Ed Lotterman: Markets will compensate for crop losses

June 20, 2014 

CRB Ed Lotterman

Ed Lotterman

CRAIG BORCK — Staff

Don't worry about not being able to buy almonds or garlic just because California has a water shortage.

And just because most copper mines in Michigan and Montana closed a year ago doesn't mean that all the copper is gone from those states or that mining will never be important there in the future.

The fact that a lot of something is produced in a given geographic area doesn't mean it can be produced only in that area. Nor does it mean a drastic reduction in supplies will follow if the product no longer can be made where it is now.

The exact geographic location of production at any given time depends on the cost of inputs, such as land and labor, relative to the sale price of the product itself. An increase in the price of some important input in a given region, as is happening with water for crops right now in California, results in that area losing its competitive advantage over alternate locations. Production will shift to whatever competing locations that have more advantageous prices.

While this shift must cause some increase in the price of the final good, the increase often is quite small. Nearly always it is much less than the numbers tossed around by gloom-and-doomers, who may have a financial stake in trying to scare voters and politicians into spending programs that will benefit them personally.

All of this is occasioned by news about California's drought, which certainly is severe. California is an agricultural powerhouse, the most important state by value of farm production. Its $45 billion of annual output is 40 percent higher than Iowa's, the runner-up, and about six times that of Idaho, which comes in 20th. It is the largest producer of 80 different crops and grows 99 percent or more of 15 crops. The state grows a third of all vegetables produced in the country and two-thirds of its fruits and nuts. It is a major producer of milk, alfalfa and rice.

Warnings that the lack of water will depress California's food production and harm households across the nation seem plausible. Yes, especially in the short run, a California drought will increase the price of some fruits and vegetables. But the longer-run effect is not threatening.

Most crops grown in California can be grown elsewhere. Many were before subsidized irrigation water in California gave that state an advantage. Have you ever wondered why New Jersey is "the Garden State" or why H.J. Heinz is headquartered in Pennsylvania? When my grandfather first came to this country from the Netherlands in the late 1890s, he was on a labor contract to work in vegetable production in Maryland. Baltimore was the vegetable canning capital of the nation. He also spent a year near Chicago, in an area dominated by truck farms supplying vegetables to that metro area.

These were efficient farms, and U.S. food costs already were among the lowest in the world. But California did have an advantageous climate for tree crops, berries and vegetables. All it lacked was water at the farm. Irrigation, some of it funded locally and some with federal money, solved that problem.

With inexpensive water, California soon dominated in many crops. Producers in the East shifted to less-intensive, lower-priced commodities.

Thousands of acres that were truck farms in 1900 have been urbanized. But there still are millions of acres now growing corn, soybeans and other commodities that could be switched to high-value crops for human consumption. There still are peach orchards in Georgia, Missouri and Colorado, and there could be many more. Ditto for many other products still dominated by California.

True, one may say, but you cannot establish nut and fruit orchards in one year. You cannot duplicate California's packing sheds and canneries immediately. So am I not repeating economists' perennial error of assuming that "adjustments" take place immediately with zero cost?

This is a fair criticism. But even if growing urban water use and lower water availability long term combine to shrink California agriculture, this won't happen overnight either. Long-term declines in water availability will give time for production to shift in response to market forces.

The fallacy that current spatial patterns of production are the only ones possible is not limited to food and California. When I worked at the Minneapolis Fed in the 1990s, I followed mining in the region. Copper mines in Montana and Michigan's Upper Peninsula then were only marginally profitable. The rule of thumb was that no U.S. copper mine could survive at prices below 80 cents per pound. Peru, Chile, Zambia and other low-cost producers would dominate, alarmists warned. The U.S. would become dependent on imports since we no longer had any copper.

The reality is that we have tens of millions of tons of copper ore, and at some price, it is profitable to mine. (And yes, the environmental costs of mining many deposits are high and those have to be taken into account in evaluating the overall benefits to society.)

China's current dominance of production of rare earth metals that are vital in some electronic components has been fertile ground for alarmists. Yes, a sudden cutoff by China, perhaps for geopolitical reasons, could cause severe problems for the economies of other industrialized nations.

But these elements can be found in other nations, including the United States, Chile and Bolivia. New development is occurring in several nations.

The economically optimal place to produce something at any point in time depends on several factors. As these change, so does the most profitable location.

Economist Edward Lotterman writes in St. Paul, Minn. Write him at boise@edlotterman.com.

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