion about the effects of water transfers on unregulated, common-property groundwater usage depends on the perspective. Even with a 20% transfer of surface supplies, short run impacts on net revenues from crop production and on the aquifer are modest. Over a longer term, the effects could be substantial.
The results also suggest that both the groundwater effects and the time horizon are critical in determining the break-even price for water transfers. At the 20% transfer level, a $16 per acre annual reduction in net profits at the 20 year time horizon implies that farmers would break-even at a price of $41 per acre-foot per year. Over a 50 year time horizon, the same deal-a permanent transfer of 20% of their water-would require a break-even price for transferred water of $66 per acre-foot per year.
Both prices are in the range of those discussed for water transfers from the region, but the difference in the implied price between 20-year and 50-year time horizons is significant. This difference arises because the price implied by the shorter time horizon does not account for the longer-term impacts on the quantity of groundwater available, or the costs of using it.

Figure 1: Effects of a 20% water transfer and groundwater management on the water table, groundwater extractions and annual profits from crop production

Economically efficient groundwater management

To be economically efficient, groundwater extractions over time must maximize the present value of total net benefits of all users in the basin. This implies a need for some management, recognizing that one user’s behavior affects water available to others. Economic efficiency also incorporates the notion that “investments” in the groundwater stock-the cost of managed reductions in withdrawals-should earn a rate of return equal to that elsewhere in the economy. (Again, our figures do not include revenue from water sales.)
As with common-property usage, the economically efficient usage scenario causes the water table to decline over the entire time span even without transfers. However, the process of resource loss-falling water tables and increasing pumping lift-is slowed. Because this scenario accounts for the effect of current withdrawals on future pumping costs, optimal annual withdrawals are lower. In particular, withdrawals from the basin at the beginning of the period are some 805,000 acre-feet, or 0.89 acre-feet per acre per year less than those under common property usage. However, this difference declines over time. In our model, in fact, withdrawals eventually are identical under the two regimes although the water level is lower under common property usage.
The main tradeoff inherent in optimal groundwater management is illustrated by differences in net profits to crop production over time. During the first few years, annual basin-wide net profits are less under an economically efficient groundwater use system than under common property usage, due to reduced extractions and use of more expensive irrigation systems. Within the first decade, however, the results switch and economic efficiency results in higher net profits, due to lower pumping costs.
We measure benefits from groundwater management as the difference in the present value of net profits from future crop production under the two regimes-common property and economic efficiency. On average, total benefits to groundwater management for the basin are $5.64 per acre per year over the 50 year horizon. This result does not take into consideration management costs such as reaching initial agreement, monitoring and enforcement, and so on.
How is this potential payoff to groundwater management affected by the proposed water transfers? Reducing surface water use by agriculture in the basin makes the groundwater resource more valuable and so the gains from groundwater management increase. A 20% water transfer results in average annual management benefits of $6.18 per acre. Thus, the surface water transfers imply increases in the incentive to manage the resource. Overall, however, benefits from groundwater management appear to be rather modest.

Conclusions

Groundwater withdrawals by individual users involve a range of impacts over time and on other users that are not considered in a common property situation. This neglect leads to less efficient use of the resource. Groundwater management can therefore potentially improve economic efficiency and hence increase net returns to all users of the groundwater basin. Even without market transfers of water, the model shows basin-wide benefits from groundwater management of $5.64 per acre per year. Furthermore, water transfers increase both stress on the aquifer and benefits from management. We find additional increases in management benefits of 5% and almost 10% for the two levels of water transfer.
This analysis is only a first step in evaluating the economics of water transfers on groundwater systems. Since our model considers only one dimension of the problem (quantity effects on the aquifer), the analysis leaves out much of the complexity and variability of both the economic and hydrologic systems. Not addressed, for example, are the additional complications brought on by random fluctuations in annual surface flows, water quality and subsidence issues, regulatory costs, and effects of less-than-perfect regulation and regulatory inefficiency. Further, we hypothesize either a 10% or a 20% water transfer rather than modeling the water market explicitly. Finally, the study only considers one area (Kern County). While the results are perhaps relevant to other heavily-overdrafted agricultural basins in the southern San Joaquin Valley, conditions elsewhere in California differ widely and different results might be obtained there.

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AIC Quarterly: Volume 12, No. 3, 1998

THE UC/AIC QUARTERLY

THE NEWSLETTER OF THE UC AGRICULTURAL ISSUES CENTER
VOLUME 12. NO. 3. 1998

Director’s Message
by Daniel A. Sumner

Agriculture is used to variable production and market conditions. This reality has been particularly evident this year with El Nino, the Asian financial crisis, and variability in financial markets with its implications for the U.S. economy, as well as the related drop in many commodity prices.
These issues are each important and AIC has programs of work related to each. For example, at our Winegrape Outlook Workshop this summer one focus was on the importance of continuing income strength in the United States to create demand for the new winegrape production that will soon be forthcoming. The Asian financial crisis is of particular concern because such a high proportion of California farm exports goes to Asia. AIC has recently developed data to document more accurately the magnitude and distribution of these exports. This fall we will prepare an Issues Brief and other material presenting detailed analysis of just how economic troubles in Asia affect the California agricultural economy and its prospects.
Our forthcoming seminar on risk management will consider how growers and agricultural business may deal more effectively with variability in markets and other factors of uncertainty affecting agriculture. That seminar will deal not only with production, markets and financial risks, but also with labor, environmental, water, and farm and family business considerations. This December our annual Executive Seminar will focus on “Risks and Opportunities for California Agriculture” to emphasize that change may have both upside and downside aspects.
Not all variation means risk; risk relates to variability that is not fully anticipated. Further, the costs associated with variability depend on the degree to which one anticipates and plans ahead. Thus, a sound strategy for dealing with variability is to improve one’s information and knowledge. That is the role of AIC. Our goal is to help California agriculture take advantage of the upside and prepare for the downside. We think this is useful for agriculture and important for California as a whole.

Exotic Pest and Disease Policy Study: An Update

The AIC Exotic Pest and Disease Policy study is designed to strengthen the scientific basis for public policy decisions. We have the involvement of crucial UC faculty and staff assured, with active participation from government, industry and others.
Research will be centered around broad unifying principles and on case studies selected for their diversity of biological and social effects, control methods and policy issues. These multidisciplinary research teams include collaborators from academia, government and industry.
The case studies and team leaders are:

  • soilborne nematodes-Howard Ferris, UCDavis
  • Mediterranean fruit fly-Jim Carey, UCDavis, together with Jerry Siebert, UCBerkeley, and Joe Morse, UCRiverside
  • recent thrips and mites affecting avocados-Mark Hoddle, UCRiverside
  • ash white fly-Tim Paine, UCRiverside
  • red imported fire ant-John Klotz, UCRiverside
  • yellow star thistle-Joe DiTomaso, UCDavis
  • weed issues in general-Marcel Rejmanek, UCDavis
  • citrus canker-Ed Civerolo, USDA and UCDavis;
  • rice blast-Bob Webster, UCDavis
  • diseases affecting greenhouse and container grown plants-Jim MacDonald, UCDavis
  • foot and mouth disease-David Hird and Lovell Jarvis, UCDavis
  • bovine spongiform encephalopathy (BSE)-Alex Ardans, UCDavis
  • exotic Newcastle disease-Patricia Wakenell, UCDavis.

In addition, Deborah Golino, with Dan Sumner, will head a team looking at international trade rules.
Participanting economists include Jerry Siebert, David Zilberman and David Sunding from UCBerkeley; Lovell Jarvis, Karen Klonsky, Hyunok Lee, Jung-Sup Choi (a Fullbright scholar from Korea) from UCDavis; Keith Knapp from UCRiverside; and from AIC, Dan Sumner, Karen Jetter (a post doc for this project) and JooHo Song (an international policy fellow jointly with CDFA).
California Department of Food and Agriculture and the USDA Animal and Plant Health Inspection Service have committed resources to the project. In addition, CDFA, USDA and a number of private sector scientists and economists have volunteered to participate on the research teams and provide their expertise. Marcia Kreith, the project coordinator, is keeping the project on track and on schedule (530-752-8670; mtkreith@ucdavis.edu).

