AIC Issues Brief

No. 1, June 1997

Economic Impacts of Irrigation Water Cuts
in the Sacramento Valley

Hyunok Lee
Daniel A. Sumner
Richard E. Howitt*

In the Sacramento Valley, irrigation water is vital to agriculture and agriculture is vital to local economies. Our recent research investigated these relationships by asking this question: If a substantial part of the Valley’s irrigation supply became unavailable, what would be the economic effects on farmers and on communities—and where would the loss hit hardest?

Specifically, the research analyzed the impacts of a hypothetical permanent 25% cut in surface irrigation water supply to the Sacramento Valley (Tehama, Glenn, Butte, Colusa, Yolo, Yuba, Sacramento and Sutter counties; see Figure 1). All of those counties have large agricultural industries; agriculture leads the local economy in all except Yolo and Sacramento. Nearly all of this farm-related economic activity depends on irrigation water.

The reduction of 25% was chosen for the study because that amount would be large enough to have potentially noticeable effects while being feasible and within the range of experience in California. The research investigated economic impacts of a 25% reduced surface water supply in four hypothetical situations—normal and drought years, with 10% additional groundwater pumping and with no additional groundwater use.

To highlight the main results, we focus here on only one of the scenarios: a normal non-drought year (based on data from the average of 1985-88) without supplemental groundwater. Under these circumstances, the study results indicate revenue losses for most crops throughout the Sacramento Valley totaling $32 million. The effects are not uniform.  Indeed, 80% of those losses would take place in counties that depend most heavily on agriculture, and particularly on rice.

A reduction in one input alters a production system in complex ways. Irrigation is vital, yet there are measures that growers take to mitigate losses. They adjust to water shortages by (1) using alternative technologies or otherwise reducing water use per acre, (2) switching to crops that use less water, or (3) reducing acreage that is irrigated. This research investigated such adjustments and traced the resulting economic impacts at the county level.

Figure 1: The Study Area

map of study area

The Study Area

Demographically and economically, the eight counties in the study vary greatly—a fact that strongly influences likely effects of a water shortage. Sacramento County, largely urbanized, has two-thirds of the entire region’s population. Butte and Yolo counties also have proportionately large urban populations. The other counties are smaller in population and tend to be more dependent on agriculture. Colusa and Glenn counties have the largest agricultural sectors in relation to their overall economies—54% and 46%. Other counties in order of importance of agriculture to the local economy are Sutter (17%), Tehama (13%), Yuba (13%), Yolo (8%), Butte (6%) and Sacramento (1%).

The proportion of agricultural jobs compared to total employment shows a similar pattern, ranging from about one-third in Colusa County to only 1% in Sacramento County.

In total value of crop and livestock production, the lineup of counties in the study area appears somewhat different. Yolo County heads the list, followed closely by Sutter and Sacramento counties. The rest, in order of farm value produced, are Butte, Glenn, Colusa, Yuba and Tehama counties.

Fruits and nuts account for the largest share of agricultural revenue in the Sacramento Valley, contributing substantially in all of the study counties except Colusa and Sutter. Vegetable crops, especially tomatoes, provide the next largest source of revenue. Rice has a special place in the study, both because it is particularly important to the economy in most counties (Butte, Colusa, Glenn, Sutter, and Yuba) and because the crop is particularly vulnerable to water shortage.

The eight counties also differ in sources of irrigation water supply. The primary source for the region as a whole is groundwater, followed closely by local surface water supplies. Other important sources in certain areas are the federal Central Valley Project and the State Water Project.

The Economic Model

The analysis considered both (1) direct production and economic effects of reduced water supply on agriculture (crop acreage, water use, irrigation system costs and on-farm revenue) and (2) indirect effects of the agricultural adjustments on local economies.

Certain characteristics of the model are worth highlighting:

  • The model allows water transfers within seven sub-regions in the Sacramento Valley, but allows no transfer across sub-region boundaries. These sub-regions are relatively homogeneous, but may include several water districts and parts of more than one county. In reality, water is usually not fully transferable within a local region and may be partly transferable across regional boundaries. Our two assumptions on transferability are offsetting, but, we think the economic results may be underestimated slightly due to these assumptions.
  • The analysis allows for the fact that farmers can adjust to a water shortage by increasing efficiency of their irrigation systems—but only at a significant cost. Irrigation systems in the Sacramento Valley have been steadily improved in recent years, and the model assumes that additional gains are possible and would be made if water were even more scarce.
  • Output and input prices are treated as constants. Possible price effects of changes in crop output resulting from the 25% cut in water supply are not included (they are expected to be quite small). Even for japonica rice, for which the study area produces much of the national output, projected effects on the world and local rice prices are expected to be small.

To determine agricultural effects of the 25% cut in the surface water available for irrigation, the model first projected crop supply and input use responses, including changes in crop acreage, per-acre water use, irrigation system costs and resulting water costs. From this, changes in farm revenue were calculated.

