Will California Drought Lead to Higher Food Prices Across United States?

April 9, 2015 Updated: April 9, 2015    

It’s one of the major questions related to the multiyear drought in California—will the lack of water lead to higher food prices in supermarkets across America? Has it already?

The short answer is that food prices have indeed increased dramatically for a number of food products over the last year. For instance, romaine lettuce jumped about 60 cents per pound to $2.19, and frozen orange juice went from $2.43 for 16 ounces to $2.73, an increase of 12.5 percent, according to Bureau of Labor information comparing February 2014 prices to February 2015 prices.

But experts noted that it’s complicated—such price increases stem from a variety of factors, of which the drought is just one. And while some food products increased in price, others, such as milk, coffee, and peppers, have decreased. Other analysts warn the drought will likely have a bigger impact in the coming weeks and months.

Crops at Risk for Greatest Price Increase

Eat an almond anywhere in the world, and there’s a good chance it was harvested in California.

The state produces about 80 percent of the global supply, exporting about 70 percent of the 1 million tons it produced in 2012, for example. Farmers hauled in $3.3 billion that year for almond exports, easily the top export from The Golden State in terms of value.

California also produces the bulk (70 percent or more) of 20 other food products in the United States, including apricots, avocados, strawberries, and romaine lettuce.

But most of these products are increasingly imported, decreasing the potential price increases due to the drought. About 7 of every 10 avocados, in American grocery stores, for example, are imported. Most apricots, kiwifruit, and artichokes are also imported. About half of the figs, grapes, plums, olives, and garlic are imported.

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That leaves about a dozen crops that California produces the bulk of that aren’t supplemented much by imports: The United States barely imports any of the nuts California specializes in—almonds, walnuts, and pistachios; it imports little that the fruit that the state produces the majority of—strawberries, lemons, nectarines, and peaches; and these vegetables are barely grown outside California—broccoli, carrots, cauliflower, celery, and lettuce.

James Dunn, professor of Agricultural Economics at Penn State, said he sees a big potential for the drought to impact the price products that California specializes in, such as almonds. 

“We’ve seen some of them increase, but we’re going to see more of them,” he said.  

While the drought has had an impact on some prices already, there’s typically a delay in how food prices are affected because of harvest cycles. But, for instance, almonds are set to become more expensive this year since a number of farmers cut off bunches from almonds trees last year because of the drought—a drastic measure that has also been employed this year.

 

“We’re working off the inventories right now, but the prices of those inventories are already starting to reflect the fact that there’s not as much new crop behind it, so that becomes a big deal,” Dunn said.

“For example, typically in the corn business, if we don’t have at least 40 days of supply going into the harvest, then things really get dodgy, and people start to get really worried about running out of corn. … That’s true of other things as well … if you know a bad crop of almonds are coming, then the almonds that you have now are going to be more expensive because you know there’s not a regular sized crop going to be harvested in 2015.”

“Some of these things could quite easily—something that is particularly a California crop—could double in price, depending on where exactly in California it’s produced and on how dependent it is on the snowmelt, because essentially California doesn’t get much of their water from rain, it comes from snow,” he added.

California Gov. Jerry Brown recently mandated a 25 percent cut in water across the state because the regular supply of snow melt has consistently decreased during the four years of drought. 

Will Prices Keep Rising?

Food prices typically rise 2.6 percent every year (compared to the 20-year historical inflation average of 2.4 percent). The Economic Research Service at the Department of Agriculture predicts an increase in 2015 in line with historical averages.

The major exception is beef and veal, which is forecast to increase as much as 6 percent, although for reasons largely unrelated to California. Despite the drought, fruit prices are predicted to only rise 2.5 to 3.5 percent and vegetable prices are predicted to rise only 2 to 3 percent across the United States.

“However, depending on its continued severity, the drought in California has the potential to drive prices for fruit, vegetables, dairy, and eggs up even further,” noted Annemarie Kuhns, an economist at the service.

Kuhns said that milk prices could also swing up soon due to the drought, primarily because it could increase the price of alfalfa, the primary food for dairy cattle.

For most other food categories, the drought effect won’t be seen quite yet, perhaps not for more than a year.

“A lot of times, the drought is still ongoing, we don’t know the length and how severe it will be for the future, and also it’s hard to tell you what some of these farmers planting decisions will be. And the decisions that they make based on the drought conditions could affect what they grow and how much they grow of it and could potentially affect what we pay at retail down the line,” Kuhns said.

Dunn said he sees a much bigger impact only for certain sets of people, since most of the products California specializes in aren’t core products.

“In general, those don’t contribute a lot to people’s food market basket, so most individuals are not going to get hit hard by that. But if you are somebody who’s a vegetarian, or someone with heavy dietary needs, you’re going to see the cost of your market basket rise significantly.”

The drought is impacting some prices outside the United States too. Researcher Brent Mansfield found that the price of greens in Canada increased 3.1 percent last year, primarily because of the drought since California is the country’s main source of produce during the winter.

Mitigating Factors

A number of potentially mitigating factors have helped limit the increase in food prices so far and should help limit them in the near future. 

One is economic incentive. Most of the crops California specializes in bring farmers and companies a lot of money, such as the billions from almonds. When a farmer is forced to curb water usage, he’ll sacrifice the lower value crops. 

“The crops where California has a large market share tend to have high gross and net revenue per acre-foot of water (almonds, other nuts, grapes, berries, and vegetables). So farmers have a large economic incentive to shift scarce and expensive water from field crops to these high-revenue per acre-foot crops,” said Daniel Sumner, director of the University of California Agricultural Issues Center, in an email.

“The bottom line: Farmers are scrambling to efficiently use what water they have (largely stored in aquifers) to keep food supplies available, especially for crops where substitutes from elsewhere are not readily available.”

Also, some crops, such as multiple fresh vegetables, avocados, and high-priced wine grapes, are largely from the coastal regions of California, where water cuts have been smaller and the groundwater hasn’t shrunk as much.

Dairy prices have mostly fallen over the past year, especially milk. The drought has increased milk-production costs in California, and the state’s dairy production has also decreased this year because of the low global milk prices. These factors alone would cause dairy products to rise in cost, but the drought effect on national prices for milk, cheese, and other dairy products is small because of the other market factors that have lowered milk prices, such as the reduced export demand. 

(U.S. Department of Agriculture's Economic Research Service)
(U.S. Department of Agriculture’s Economic Research Service)

Cattle ranches in California have also been forced to cut their herds due to the drought, but California doesn’t produce much beef so the impact on prices has been minimal.

Another mitigating factor is the strength of the dollar, which enables U.S. companies to import food at cheaper prices. 

“You’re getting more of the commodity for the dollar,” said Kuhns.

The strong dollar has two big effects. First, imports get cheaper because one dollar buys more food in foreign markets. However, domestic food products become more expensive for foreigners so they buy less. That helps limit price increases, and in some cases even spurs price cuts since more of the U.S.-grown products are staying within the country. Indeed, a recent report from U.S. Commerce Department notes that California exported fewer agricultural products in February compared to last year, even though the exports made more money.

Gas has gone down over the last year or so, meaning it’s become less expensive to transport foods across the United States, yet another contributing factor to mostly balanced food prices.

While some products have risen over the last year or so, others have decreased, causing a general balance of food prices.

“In general food prices right now are not going up because the price of corn and soybeans and stuff has made the stuff from animal agriculture much more affordable,” said Dunn of Penn State.