New Export Statistics Reported by AIC by Heather Benson, David Hart and Nick Kuminoff

The Agricultural Issues Center, in conjunction with the California Department of Food and Agriculture, recently reported new and more accurate export statistics for California agriculture during 1995-97. These statistics help fill a data void; previous efforts to quantify agricultural exports by state have had well known deficiencies. The Center-designed system synthesizes USDA data, California port data, Canadian import data and information from industry sources to provide the most accurate estimate of California agricultural exports available.
California agricultural exports were nearly $7 billion in 1997, a $500 million (8 percent) increase from 1995. Cotton and almonds top the list of commodity exports in all three years. Wine contributed $165 million to the export value growth, with an 80 percent increase over the three-year period. The ten highest value export products (cotton, almonds, wine, fresh grapes, oranges, cattle products, processed tomatoes, dairy products, raisins and walnuts) constitute more than half of the total agricultural export value.
The chart below shows 1997 exports by commodity group. East Asia and other Pacific Rim countries receive the bulk of California agricultural exports, with Japan and Canada the two largest destinations. Japan imported more than $1.3 billion of California agricultural products in 1997-a diverse list of cotton, fruits, nuts, vegetables and animal products. California agricultural exports to Canada, totaling nearly $1 billion, were almost exclusively fruits, nuts and vegetables. Asian countries comprise six of the top 10 export markets, with cotton, dairy products and table grapes the leading products shipped to those markets. European countries import processed horticultural products such as wine, nuts and dried fruits from California.
AIC also used export data to develop estimates of the farm value of exports, comparing exports to the value produced for each major commodity. For example, more than 80 percent of California cotton and more than half of California almonds are exported. For animal products such as dairy, beef, chicken, eggs and turkey, less than 10 percent of California production is exported. The export share for most fruits and vegetables falls between 15 and 35 percent.
A more detailed account of the results, their implications and their limitations will be the subject of an upcoming AIC Issues Brief, and will be posted on the AIC web page, https://cail.ucdavis.edu.

On The Web

The World Wide Web is now a main attraction of the information age. Without the Web, the newly opened cyberspace would be populated only by technology experts and researchers. AIC’s website, opened in 1996, is now a standard part of our public presence.
In order to find out more about the use of information sources on the Internet, AIC circulated a questionnaire earlier this year and received more than 250 completed responses from those on our address list. We thank those of you who supplied these data. They have been informative and useful.
We asked about computer technology, experience with computers and Internet applications, and about how and why the Web is used. The responses provide information on the adoption and diffusion of Internet applications, and will help AIC and others design improved Web sites of more use to patrons.
Survey respondents are well-educated leaders holding responsible positions in all sections of California agriculture. The majority of our respondents (43%) are between 46 and 55 years old, most (53%) attended graduate school, and most (54%) have executive responsibility in their organizations. Educational institutions are best represented (29%), followed by government agencies (19%). Farming enterprises, agribusiness and public affairs organizations are equally represented, each accounting for 16% of the total. Most respondents work in relatively large organizations.
A small set of questions probed the computer literacy of our respondents. This turned out not to be an issue as 96% of the respondents use computers regularly at work and a similarly large proportion has used computers for more than two years. Nearly all use their computers for writing (97%) and for sending email (93%). Spreadsheets and databanks are also widely adopted by these leaders in agriculture: 77% of our respondents employ spreadsheets and 69% use databanks.
AIC’s clientele is well wired; 71% are networked and almost all respondents (94%) can connect their PCs to the Internet, many (41%) by means of a fast (> 28.8 Kbs) modem. Only 4% have never used the Web at work and 71% have used the Web for more than one year. Popular uses of the Web are to retrieve reference material and research reports. Accessing newsgroups, information about commercial services, financial information, or finding addresses are infrequent uses.
The most frequently listed causes for frustration when visiting Web sites are having to wait for a slow page to view or download, followed by broken links, and not being able to find the information one is looking for. Other causes of frustration, such a losing one’s orientation on the Web or having difficulty navigating a site, are not as frequent.
Our respondents also assessed AIC’s own Web site, which many had visited for the first time only recently. Using the information obtained from this survey we are now in a much better position to accommodate the feedback we received and design a site that is more informative, quick to access and navigate, and pleasant to visit. The new AIC website at https://cail.ucdavis.edu will be up and running soon. Look there for a complete review of the responses to the AIC Web Survey.

Upcoming Events

Note the fliers for the Agricultural Risk Management Conference on October 21 and the Executive Seminar on Agricultural Issues on December 8 (both in Sacramento) which are enclosed with this AIC newsletter. For more information, phone 530-752-2320 or email agissues@ucdavis.edu.

Winegrape Outlook Workshop Wrap-up

AIC’s first Winegrape Outlook Workshop, held in Sacramento on July 24, drew over 160 growers, vintners, and associated industry personnel. All aspects of the industry were represented, from growers, wineries, concentrate buyers and nursery operators to financial institutions and grower organizations. John Kautz, the luncheon speaker, provided a personal historical perspective on changes in the industry. AIC Director Daniel Sumner moderated the workshop.
The main focus was on the economic outlook during 1998-2000 for the popular varietals: cabernet, merlot, zinfandel, chardonnay and sauvignon blanc. Speakers discussed recent trends and the near future for prices and acreage. Barry Bedwell, President, Allied Grape Growers, presented his recent analysis of statewide plantings and their implications for acreage and crush levels. Dale Heien, Professor of Agricultural and Resource Economics at University of California, Davis, gave price forecasts based on acreage estimates by Bedwell. Their results indicated that oversupply and hence the possibility of lower prices is more concentrated in the southern San Joaquin Valley and in varietals such as merlot and chardonnay. Vaughn Koligian, CEO of the Raisin Bargaining Association, concluded the morning session with an overview of the raisin industry.
The afternoon session featured George Schofield (George Schofield Company), Eric Sims (Motto, Kryla, & Fisher), Robert Smiley (Dean, Graduate School of Management at UCDavis), and Bill Turrentine (Turrentine Wine Brokerage). Their discussion centered on the demand for wine at the bulk and retail levels. The broad conclusion of this session was that the demand for wine remains both robust and highly correlated with the performance of the national economy.
One of the most impressive characteristics of the Workshop was the vigorous and thoughtful discussion in each session. Based on the success this year, AIC plans to make this outlook workshop an annual affair. Watch for our announcement for WOW II in coming issues.

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Organic Agriculture in California: A Statistical Review

AIC Issues Brief No. 6, 1998.

Organic Agriculture in California: A Statistical Review Laura Tourte and Karen Klonsky

The size and growth of organic farming has stimulated considerable discussion and speculation. Farmers, agribusinesses, policy-makers, public interest groups, educators, researchers and investors—all need reliable information on organic agriculture to make informed decisions about business strategies, teaching and research agendas, and institutional policies. Statistical analyses of organic farming contribute crucial information for these decisions.         This AIC Issues Brief provides data on organic agriculture in California, drawing on a larger report prepared in collaboration with the California Department of Food and Agriculture (CDFA).         The data used here resulted from requirements of the California Organic Foods Act (COFA) of 1990. The purpose of COFA was to standardize the use of the word “organic” as a marketing label and to put standards and procedures into place to regulate the production, processing and handling of organic products. As part of these regulations, COFA requires registration with CDFA of all growers and handlers of commodities marketed as organic. Data from the registration forms during the first three years of the program (1992-93, 1993-94, and 1994-95) are presented here. This is information as reported to CDFA, and should be viewed as best estimates taking into account possible limitations in the data. (See “Data Clarification and Limitations.”)         Data are summarized here separately for “registered” organic farms (and handlers) and for “certified” organic farms. Numbers in the registered category include certified farms, but organic certification is separate from, and is not a substitute for, state registration. Registration is regulated by state law and is mandatory. Certification is through private organizations and is voluntary. Virtually all large-scale organic farm operations in California are certified as well as registered, while many small ones are not.         Certification requirements will change when standards to regulate organic agriculture on a national scale are developed under the federal Organic Foods Production Act of 1990 (OFPA). Federal regulations have been “in process” since 1990 and it is not clear when they will be finalized. However, the legal definition of organic agriculture, as well as its proposed practices, are currently generating considerable attention. (See final section, “Impacts of New Regulations.”)         For both the registered and certified categories in this report, California is divided into seven geographical regions based on those used by CDFA. Also, the principal commodity groups used by CDFA in reporting annual statistics are used here—with the exception that we added a combined fruit-nut-vegetable group, since some growers reported their production in a manner that made it impossible to separate their acreages and sales into separate commodity groups.

