Updates on the California Drought Status for Ag Professionals
Of all the areas at risk of drought in the American West, California is noteworthy due to its importance to the nation’s food supply and its frequent exposure to drought. Between 2012 and 2016, California experienced a multi-year drought that led to annual losses of up to $1.84 billion and 10,000 jobs. There are already signs that another exceptionally dry period is likely, and agricultural professionals need to be prepared to act now.
Amid its daunting exposure to drought, California is a veteran of dealing with drought and ought to look toward the coming years of megadrought with equal parts determination and enthusiasm for proactivity.
In order to minimize the impacts of drought, ag professionals should learn from drought history, recognize the necessary solutions that are available, and be proactive about identifying the financial risk that comes from drought.
This post will explore the most recent updates to California’s drought status, and how lenders and investors can use GIS data to assess and mitigate portfolio risk.
Current California Drought Status (June 2021)
The U.S. Drought Monitor uses data from the USDA, NOAA, and the National Drought Mitigation Center to provide updated maps every Thursday with state-specific pages showing drought conditions on a scale from D0 to D4.
As of July 8, 2021, 100% of the state is experiencing Moderate Drought (D1) conditions or higher. Over 85% is in Extreme Drought (D3), while over 33% is experiencing Exceptional Drought (D4) conditions. These areas are largely concentrated in the Central Valley, reaching from San Joaquin to as far north as Shasta County.
According to the U.S. Drought Monitor, April 2021 was the 5th driest April in at least 127 years, and the 15th driest year over the same timeframe – surpassed only by the most recent California drought.
Areas that reach D3 and D4 status can expect severe water shortages and restrictions, increased wildfire risk, and reduced crop yields.
As of July 8, 2021, 50 out of 58 counties in California are under drought declaration.
Current Conditions in California
In addition to the nationwide drought monitor, California has a state-specific drought preparedness resource that contains the latest measurements of reservoir levels, rainfall, snowpack, and more. Since snowpack and streamflow are some of the main indicators of drought, ag professionals should keep a close eye on these data points.
As of July 8, 2021, nearly all major reservoirs in California are at below-average levels, with Lake Shasta at 47% of its historical average and Oroville at only 30%. Likewise, snowpack and river flow are at just a fraction of their normal levels – in some cases, lower than they were during the 2012-2016 drought.
These conditions are already leading to regulatory and market responses, including reduced water allocations and higher water prices. Ag professionals who don’t take these conditions into account may find themselves facing reduced crop yields and increased competition for scarce water resources.
California Drought Declarations
Other indicators to look out for include drought declarations at the statewide level, which can have both positive and negative repercussions for farmers. On April 21, 2021, Gov. Gavin Newsom delivered the first emergency declaration of the year, encompassing the Russian River Watershed. Less than a month later, it was followed up by an additional declaration on May 10, expanding the emergency to cover 41 counties in all.
While an emergency declaration can further limit available water resources by instituting voluntary and mandatory conservation measures, it also “directs state water officials to expedite the review and processing of voluntary transfers of water from one water right holder to another, enabling available water to flow where it is needed most.”
These transfers can be key to ensuring a sufficient water supply throughout the growing season.
Ag finance professionals should familiarize themselves with both the California water rights system and smart water markets to find out what options are available to their borrowers during times of severe water stress.
California Drought Risk for Agriculture Professionals
Drought brings a complex web of risks to agriculture professionals, both on-farm and to financial institutions. California farmers in critically overdrafted basins (high and medium priority basins in 2022) are thrown into a tug of war for water and must adhere to pumping restrictions and reporting requirements under the Sustainable Water Management Act (SGMA), which can vary from basin to basin and add further complexity to a farm’s water rights situation.
It is crucial for lenders and investors to have a parcel-specific financial risk understanding of their portfolios. Everything from the water rights associated with a specific parcel of land to the watershed and irrigation district that it’s located in can have a major impact on its viability.
GIS is the future of data management and risk mitigation. It joins bank, investor, or lender data with the context of local risks.
Why Planning Ahead for Drought is Key
Planning ahead for a drought isn’t just good business sense in the short-term — it’s also a smart play for longevity. Understanding lender/bank data in the context of the network of subjective and local risk factors empowers more informed decision-making, which is necessary to build resilience in this drought.
There are social and environmental aspects as well that are connected to agriculture. According to the Public Policy Institute of California, smaller communities are “much more vulnerable than urban residents” and a “creative package of solutions” will be needed to ensure sufficient access to drinking water supplies.
Likewise, freshwater ecosystems have been hit hard by previous droughts, and “many watersheds will see escalating conflicts over trade-offs between water used to maintain habitat and water for homes, businesses, and farms.”
Nature-based solutions can be a winning solution for all involved, since maintaining a healthy water cycle is integral for both municipal and agricultural water users. Recognizing ecosystem services will be a key strength in creating financial resilience amid drought and a changing climate
By being proactive about drought risk – and using data-driven intelligence to inform their lending and investment decisions – ag professionals can protect their bottom line while working with their borrowers to support a more resilient agricultural system.
The Bottom Line
As of July 2021, California is experiencing extremely dry conditions that point to long-term drought, including low snowpack and streamflow levels in key agricultural regions. As of July, 2021, 86.3% of California is in a drought declaration, and water allocations have been reduced and are uncertain in many watersheds.
Ag professionals should use GIS to add context to their data in order to anticipate water shortages and reduce the impact of drought on their portfolios.
According to the United Nations Environment Program Finance Initiative, climate impacts could lead revenues for agricultural borrowers to drop by 12-22% by 2040 and cause agricultural loan defaults to increase by 10-15%. The changing landscape of 21st-century...
Business risk in agriculture comes in many forms, including production risk due to crop failure or adverse weather events, and market risks due to falling commodity prices or higher input costs. Climate change is introducing more uncertainty into the equation,...
The most informed investments are the most secure investments. In the rapidly evolving world of US finance, remaining informed on the latest tools and strategies is key to understanding the ag lending and investment landscape. One approach continues to gain momentum....