How might the California drought impact Southern agriculture?

How might the California drought impact Southern agriculture?

California in fourth year of drought. Municipalities offering to buy farmers' irrigation water. May lead to more medium-grain rice in the South.

The vice-like California drought – now in its fourth year -- is only tightening and state residents would surely be willing to trade some of that famous sunshine for a mass of rolling rainclouds.

Now, that drought is impacting agriculture outside the state’s borders. Farmers in the western state are being offered burgeoning sums for their irrigation water and, if the deal is struck, that may mean a gap in the medium-grain rice market. Farmers in the South may be tempted to fill that hole in the market.

Will California drought boost Mid-South rice?

Stuart Hoetger, California-based Firstgrain economic consultant, says the drought in northern California “is bad, but it’s worse in central California. Roughly 67 percent of the state is in extreme drought. The farther south you go, the worse the drought and the more pressure there is to take more water from the north.”

In late March, Hoetger spoke with Delta Farm Press about the situation. Among his comments:

California farmers have been offered money for their water from municipalities before, right? But now it’s reached the level where they’re actually considering it?

“Most certainly. Water sales have been happening here for a long time. I grew up in southern California and so was the recipient of some of those sales. Now, I’m up here in the north watching my neighbors sell their water.

“One acre of rice provides enough water for six households in southern California for a year. So, there’s always a battle from people farther south wanting water. Unfortunately, it’s often used for watering lawns and filling pools rather than for producing food.

“When the water sales are at $300 or $400 per acre, most farmers aren’t interested because it’s more lucrative for them to go ahead and grow the crop. However, this year, they’re being offered $700 per acre foot. That equated to, roughly, $25 per hundredweight -- $18.50 to $19.50 over loan. The current market for rice is about $16 over loan. So, right now, farmers are basically guaranteed to sell their water for $3 per hundredweight more.

“An acre foot of water equates to about 325,000 gallons. It takes about three acre feet of water to grow rice. So, the farmer could get about $2,100 per acre for water he’d use to grow the crop. He’d get about $1,870 per acre if he grew the rice, depending on where the crop is grown in California.”

What are you hearing from the farmers about selling their water?

“The water sales won’t really finalize until after April 1 when the California Department of Water Resources (DWR) goes up into the mountains and does a final survey. There are three ways to store water in the state: snow pack, reservoirs, and groundwater. Snow pack is the largest way we store water in the state and, right now, it’s only 12 percent of the average and not much in the forecast.

“So, what will happen on April 1 is the DWR will send up surveyors to check the snow pack levels. Once they find that the snow pack looks bad, they’ll limit the amount of water sales that can occur. That’s because water allocations will be lowered in general.

“To clarify: the DWR monitors water on a state level but there are also counties and districts that manage water on a more micro level.”

What’s the current estimate for rice acres in 2015 for California?

“Right now, our best estimate is between 342,000 acres and 352,000 for medium- and short-grain rice. That’s a drop of about 12 to 17 percent.”

The South

How might the South play into the medium-grain vacuum that would leave?

“At this point last year, California had sold 150,000 tons of rice to Turkey. Currently, the United States has sold 160,000 tons – but it’s largely Jupiter (a Southern medium-grain). So, we’ve already lost over 150,000 tons of business to the South. And that’s not including the fact that California is now competing with the South for Taiwanese business. We expect the only growing competition from the South to be for Taiwanese and Middle Eastern business.

“Also playing into this is Australia’s medium-grain production dip. Their production fell by 24 percent last year and is expected to drop another 15 percent in 2015.

“All that means rice farmers in the South are having their heads turned by medium-grain possibilities. I was doing a presentation here yesterday and asked how many knew the price of Jupiter. Not a single person raised their hand. The flip side of that is we did a presentation not long ago in the South and asked how many of them knew the price of California rice. Nearly everyone raised their hand.

“So, for the first time in a long time, Californians need to learn what’s happening in the South. The South is certainly always watching what’s happening here. There will definitely be a price correlation because farmers in the South will plant rice without a contract this coming year. That creates a cash market.

“The South can only really compete with California in the Middle Eastern market – Jordan, Turkey, Libya – and Taiwan. While there seems to be a lot lining up right for medium-grain in the South, we’re only cautiously optimistic in advising farmers there to plant medium-grain rice. That’s largely because if they can’t sell their medium-grain, it’s sold as Number 3 at extremely low prices or not sold at all. It’s definitely possible to see the South overproduce medium-grain rice this year because ir demand is only limited to a few markets.

“Most of the Calrose business is done on a milled basis. Calrose is at $905 per ton and Jupiter is about $615 a ton in the South. On the farm, you’re looking at $22 per hundredweight in California compared to $13.30 per hundredweight for Jupiter. A lot of that is due to quality – Calrose is the premier medium-grain especially with large-scale commercial production.”

2015

General thoughts on the 2015 crop?

Milo Hamilton, president of Firstgrain: “On the long-grain side, we’re near major primary lows. It’s very difficult to see that because everyone is so bearish. The thing that’s made things so bearish isn’t the rice market but the dollar and crude oil. There’s incredible heavy pressure to sell these markets by outside speculators.

“That’s pushed the (long-grain) price $1 to $2 under value. Until that that selling releases itself, we’ll continue to see these kinds of prices.

“The hinge vote on this isn’t what happens in Asia but what will happen mostly in Arkansas and to a lesser extent, Missouri. We think acreage could be down in Mississippi and northeast Louisiana. It’ll be down in Texas for water reasons.

“The long-grain price is coming into a major low, no doubt. The ability to recover is based on acreage. We had a large increase in acreage and when that happens, the price goes down. At $10 the price is about the same as Thai rice – at least on a milled basis. The last time that happened was in 2010. The two countries (Thailand and the United States) don’t stay together very long. We don’t see the U.S. market trading at that level for long because it’s below the cost of production. The farmers in rice are growing it because of the counter-cyclical payment that’s available. Without that payment, you’d hear a giant sucking on rice acreage in the South.

“If the rice acreage goes up 10 percent, we’ll stay in pea soup for a while. Outside the Arkansas area it appears rice acreage could be down as much as 8 percent. We’re doing a Firstgrain acres survey this week that will help clarify that.”

Hoetger: “We think Jupiter acreage will increase in Louisiana about 10 to 15 percent. It’ll be up 5 to 10 percent in Arkansas. That’s because Louisiana folks will plant earlier and Arkansas will respond to that.

“I’m a bit worried about the risk of overproduction. I hope farmers in the South keep that in mind. The medium-grain there is mostly contracted by domestic companies. The leftover is sold overseas and you can’t rely on those markets. Turkey can buy 150,000 tons of rice one year and 20,000 tons the next. It’s risky to plant medium-grain rice in the South without a contract.”

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