DATA CLARIFICATIONS AND LIMITATIONS

Any registration process requires only limited information. Therefore, some features of California’s organic agricultural industry are not reflected by data in this report. For example:

  • There are undoubtedly growers who produce organically but have no interest in labeling or marketing their crops as organic. They are not required to take part in CDFA’s Organic Program, and are not included here. This group could include relatively small to medium-sized growers who have developed a marketing relationship with their clientele that is based on mutual trust and does not rely on organic labeling to verify production methods. This group could also include growers using organic methods because of concerns about environmental impacts or farmworker safety, but who do not see a marketing advantage in selling their crops as organic per se.
  • Some industry experts believe that only about 30 to 40% of all production by growers actively participating in the organic market is actually sold as organic. The remaining portion is thought to be sold through conventional channels and may not be reported as organic sales by producers.
  • Some growers who appear to be “small” or “medium-sized” organic farmers based on the information on their registration forms may actually be larger operators experimenting or diversifying with some organic acreage.
  • Registrants grossing over $5 million annually are not obligated to report any sales above that amount. Therefore, the total value of production is probably underestimated in the data because income realized by some high-revenue producers and handlers is not fully accounted for.

INDUSTRY TRENDS, 1992-93 to 1994-95

During the three years of the study, as shown in Table 1:

  • The number of registered organic farms increased from 1,157 to 1,372 for a total gain of 19%.
  • Registered organic crop acreage increased from 42,302 to 45,070, a more modest gain of 7%.
  • Value of production for registered growers went up from $75.4 million to $95.1 million, posting an overall gain of 26%.

Table 1. Registered Organic Agriculture as Reported to CDFA, 1992-95

Year Number of Farms Total Crop Acres Total Gross Sales ($)
1992-93 1,157 42,302 75,436,817
1993-94 1,129 40,571 78,331,295
1994-95 1,372 45,070 95,099,386
Growth (%):
Year 1-2 -2 -4 4
Year 2-3 22 11 21
Year 1-3 19 7 26

        In contrast, during the same three years, the number of registered growers who were also certified declined 2%, from 527 to 517. However, certified acreage increased 7%, from 34,679 to 37,110, and certified gross sales increased 30%, from $65.9 million to $85.6 million. Some concentration in the certified sector was evident, as fewer growers farmed more acres. Although certified organic farms represented less than half of all registered organic farms, they accounted for more than 80% of the registered acreage and about 90% of the value of production.

The expanding market for California’s organic production suggests an industry with improved production efficiency, enhanced consumer demand or both. Note that gross sales increased at a greater rate than the number of acres farmed organically—indicating that revenue increases were not simply the outcome of acreage expansion alone. Growers may have become more proficient in organic production methods, and in business and marketing strategies. Increased consumer demand also may explain the considerable increase in sales value.

Organic Commodities. Every major farm commodity group is represented in the data—more than 70 individual commodities in each year. However, the relative importance of commodity groups to total sales value within the organic industry differs from the state’s agriculture as a whole. Most notably, vegetable crops are much more important to organic sector sales than to total agricultural sales in the state (57% versus 23% in 1994-95). At the other extreme, field crops, livestock, poultry and related products generated only 4% of organic sales, but over 40% of total farm value. Vegetable crops, and fruit and nut crops are the commodity groups of most consequence for organic agriculture in California. These industries have the largest number of farms, the largest acreage, and by far the largest gross revenues. During the three-year period, they generated 95% of the total value of organic production from approximately 80% of the state’s registered acreage (Table 2).

Table 2. Value of Production for Registered Organic Growers by Commodity Group
as Reported to CDFA, 1992-95

Year Vegetable Crops Fruit & Nut Crops Combined Fruit, Nut & Vegetables* Field Crops Nursery & Flowers Livestock, Poultry & Products
1992-93 37,289,221 33,454,761 1,275,543 2,937,723 442,512 37,057
1993-94 41,993,421 28,051,041 4,830,405 2,570,137 846,886 39,405
1994-95 54,486,449 30,934,372 4,832,971 3,761,960 939,373 144,261
Growth (%)
Year 1-2 13 -16 279 -13 91 6
Year 2-3 30 10 <1 46 11 266
Year 1-3 46 8 279 28 112 289

*This category includes farms for which reported sales are aggregated fruit, nut and vegetable sales.

Looking only at crop production (excluding livestock, poultry and related products) in 1994-95, 1,363 registered organic farms in the state reported almost $95 million in sales from almost 45,000 acres. This accounted for less than 1% of the total value of crop production in the state. However, organic production generally has exceeded the state’s rate of yearly increase in total agricultural value.

Vegetable crops were the single most valuable organic commodity group, accounting for at least half of the state’s gross sales from approximately one-third of the registered acreage each year. During 1992-95, vegetable crops posted only a 4% increase in the number of producing acres, but a 46% increase in total sales—suggesting a shift in products grown, considerable gains in production or marketing efficiency, and/or increased consumer demand. In comparison, fruit and nut crops received about one-third of the state’s total organic sales value from almost half of the registered organic acreage. During 1992-95, fruit and nut crops recorded a 7% increase in acreage, but an 8% decline in overall value of production.

Field crops, though of considerably less value to California’s organic industry than vegetables or fruit and nut crops, nonetheless recorded a 28% increase in sales during 1992-95.

Geographical Distribution of Organic Acreage and Crop Value. Vegetable crops predominated in the Central Coast/Bay Area, the San Joaquin Valley and the South Coast regions. Fruit and nut crops were particularly important in the San Joaquin Valley and North Coast regions, and field crops in the Sacramento Valley.

During 1992-95, the San Joaquin Valley claimed the largest number of registered organic acres of any region, with about one-third of the state total. The Sacramento Valley was second with approximately one-fourth of the total acreage, followed by the Central Coast/Bay Area region with roughly one-sixth of the total.

During the three-year period:

  • The San Joaquin Valley recorded a 12% decline in revenue from the first to the third year of registration, dropping to $23.6 million in 1994-95, with a 3% decline in acreage, but roughly the same number of growers.
  • The Central Coast/Bay Area region showed over 69% growth in revenue, moving from $17.8 million to $30 million. At the same time, total acreage increased 11%, with grower numbers increasing by 5%.
  • In the Sacramento Valley, the value of production increased by 28%, climbing from $6.8 million to $8.7 million, while acreage declined by 4%. The total number of growers stayed essentially the same.
  • In the South Coast, the number of growers and total acreage grew by about 43% and 42%, with a corresponding 29% increase in total revenue. Sales were $13.8 million in 1994-95.

During the three years of the analysis, all regions demonstrated considerable growth in gross revenues except the San Joaquin Valley. Nevertheless, that region, with the second highest total revenue in 1994-95 and the largest organic acreage, clearly remained a major contributor to the state’s total organic sales and to overall organic agriculture.

