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Marketplace Morning Report

California’s drought: Bad, but not the whole economy

Adriene Hill Feb 12, 2014
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It’s dry here in California. Really dry. The state is facing its worst drought in more than a century.

President Obama will be in Fresno, the heart of the agricultural Central Valley, to check things out Friday. The governor has declared a statewide emergency.

The drought is decidedly bad for farmers. But what it’ll mean for the rest of the economy isn’t as obvious. 

At 7:30 a.m. at the Los Angeles Wholesale Produce Market, the day was coming to an end. Jesse Martin, president of Value Produce, showed me the fruit he had for sale: kiwi, strawberries, grapes, melons. His take on the drought: “everyone is going to get hurt.”

But, he’s not that worried. “It’ll be a little more money to the housewife,” he says.

The housewife — and the rest of us who eat.

But, a few extra dollars for fruit each week is nothing compared to what some California farmers are in for. Without water, crops will die. The California Farm Water Coalition estimates 500,000 acres will be fallowed. It says the drought could cost the agriculture industry $2 billion. And $2 billion sounds big. It is big.

But, it isn’t a disaster for the state. Not yet.

“It’s not the sort of thing that’s going to tip the state into recession or anything like that,” said Jeffrey Michael, head of the Business Forecasting Center at the University of the Pacific.

California’s GDP is $2 trillion.  The economy here is the same size as Russia’s.

“The state’s overall economy is primarily a service economy in big coastal metro areas,” Michael said, “which is pretty much unaffected by the drought.” 

Agriculture uses about 80 percent of California’s developed water. The state grows two-thirds of the country’s fruits and nuts. But, agriculture is only about 2 percent of the state’s economy.

“The economy of California is huge,” Michael said. “We don’t want to minimize the impacts. You can make just about anything in California look small just by comparing it to the total.”

The power industry is pinched by the drought. Fisheries. Recreation. Some towns are just a few months away from running out of water.

Without rain, or a change in how we use water, things could get a whole lot worse.

David Rose is an analyst and water expert at Wedbush Securities. We peered out a tenth floor window, looking at rooftops dotted with cooling towers. These towers, Rose said, sustain Los Angeles. And use a tremendous amount of water.

Everyone needs water. Farmers. Manufacturers. Lawyers. Movie executives. Even securities analysts.

“It’s very important for California from a competitive perspective to attract businesses,” Rose said, “and in order to attract businesses, you have to insure 100 percent reliable affordable water, every single day.”

Right now, Rose said, California is thirsty for more water than it has. If this drought continues, it may have even less to drink in the future. Which means the state has some long term figuring to do.  

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