Table 1: Farm Revenue Changes from a 25% Surface Water Reduction

Farm Revenue Changes (1,000 dollars)
Commodity Tehama Glenn Butte Sutter Colusa Yuba Yolo Sacramento Total
Pasture -299 -337 -418 -483 -40 -139 -249 -349 -2,314
Alfalfa Hay 46 -86 -8 -14 -124 -4 -243 105 -328
Sugarbeets -5 -105 -13 -60 -171 -3 -158 -26 -541
Field Crops -155 -348 -102 -1,000 -934 -41 -899 -152 -3,631
Rice -26 -4,132 -2,575 -2,744 -6,584 -1,405 -929 -211 -18,606
Vegetables -1 a -1 -72 -78 a -56 -3 -211
Tomatoes a a a -102 -187 a -366 7 -648
Fruits, Nuts 59 -27 -140 -70 -27 -35 -25 11 -254
Small Grains -331 -362 -599 -699 -574 -156 -1,345 -67 -4,133
Subtropical 2 5 -4 a a -3 a -3 -3
Total -710 -5,392 -3,860 -5,244 -8,719 -1,786 -4,270 -688 -30,669

Notes:

(a.) Not produced in this country.
Reduction in surface water is from a normal rainfall year, with no additional groundwater pumping.
Field Crops include field corn, dry beans, oilseeds and miscellaneous hays.
Small Grains include wheat, barley, etc.
Subtropical orchard crops in these regions include olives and kiwifruit.

Farm Impacts

Estimated changes in farm revenue for selected crops in the eight study counties are shown in Table 1. Across all counties and for most crops, the study shows that reductions in agricultural revenue are expected. There is substantial variation in the amount of loss, depending on crop and location. Much of the variation across counties reflects differences in the relative importance of groundwater in the county water supply.

Rice stands out among crops. Rice takes the largest proportional cuts in per acre water use, incurs the highest irrigation system costs, and suffers the largest acreage losses. Rice tends to be particularly dependent on surface water supplies. Rice revenues are relatively important in Colusa, Glenn, Sutter, Butte and Yuba counties. In these counties, projected farm revenue loss for rice totaled $17.4 million.

Overall, as expected, our results show that crops with more return per acre and per unit of water have less reduction in acreage. Pasture has the largest acreage cuts in all counties, while vegetable and orchard crops exhibit only small changes.

Not shown in the table but documented by the research: (1) in some cases, there are shifts toward crops that provide less revenue per acre, but also use less water; (2) in extreme cases, some land is removed from production.

Impacts on County Economies

The economic impacts of irrigation water cuts on counties depend on the magnitude of farm income lost and also on the crops involved in the adjustment process. For each crop in each county, a specific economic multiplier was used, taking into account off-farm handling and processing, as well as the scale of other local economic activities. These multipliers range from 1.2 to 2.5, meaning that a $1 change in farm gate revenues results in a $1.2 to $2.5 change in the overall county economy. Of all crop categories, fruits and nuts have the highest multipliers. (The multiplier analysis applies the same approach in the AIC publication The Measure of California Agriculture by Carter and Goldman.)

As expected, county income effects are negative, but vary in magnitude (Table 2). The largest county income loss occurs in Colusa County and the smallest in Tehama County. Glenn and Sutter counties also experience large income losses.

Table 2: Income Effects of a 25% Surface Water Reduction

County Income Lost
(1000 dollars lost)
Income Lost
(% of county
income)
Tehama 929 0.18
Glenn 7,762 2.48
Butte 6,697 0.39
Sutter 8,153 0.98
Colusa 12,589 5.35
Yuba 2,577 0.45
Yolo 6,326 0.31
Sacramento 1,195 0.01
Total 46,228 Average 0.25
Total without
Sacramento
45,033 Average 0.72

Rice again plays a crucial role, since the reduction in rice production alone accounts for 62% of the total income loss in the Sacramento Valley. Counties with large income losses are all associated with major rice production, except for Yolo County where losses are mostly in field crops, small grains and alfalfa.

Since counties differ in the scale of their economies, the total agricultural income loss for each county was also calculated as a percentage of that county’s total personal income. The results are also shown in Table 2.

Colusa County is the hardest hit, losing over 5% ($12.5 million) and Glenn County is next at about 2.5% of county income. These two counties have the lowest personal income levels of all Sacramento Valley counties, as well as the highest reliance on agriculture in their economies. In the other six study counties, projected losses to agriculture from the loss of irrigation water are less than 1% of county personal income.

A similar procedure was used to project the number of farm and farm-related jobs lost as a result of the cut in water supply. The results are shown in Figure 2. In the eight counties, total job losses equal 305, with about 185 from the rice industry alone.Overall, 60% of job losses in the Valley are attributable to losses in rice revenue. As with county income, Colusa County would be hardest hit in terms of jobs lost.

graph shows jobs lost by county

Results of the UC study indicate at least three general conclusions:

  • Adjustments that occur within the agricultural production system in response to reduced water supply are crucial.
  • A reduction in water supply, of course, results in relatively greater economic impacts on those counties more dependent on agriculture.
  • Those counties whose economic livelihood depends heavily on agriculture are also the poorest counties in the Sacramento Valley. Thus it appears that the counties with least economic resources would be hardest hit if the water supply is reduced.

* Dr. Hyunok Lee is a research economist in the Department of Agricultural and Resource Economics at UC Davis. Richard E. Howitt and Daniel A. Sumner are professors in the same department. Sumner is also director of the UC Agricultural Issues Center. The authors thank Ron Felthoven, David Hart and Gabriel Tiffany for research assistance; Ray Coppock for editing; and Corrin Rausenberger for layout and design. We also acknowledge helpful comments from Rich Golb, Katy Howe and Marcia Kreith, and the California Rice Research Board for financial support. For more on the model and for additional detailed results the reader is referred to a forthcoming AIC report, Economic Impacts of Reductions in Irrigation Water Availability in the Sacramento Valley by Lee, Sumner and Howitt.