Farm Numbers. Size, Sales. During the three years of analysis, average acres per registered organic farm decreased by 10%, while sales per acre went up 18%—resulting in an average increase in sales per farm of 6%. In crop categories:

  • The number of registered organic vegetable farms decreased 6% from 405 to 383, while average acres per farm went up 14% from 36 to 41, and sales per acre increased 40% from $2,615 to $3,655. Average farm sales increased from $93,610 to $150,023, a phenomenal 60%.
  • Fruit and nuts tell a different story, with the number of farms increasing 22%, from 800 to 974, but average acres per farm dropping 9%, from 24 to 22. In addition, sales per acre dropped 16%, from $1,749 to $1,504, and sales per farm decreased 27%, from $42,664 to $33,558.
  • Field crop farms, comprising less than 2% of the total, nonetheless showed a dramatic increase over the three-year period in average farm sales, moving up 66%, from $62,483 to $103,987, along with a 7% increase in farm size from 196 to 209 acres. Sales per acre increased 57%, from $318 to $498.

In all three years, about two-thirds of all registered organic growers were located in one of the coastal regions, with the greatest concentration in the South Coast. Farms with the largest acreage were typically in the San Joaquin and Sacramento Valleys, and the South Eastern Interior. Regions with the highest average annual farm sales were the San Joaquin Valley and the Central Coast/Bay Area, which had the largest proportion of high-value vegetable and nursery and flower crops. In 1994-95, average sales per farm were $220,800 for the San Joaquin Valley and $148,365 in the Central Coast/Bay Area.

ACREAGE AND SALES DISTRIBUTIONS ACROSS FARMS

Most registered organic farms have few acres and small annual sales. In the third year of the program, 50% of all registered farms consisted of less than five acres, and grossed under $6,000. Because the two categories of vegetables and fruits/nuts represented 95% of all farms, their statistics were similar to the overall numbers:

  • Half of all vegetable farms had three acres or less, with sales under $8,350.
  • Half of all fruit and nut farms had five acres or less, and grossed under $5,000.

Not surprisingly, the midpoint size for farms growing field crops was larger, at 107 acres, with annual sales at $52,000.

Revenue from organic agriculture is highly concentrated. In 1994-95, as indicated by Figure 1, over half of the value of organic production was represented by the 2% of growers who grossed over $500,000 each. At the other end of the spectrum, growers grossing $10,000 or less comprised two-thirds of all growers and only 5% of sales.

Figure 1. Income Concentration for Registered Organic Growers as Reported to CDFA, 1994-95

The top revenue-generators were all certified, while those with the lowest sales frequently were not. This indicates that certification may be an important marketing tool for full-time growers with large sales volumes and little direct contact with consumers, and less important for part-time growers or those selling their product through direct marketing channels. It also may indicate that certification procedures and fees are a barrier for growers with low farm incomes.

These patterns suggest an industry with a predominance of very small part-time growers but also a substantial number of full-time growers.

PATTERNS OF ENTRY AND EXIT

Although the total number of registered farms changed very little from the first year of the program to the second (2% decrease), the numbers of new farms entering and leaving the program during that time were significant. Almost one-third of the original growers dropped out of the program in the second year, only to be replaced by almost as many new registrants. However, over 90% of the growers who registered in the second year continued in the third, and an additional 348 entered the program—resulting in a total of 1,372 registered farms in 1994-95 and a net increase of 215 growers over three years.

Various factors likely contributed to these entry and exit patterns. First, there was some incentive to register early in the organic program because only a one-year transition period was necessary at that time to change a farming operation from conventional to organic practices; a three-year transition period was planned for a later date. In addition, media attention directed to the perceived positive attributes of organic farming (pesticide use reduction, enhanced food and farmworker safety, environmental protection) influenced both consumer awareness and grower registration. Some growers undoubtedly registered at the program’s inception hoping to secure the higher prices that organic products often command. These prospective higher prices combined with potential on- and off-farm benefits provided an attractive farming option.

Although it is true that organically produced crops often command higher market prices, successful organic farming also requires development of new management skills and a significant level of commitment over time. There are a number of acknowledged challenges to farming organically, including lack of available information on organic production methods.

Because organic growers are prohibited from using many conventional inputs such as synthetic fertilizers and pesticides, the relative level of production risk for organic farming may be higher—especially during the transition years. The transition from conventional to organic can be particularly challenging for pest management, with some growers citing substantial crop losses.

Thus, costs of production for some organic crops may be higher than for their conventional counterparts. Also, annual crop growers have cited problems in finding suitable crops for their rotation schemes, and perennial crop growers in particular grapple with the dilemma of crop diversification in what are essentially monocropped systems.

Marketing is a separate challenge for organic food and fiber crop producers because markets may not have been well developed nor have the requisite grower/buyer relationships been adequately established. These challenges would have contributed to the grower attrition rates shown in the analysis.

REGISTERED HANDLERS

During 1992-95 the total number of registered handlers of organic products decreased 9%, while handler sales value increased 56%. The Central Coast/Bay Area region had over one-third of the state’s handlers and about one-half of the total sales. The South Coast had another one-third of all handlers and accounted for over one-fourth of all sales. Fruit, nut and vegetable crops combined generated the highest revenues for handlers in all three years of the analysis, representing between 80% and 92% of the totals. Field crops claimed essentially all of the remaining sales.

IMPACTS OF NEW REGULATIONS

Current production and market indicators suggest that organic agriculture will continue to experience substantial growth. Perhaps more critically important to the organic industry at present, however, is the proposed rule of the USDA’s National Organic Program. Developed in response to the requirements of the Organic Foods Production Act of 1990, this proposal would set national standards and regulations for organically produced agricultural products—including certification of producers by accredited certification agencies. Published in the Federal Register on December 16, 1997 for public comment, the proposed rule has generated intense discussion, particularly on three key issues: whether to allow the use in organic production of (1) genetically modified organisms, (2) irradiation and (3) sewage sludge. (So much so that the public comment period was extended from March 16 to April 30, 1998.)

Of particular importance to organic producers and certification agencies is the issue of certification. The proposed rule states that producers with annual sales at or above $5,000 must be certified each year by an accredited certification agency. Fees would apply for both accreditation of agencies and certification of growers. These fees have important implications for growers with low sales and for certifiers without a large grower base from which to derive income.

In 1994-95, only about one-fifth of organic growers in California with annual sales of $10,000 or less, and one-half of growers with sales of $25,000 or less, were certified. In contrast, all organic growers grossing above $500,000 per year were certified. It therefore appears that, under the existing system, many small growers do not see the benefit of certification relative to the expenses associated with the certification process.

Thus, for growers who gross over $5,000 annually but nonetheless operate on a modest scale, the new federal requirement could prove a significant deterrent. These growers may respond to the certification requirement by dropping out of organic production altogether, or by forgoing certified organic production in a legal sense and instead marketing with another form of labeling related to production methods.

Likewise, some certification agencies may cease to operate. Others may pass most accreditation costs on to their producers. New certification agencies, perhaps catering to very small growers, may emerge. At this time, however, it is not clear how much attrition or entry of either growers or certification agencies might result from the impending federal law because it has not yet been finalized.

CONCLUSION

The registration data for the first three years of the organic program in California reveal considerable growth in terms of number of farms, acreage and farmgate sales. Farmer exit and entry patterns indicate substantial turnover in the organic sector, although it continues to grow. (In fact, CDFA estimates the current—1998—number of growers and handlers at 2,300, impressively higher than the 1994-95 number of 1,561.)

Implementation of the federal law, which will require certification of commodities marketed as organic, will undoubtedly serve as another catalyst of change. The evolution of the organic sector has broad implications for such nation-wide issues as food safety, viability of rural communities, resource conservation and environmental quality.

* The full report, published by the Center, is Statistical Review of California’s Organic Agriculture, 1992-1995, by Laura Tourte and Karen Klonsky. Tourte is a research associate and Klonsky is a specialist, both with Cooperative Extension, Department of Agricultural and Resource Economics, UC Davis.

 

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AIC Quarterly: Volume 12, No. 2, 1998

THE UC/AIC QUARTERLY

THE NEWSLETTER OF THE UC AGRICULTURAL ISSUES CENTER
VOLUME 12. NO. 2. 1998

Director’s Message
by Daniel A. Sumner

Regular readers of the AIC quarterly may have noticed how much of what we do at the Agricultural Issues Center has an international flavor. This does not reflect a conscious choice to emphasize the global nature of California agriculture as much as recognition of an inescapable reality.

Our current major project on non-indigenous agricultural pests and diseases involves international issues in fundamental ways. First, international commerce and visitors are the source of many of the pest invasion threats with which the state’s programs of exclusion, control or eradication must deal. Second, much of the concern about exotic pests reflects the potential harm that their establishment here would do to California’s ability to export agricultural products. The goal of exotic pest policy is to maintain a protective system for California agriculture that is both science-based and reasonable, and also to recognize the legitimate objectives of other countries in maintaining their own systems. Indeed, one objective of trade negotiation for California and the United States is to ensure that import rules imposed by other countries are truly science-based and reasonable. Trade is always a two-way street, and technical trade rules must protect against pests while allowing legitimate trade.

Another project illustrating the importance of international trade is the Center’s current effort to help the CDFA and others provide more accurate agricultural export data on a state-by-state basis. It turns out to be difficult to measure the actual scale of California agriculture’s international trade. Data, either in-total or by-commodity, simply are not available from official sources. The AIC project will help provide more reliable data.

A third topic with clear international significance is measuring the contribution of agricultural research and extension, and implications for organizing and financing public research and extension. Even more than agricultural goods, ideas flow readily, if not freely, across international boundaries. This means our research in California has benefits for agriculture in other countries. It also means that we gain from innovations created elsewhere. Further, consumers and others in California benefit from innovations used in California agriculture, regardless of their source. Californians also benefit from innovations imbedded in products we import, just as customers around the world benefit from our innovation. Any reasonable evaluation of research and extension programs in California must take into account important international spill-ins and spill-outs. In the world of ideas, as in the world of commodities, we are in a global market.

Valuing Foot and mouth disease surveillance

An upcoming AIC report deals with a crucial “if” question involving public policy and regulation: What if a highly contagious livestock disease-foot-and-mouth disease, in this case-suddenly appeared in California?

More specifically, how much economic loss could be avoided by quick and effective control measures? What are the possibilities for quick and effective control? The study involves an intensive study and provides sobering results.

The chances of such a disaster are unknown, but may be increasing because of more intensive international travel and trade. The AIC publication describes seven possible scenarios that might follow an outbreak of foot-and-mouth disease in Tulare County, where dairy cows and other livestock are concentrated and therefore more vulnerable to the disease. It also reviews current planned strategies in case of an outbreak, identifying potential problems and suggesting actions.

The 150-page publication is titled The Potential Impact of Foot-and-Mouth Disease in California. The author is Javier M. Ekboir, formerly a post-doctoral fellow in the Department of Agricultural and Resource Economics at UC Davis. (Now with CIMMYT in Mexico City.) Ekboir’s project was in cooperation with the UC School of Veterinary Medicine, and was supported by the California Department of Food and Agriculture.

Foot-and-mouth disease (FMD) presents no danger to humans, and in fact most adult livestock can recover from the disease. But because the virus can spread so rapidly, both livestock and livestock products from a FMD-infected region or country are embargoed throughout much of the world. In the past, outbreaks in FMD-free zones have been commonly met with “stamping-out” programs-which means slaughtering all exposed as well as all infected animals, cleaning and disinfecting all livestock premises, and then waiting to be declared FMD-free again. That is the official policy in California, in case of an outbreak here.

The total cost of an outbreak would be the sum of eradication costs (including compensation to livestock growers), production losses and, even more significant, loss of prime national and international markets for months or years. In the various scenarios, those costs in California are projected from about $2.5 billion to about $4.5 billion-and that’s assuming the outbreak is contained in the South Valley (Fresno, Kern, Kings and Tulare counties). Total U.S. trade losses would be substantially greater.

A crucial finding of the model scenarios is that, in an area crowded with livestock like Tulare County, a day or two delay in diagnosing the disease, establishing a quarantine zone, and starting the stamping-out program could make the difference between a contained outbreak and a statewide economic disaster. “The opportunity for decisive intervention lasts only one week,” the report emphasizes.

But for various reasons, including lack of awareness of the threat and lack of immediately available resources in case of an emergency, “it is highly likely that implementation of this stamping-out policy would face enormous problems which would seriously compromise its chances of success,” the report says. In the concluding chapter, those problems are analyzed and recommended actions listed.

The foot-and-mouth disease study preceded, but will contribute to, a more comprehensive extensive AIC project on exotic pest and disease policy in California. The large AIC project is considering a wide variety of pests and diseases and involves scientists, economists and others from several UC campuses, CDFA, USDA and the private sector. A conference and major report are planned for 1999.

The Potential Impact of Foot-and-Mouth Disease in California will be available later this summer from AIC.

Exotic Pest and Disease Project

The Center’s new study on exotic pest and disease policy will be comprehensive in its scope of issues, but will focus in depth on a limited number of case studies. At an advisory committee meeting on June 5, 23 attendees looked over the project plans. Represented on the committe are state, local and federal governments, UC research and extension, and the public, including agriculture.

Under consideration for case studies are exotic Newcastle disease, foot-and-mouth disease, the Medfly, rice blast, citrus canker and tamarisk.

The project’s goal is to provide a much stronger objective scientific basis for policy decisions about exotic pests and diseases, and to increase overall public understanding of the issues. Multidisciplinary research teams will review information on exotic pests and on affected crops, animals, and “third parties,” as well as relevant regulations and trade aspects, before undertaking economic analyses. USDA-APHIS and CDFA will collaborate with the UC-led research teams.

These public policy issues, and others, are on the project’s agenda:

  • What are the potential economic and environmental consequences of the establishment of non-indigenous agricultural pests and diseases?
  • How effective are current regulations in preventing new introductions?
  • What will be the effects of recent changes in import regulations and international trade barriers?
  • How much does exclusion, eradication or managed control of exotic pests benefit and costs the overall public?

Since our last report we have accelerated the project timeline with an eye to reporting preliminary findings at a public conference in May, 1999.

UPCOMING AIC EVENTS

Three workshops and seminars sponsored or co-sponsored by the Center are scheduled during the next few months. To register or get more information about these events, contact Laurie Treacher at the Center. Phone: 530-752-2320; fax: 530-752-5451; email: agissues@ucdavis.edu.

Winegrape Outlook Workshop, Friday, July 24, in Sacramento. There is still time to register for this event, which will address the outlook for winegrape demand and supply, pricing and trade issues. John Kautz, president of the California State Board of Food and Agriculture and chairman of the board of Ironstone Winery, will be the luncheon speaker. The panel of industry and academic experts includes:

  • Barry Bedwell, President of Allied Grape Growers.
  • Dale Heien, UC Davis professor of agricultural and resource economics.
  • Vaughn Kiligian, President of the Raisin Bargaining Association.
  • George Schofield, industry consultant.
  • Eric Sims, a key analyst for the Motto, Kryla and Fisher study 1998 Grape Trends: An MKF Research Report.
  • Robert Smiley, Dean of the UC Davis Graduate School of Management.
  • Bill Turrentine, of Turrentine Brokerage in San Mateo.

Daniel Sumner, Director of the Agricultural Issues Center, will moderate the panel.

The workshop is scheduled from 10 am to 3 pm at the Hyatt Regency at Capitol Park in Sacramento. Lunch is included in the $30 registration fee.

Risk Management Seminar for Agribusiness Producers, Wednesday, October 21, in Sacramento. Co-sponsored with the USDA’s Risk Management Agency, this event will include sessions dealing with:

  • Financial and marketing risks.
  • Farm labor.
  • Environmental issues.
  • Water supply.
  • Estate planning and family business organization.

Joe Glauber, USDA Senior Economist for Policy Analysis, will be the opening speaker at the seminar, which will be in the Doubletree Hotel, Sacramento. Details will be announced later.

Executive Seminar on Agricultural Issues, Tuesday, December 8, in Sacramento. Sponsored by UC’s Giannini Foundation for Agricultural Economics and by the Center, this year’s seminar has the theme “Risks and Opportunities for California Agriculture.” It will focus on the risks and uncertainties of regulations, policies and the marketing environment, as well as opportunities for California agriculture. A marketing and financial outlook session will open the seminar, followed by sessions on risks and opportunities for fruits, nuts, vegetables, field crops and animal agriculture. Vernon M. Crowder, vice-president and senior economist for Bank America Corporation, will be the lead speaker. The seminar will be held in the Hyatt-Regency Hotel, Sacramento. Details will be announced later.

Awards and Honors

Colin A. Carter, a UC Davis professor of agricultural economics and AIC Associate Director, has received the Distinguished Policy Contribution Award of the American Agricultural Economics Association. The AAEA award cited his contribution in “objectively analyzing the issues surrounding single desk selling.”

Heather Benson, an AIC student assistant, was named the Western Agricultural Economics Association’s Outstanding Senior at UC Davis. Ms. Benson graduated in June and leaves AIC in August on her way to law school at Vanderbilt University.

Farmland Publication

An upcoming AIC report is previewed in the May-June issue of California Agriculture, published by UC’s Division of Agriculture and Natural Resources. A special section of the DANR publication, with spectacular color photos, probes crucial land-use issues in California involving farmland protection, the urban fringe, growth policies, and land trusts.

The articles are condensed from several chapters in California Farmland and Urban Pressures: Statewide and Regional Perspectives, to be published by the Center later this year. The editors are Al Medvitz, a Solano County rancher and land-use specialist, and Al Sokolow, public policy specialist at UC Davis. The authors are from the academic, private and governmental sectors.

The papers, focusing on both statewide patterns and regional profiles, were first presented at meetings of the American Association for the Advancement of Science (AAAS).

AIC-Generated Export Statistics

An ongoing AIC project will generate revised and more accurate agricultural export statistics for the State of California. These data will be officially released by the California Department of Food and Agriculture in August.

Until about 1990, California farm export statistics were produced by an intensive system of information-gathering. This system proved too costly, but the procedures used subsequently did not produce reliable numbers. The Center has analysed the situation and is using a procedure that produces more accurate results in a cost-effective way. Since the need for reliable agricultural export statistics is nationwide, other states have expressed interest in the Center-designed system and are cooperating in its development.

Accurate agricultural export figures are important for planning and decision-making by government agencies, financial institutions, industries and others.

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Management Changes and Impacts of the 1996 Farm Act

Management Changes and Impacts of the 1996 Farm Act: A National Study and a California Viewpoint (no. 5, March 1998)

Warren E. Johnston and Lyle P. Schertz

The Federal Agricultural Improvement and Reform Act of 1996 dramatically changed the decision-making environment for U.S. farm operators, land owners and land managers. Major elements of the new federal law—production flexibility contract payments (PFCPs), the end of commodity-specific base requirements, and the elimination of annual set-asides and planting restrictions—are challenging farm decision-makers throughout the nation to rethink their management strategies.

Reactions and comments by those decision-makers were voiced during a series of panels of professional farm managers conducted during the spring of 1997.* These responses provide early indications of change taking place in important agricultural areas, including the Plains States, the Midwest, the Southeast, the Mississippi Delta and—most relevant for this AIC Issues Brief—a rice and cereal growing area of the western Sacramento Valley.

Panelists indicated that the new farm bill’s increased planting flexibility was not fully incorporated into 1996 farming decisions. However, farm managers and operators were beginning to more fully consider the longer-term implications as they faced less optimistic outlooks for the 1997 crop year.

Survey responses and discussions with panelists confirmed that farm owners, operators, and managers favor three particular features of the 1996 Farm Act: (1) the predictability of the program payments, which are no longer tied to farm prices, (2) the unambiguous qualifications for payments, and (3) especially, the elimination of most planting restrictions. Additional issues that emerged from the study include:

  • Capitalization of payments into land value and higher land rents in many areas.
  • Concerns about more variability of commodity prices, leading to increased interest in marketing and risk management strategies.

Understandably, much of the concern of the Sacramento Valley panel, held at Colusa, was focused on decisions involving the limited alternatives for rice production. The 1996 Farm Act signals real expectations of lower returns for rice and, thus, relatively more attractive returns for other crops. For some farm operators, this implies a need for drastic changes in crop mixes.

This AIC Issues Brief summarizes the findings of the Sacramento Valley panel, with some comparisons to other major U.S. production regions. Readers may examine major findings of the nation-wide study,** including two USDA publications and individual chapters summarizing findings of the other panels through links at the bottom of this webpage.

 

ANTICIPATED CHANGES

The Sacramento Valley panel was comprised of growers and professional farm managers whose overall crop mix was over half rice, almost 10% wheat or corn, and about one-third other crops. These individuals were generally not optimistic about the longer-range prospects for agriculture in their region (all acknowledged that they had considered quitting farming; some said they still do). They all anticipated substantial economic pressures in the future.

When asked what changes in management they expected to be most pronounced over the next five years, they focused almost exclusively on (1) the need for more attention to marketing, (2) the need for greater acreage adjustment among crops, and (3) the expectation of increased price volatility. As Table 1 shows, panelists elsewhere in the U.S. were concerned with these three issues but also were intrigued with more use of new technologies (e.g., advances in seed genetics, bioengineering and pesticide resistance) and with a number of “other” effects on their management decisions (e.g., higher land values and leases, changing production practices, and increased competition among renters for land.)

Table 1. Panel responses regarding major changes in management for farm resources expected to be the most pronounced in the next five years. California (Colusa) panel and all U. S. panels combined

Percent of panelist responses
Type of Change Colusa panel All U.S. panels
Greater adjustment of acreage among crops 33 pct. 25 pct.
More attention to marketing 33 pct. 28 pct.
Use of new technologies 4 pct. 16 pct.
Increased price volatility 29 pct. 13 pct.
Other 0 pct. 18 pct.

In discussing marketing, the Sacramento Valley panelists pointed to their historical reliance on cooperatives for marketing rice—in the words of one, “with few options.” Many noted the need for new marketing alternatives. The development of contract production may offer such an alternative, although for a relatively minor share of production. Contracts could tend to shift risk to the marketing firm and provide more security to farm lenders. In the view of the panelists, the marketing contracts would be particularly important for niche products. However, an opinion was also voiced that higher prices currently offered for niche products might result in “everyone jumping into production,” causing price volatility and/or lower prices. In general, panelists saw the need for farmers to be more proactive in marketing, with greater use of tools such as futures, options, and contracts.

Since profit margins are slim, panelists indicated that where possible they will switch to crops judged to have more profit potential—but that they also need to take into account associated adjustment costs. Expectations were that acreages will adjust on a year-to-year basis as farmers determine the most economic crops for their properties. Panelists with no, or very limited, production alternatives said they focused on reduced costs of production and hopes for improved marketing.

The Colusa panelists stated clearly that they expect increased price volatility not only for rice, but also for many of the alternate crops grown on more diversified properties. A specific but not always attainable answer, they said, is “to forward-contract rather than produce on speculation, and to make sure that contracted prices pay for production.”

 

FORCES DRIVING CHANGE

Forces that underlie, or will underlie, major changes in management decisions by Colusa panelists—most of whom are involved in rice production—are (1) environmental concerns/regulations, (2) higher input prices and (3) concerns about commodity prices. (See Table 2.) The U.S. panelists were also highly concerned about commodity prices. More than the Colusa panel, they focused on issues relating to farm program changes and the impact of world demand and weather on their production decisions.

Table 2. Panel responses regarding major forces expected to influence 2000-2002 management decisions, California (Colusa) panel and all U. S. panels combined.

Percent of panelist responses
Type of Force Colusa panel All U.S. panels
Environmental concerns/regulations/pests 24 pct. 7 pct.
Higher input prices 24 pct. 8 pct.
Commodity price uncertainty 24 pct. 10 pct.
Commodity price levels 14 pct. 14 pct.
Program changes 10 pct. 24 pct.
World demand 4 pct. 14 pct.
Weather 0 pct. 14 pct.
Other (new crops/technologies; competitive pressures) 0 pct. 9 pct.

Environmental Concerns. Panelists said that the combination of very restrictive California and federal environmental and resource regulations puts California agriculture under intense scrutiny and results in limitations that are excessive when compared to other areas of the nation. One reason, they noted, is urban growth, with much of the state’s population lacking understanding of agriculture, and even the origins of food. The urbanization of California also generates air and water resource-related impacts on food producers. For example, farmers are required to comply with clean air and water regulations and restrictions, while urban populations—in the panel’s view—are not held as accountable for air emissions and urban-sprawl externalities that reduce agricultural productivity. Rice producers mentioned the relative lack of regulation in competing areas of rice production such as Arkansas, Mississippi, and Missouri. One panelist commented that regulations could, in the extreme, “transform California agriculture out of existence.”

One panelist made a point, which other panelists ultimately endorsed—changes in acreage of basic, program crops in the midwest do affect crop choices of California producers. High commodity prices for wheat and feed grains will also be attractive to California producers and would indirectly reduce acreages available for other field and row crops (including specialty and niche products), driving up the prices for those crops as well.

Outlook for prices. Higher input costs and lower commodity prices are exerting serious pressure on western Sacramento Valley growers and all panelists were concerned about the problem. In their view environmental concerns and environmental regulations particularly impact California growers, resulting in higher per-unit costs of production that will not be reflected in output prices.

The other component of the producers’ cost-price squeeze is crop prices. These operators expected lower prices, especially for rice, and more price uncertainty in general for non-contracted crops. The panelists believe that global demand will importantly influence commodity prices, even for sales in domestic markets. For example, increased imports can mitigate domestic supply situations that might otherwise result in higher prices to U. S. producers. These are the realities of the global economy. Still, the Colusa panelists, like those of several other panels elsewhere in the U.S., are concerned that the playing field is not level. A particular criticism is the European Union’s subsidization of exports as a way of managing excessive stocks.

However, anticipation of improved marketing, development of “identity” products, and reduced rice acreage as growers search for cropping alternatives underlie a contrasting view that rice prices can be maintained. Given these possibilities, six of eight panelists expected that the price of rice in the terminal years of the Farm Act will be above the 1996 price. Panelists noted that currently low processing tomato prices were due to large inventories, that opportunities for high valued seed crops are good (but only for limited contracted acreages), and that in the search for cropping alternatives growers need to be aware of opportunities for contracting for specialized uses and markets.

Expected crop mixes. Diversification away from sole reliance on rice production was the general theme explored by members of the panel. Their 1997 crop mixes, where possible, included more careful attention to prices, profitability, and rotational needs. Growers appreciated the flexibility provisions of the new law, decoupling payments and permitting management decisions to plant other crops. Some were further along in finding alternatives; others were more solidly locked into a high proportion of rice on their properties. All were looking for niche products with attractive price contracts.

In the longer term, rice growers said they need especially to find quality or quantity contracts for specialty rice varieties, to give up less favorable rice leases, and to search for multiple-use soils to provide flexibility while striving to maintain efficiencies of scale. Growers with specialized rice equipment and machinery will require additional investments in order to expand into many of the alternative crops.

One grower expressed the longer term outlook in a way that summed up the views of the group: “I also hope to be more diversified. I have the acreage available, but I need capital to expand and diversify. For now, I am vulnerable and forced to take more risk than I want.”

*The study project, including a series of eight focus-group panels in early 1997, was conducted by agricultural economists Warren E. Johnston, University of California, Davis, and Lyle P. Schertz, U.S. Department of Agriculture. (Both retired.) The Economic Research Service of the USDA and the Farm Foundation, in addition to AIC, provided support for the research.

**The full report was published by USDA as an ERS Staff Paper titled Managing Farm Resources in the Era of the 1996 Farm Act. Click here for the full report of the USDA Farm Bill Study and individual state and regional summaries

 

 

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Science and Technology in California Agriculture

AIC Issues Brief No. 4, February 1998.

Science and Technology In California Agriculture 

Julian M. Alston and David Zilberman*

Development and adoption of improved technology has been a central element in creating the marvel that is today’s California agriculture, as well as some of the problems it faces entering the 21st Century.

In this AIC Issues Brief we review the role of technology in development of California agriculture. First, we document changes in inputs, outputs and productivity for California agriculture during a historic period of technological growth: 1949-1991. The trend during this time was toward less land and labor, more capital and purchased inputs, and dramatically increased agricultural output of all types.

Second, we review the evolution and adoption of certain technologies that have been particularly important to the development of California agriculture, including technology spillovers from other parts of the world with Mediterranean climates and extensive use of irrigation.

Finally, we consider the sources of new technology and the role of government in developing technology.

Inputs, Outputs and Productivity, 1949-1991

Table 1 shows changes in California agricultural output from 1949 to 1991. These new data prepared by Barbara Craig and Philip Pardey are the best available to document the growth of agricultural productivity. Using a value-weighted quantity index, the table shows that California farmers produced more than three times as much output in 1991 as in 1949. Different commodity outputs grew at different rates and at different times. For instance, greenhouse and nursery output increased almost tenfold, while production of field crops—including wheat, rice, cotton, and corn—grew by only about three times, and actually declined slightly after 1980. Meanwhile, output of livestock, fruits and nuts, and vegetables steadily increased several times over. Across all categories, the index of outputs increased 218 percent.

Table 1. California Agricultural Output

Year Total Output Field Crops Fruits & Nuts Livestock Vegetables Greenhouse & Nursery
1949 100 100 100 100 100 100
1960 145 159 107 161 141 196
1970 177 169 133 209 170 278
1980 260 315 233 245 203 607
1991 318 282 267 340 249 977
Growth Rate
1949-91		 2.76 2.46 2.34 2.91 2.17 5.43
Source: Compiled by Alston and Zilberman using data provided by Barbara Craig and Philip Pardey. These data are updated and revised from those in a previous AIC publication that analyzed agricultural productivity: Valuing UC Agricultural Research and Extension (1994).

Inputs in California agriculture also changed during the four decades, as shown in Table 2. Use of purchased inputs (electricity, fuels and oil, feed, fertilizer and seed) more than trebled. The use of capital services—including physical inputs such as automobiles, tractors, trucks and combines, as well as biological inputs such as dairy cows, ewes and breeder pigs—grew by a little more than 50 percent. However, quality-adjusted land and labor use in agriculture actually declined over the same period. Across all input categories, the index of use increased 58 percent.

Table 2. Input Use in California Agriculture

Year Total Input Land Labor Capital Purchased Inputs
1949 100 100 100 100 100
1960 123 99 88 146 178
1970 120 93 68 125 222
1980 136 100 76 134 266
1991 158 92 90 156 334
Growth Rates – Percent per Annum,1949-91 1.09 -0.2 -0.25 1.06 2.87
Source: Compiled by Alston and Zilberman using data provided by Craig and Pardey.

Tables 1 and 2 show that, between 1949 and 1991, a 218 percent increase in California agricultural output was achieved with only a 58 percent increase in inputs. Expressing aggregate output per unit of aggregate input provides a measure of productivity. Thus, productivity (the index of output divided by the index of inputs) in California agriculture doubled in 42 years.

This means if input use had been held constant at the 1949 quantities, the use of 1991 technology would have resulted in twice as much output as 1949 technology. Alternatively, to produce 1991’s output using 1949 technology would have required twice as much inputs as were actually used.

Evolution of Technologies in California

Since the last century, California agriculture has placed high priority on development of institutions and adoption of technology to improve irrigated agriculture. This process included exchange of technology with other regions sharing a Mediterranean climate and crop base.Technology Spill-ins. In the 19th and early 20th centuries, a significant process of technology transfer to California was embodied in the knowledge of immigrants from Italy, Germany, France, Eastern Europe and Asia who settled in the San Joaquin Valley and near the Russian River. Bringing crop varieties and farming practices, these immigrants established the foundation for fruit and vegetable industries in California.

Transfers of technology to California from regions with similar crops and growing conditions have continued. For example, some South African entrepreneurs and Australian companies played major roles in technology transfer, and California has been a major beneficiary of the Binational Agricultural Research and Development (BARD) program with Israel. California also has benefited from new wheat and rice varieties developed by the international research centers of the Consultative Group on International Agricultural Research (CGIAR). New, higher-yielding wheat varieties developed by the International Maize and Wheat Improvement Center (CIMMYT) in Mexico, incorporating semi-dwarfing genes and rust resistance, were designed for developing countries but turned out to be especially suitable for use, either directly or as parental lines, in California and Australia. Today, virtually 100 percent of California’s wheat has important CIMMYT-bred ancestors. Similarly, improved rice varieties from the International Rice Research Institute (IRRI) in the Philippines have been relatively well suited for adaptation to California. Essentially all of California’s rice has some IRRI ancestors.

Irrigation has made the Central Valley into the most productive agricultural region in the world, and with increasing competition for water resources drip irrigation is increasingly important. Imported from Israel in the late 1960s, drip irrigation has been widely adopted and improved, particularly in high-value vegetable crops.

Technology Development. Meanwhile, public research and extension programs in California, as well as private research and development, have revolutionized virtually every aspect of the state’s agriculture:

  • The adoption of the tomato harvester and suitable new varieties of tomatoes was remarkably swift, starting from a base of zero in the early 1960s. By 1968, 95 percent of California’s processing tomatoes were mechanically harvested.
  • The state’s cotton industry expanded rapidly in the immediate post-World War II years, and California cotton growers adopted mechanical harvesting more rapidly and effectively than elsewhere. By 1965, virtually 100 percent of California’s cotton was mechanically harvested.
  • Mechanical harvesting and bulk handling equipment dramatically changed the fruit, nut and vegetable industries. Especially where the products were destined for processing use, the innovations were introduced in the 1960s or earlier and had become standard technology by the 1970s.
  • Genetic improvement has led to higher-yielding varieties with improved pest resistance, as well as other advantages. For example, California’s almond yields per acre roughly tripled between 1950 and 1990, in large part as a result of improved varieties. Combined with other technological improvements, this has helped spur the growth of the almond industry in California so that it now dominates the world market. Similar developments combining improved genetic stock with other technological improvements and management have vitalized many other Cinderella food-and-fiber industries in California, including other nuts (pistachios and walnuts), fruits and vegetables.
  • Varietal improvement also has meant better quality—sometimes at the expense of physical yields—or an increase in the number of available varieties. For example, in 1953 there were only three leading table-grape varieties, with Thompson Seedless the most important. By 1993, substantial acreages were planted to each of eight specific table-grape varieties. Extending the season and range of varieties has provided an important stimulus to demand for fresh grapes. In the case of California strawberries, varietal improvements extended a short season to almost year-round availability—at the same time allowing improvements in quality as well as huge yield gains. Another example is the lettuce industry. At one time, “lettuce” meant Iceberg lettuce, but today California grows many types and varieties of lettuce. The industry has successfully combined advanced genetic material with improved production and post harvest technologies, as well as better understanding of the market.

Pest Control. To a large extent, the ability of California farmers to grow more than 250 different crops stems from their ability to apply technologies to avoid, resist or control a multitude of diseases and pests.

Chemical pest controls have a wide range of benefits, including increased crop yields, lower production costs, improved product quality and shelf life, and reduced inventory losses. It is estimated that the cost of banning the use of chemicals in production of just five leading California crops (lettuce, strawberries, oranges, almonds, and grapes) would range from several hundred million to billions of dollars annually and would hit consumers with substantial price hikes—50 percent or more.

However, the productivity gains from pesticides can involve costly side-effects. Intensive use of some pesticides in high-value California crops means that care must be taken to assure worker safety. The soil fumigant methyl bromide is linked to depletion of atmospheric ozone, and there is doubt that it will be available in the long run. Because of such side-effects of chemical use, as well as its high cost, an array of nonchemical methods to address pest problems has been—and is still being—developed in California.

Computers. The computerized systems that have fundamentally changed other industries have been adapted by California farmers to some, but not all, aspects of their enterprises. In the dairy industry, for example, the use of computerized herd improvement programs is widespread. One reason is that dairy farmers had an intensive manual bookkeeping system and herd improvement program before the introduction of the computer—so that computerization simplified an existing procedure. In other agricultural applications, computerization often significantly alters production processes and decision making. Also, a substantial amount of the dairy industry software was developed and promoted in the public sector. Publically-sponsored computerized systems also guide irrigation decision-making, increasing water-use efficiency.

In terms of production value, the most important single sector of California’s agricultural economy in recent years has been the dairy industry—which has developed and improved its technology more rapidly than in other states. Milk production has grown relatively rapidly. Through improved technology in both dairying itself—especially milk harvesting and milk handling—and in dairy feed production, California has become the largest and among the lowest-cost dairy-producing states in the nation.

SCIENCE POLICY: A CRUCIAL ROLE

The transformation of California agriculture that began more than one hundred years ago entailed the progressive adoption and adaptation of various types of technologies including mechanical and biological innovations, and new chemicals. Improved methods of production, in conjunction with changing markets for inputs and outputs, have promoted dramatic changes in the range, mix, and total value of products from the state’s agriculture—as illustrated in Tables 1 and 2. These productivity improvements have resulted from private and public investments in California and in other places, especially other countries sharing a Mediterranean climate.

In maintaining this technological edge, public science policy will play a crucial role. New technology in California agriculture has been developed not only through investments in research and development, but through synergism between private-sector and public-sector institutions. Federal and state governments play significant roles in the process by:

  • Creating appropriate incentives for private firms to conduct research and develop technologies for which they can be rewarded by the market.
  • Financing and conducting public research and development in situations where the private sector will not adequately fund agricultural research and development from the point of view of the state or nation as a whole.

Science policy encompasses public-sector research and development, public policy related to private research and development, intellectual property rights, and technological regulation. The evolving nature of agriculture and markets for agricultural products, society and societal attitudes about science, institutional arrangements for science, and science itself mean that science policy must evolve as well.

In shaping science policy for California agriculture, it will be important to continue to find ways to maintain or increase outputs with the same or fewer inputs—but the new agendas also stress issues such as food safety, environmental effects and alternatives to agricultural chemicals. To even sustain (much less increase) agricultural productivity for the next century will require not only carefully designed and effective science policy, but specific technological solutions as well. In turn, this will require a sustained rate of investment by both the private and public sectors and a continuing but evolving role for the University.

The federal legislation that provides the foundation for much of the agricultural research undertaken in the United States is currently being negotiated in Washington. These decisions will play a crucial role, along with California’s own policies, in determining whether the past century’s successes will be repeated in the next century.

*Julian Alston is a professor in the Department of Agricultural and Resource Economics at the University of California, Davis, and an Associate Director of the Agricultural Issues Center. David Zilberman is a professor and Chairman of the Department of Agricultural and Resource Economics and Policy at the University of California, Berkeley.

 

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