February 14, 2014

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On January 17, the governor of California declared a state of emergency due to the state’s megadrought. Most regions have only received 20-30% of their usual rain or snowfall this winter. This follows two straight less extreme, but still below normal, years of precipitation. According to US Trust’s Joseph Quinlan (via Steven Perlberg), California joins China, India, Australia, and the Middle East — all of which “are experiencing multiyear water challenges that threaten to slow or impair economic activity”.

This is a big economic issue for California, which is the nation’s largest agricultural producer. Modern Famer reports the drought will probably affect prices across the US for fruits, vegetables, nuts, olives, meat and dairy (so pretty much everything except grains and sugar). While farmers saw a record $44.7 billion in revenue from agricultural products last year, the California Farm Water Coalition estimates this year’s drought will cost the industry about $5 billion. According to Bloomberg, farmers plan to leave about 12% of fields fallow due to an anticipated lack of water.

However, some farmers can’t just leave their fields fallow for a year. Produce like cantaloupe, broccoli, lettuce, and tomatoes might be more scarce in grocery stores this year, but can be planted anew next growing season. Crops that grow on permanent trees and vines — like nuts, avocados, and grapes — have to be kept alive at all costs. California grows 80% of the world’s almonds, a crop which requires an especially large amount of water, and has planted many of the trees in parts of the state that are dry even in a normal year.

To complicate matters, the state’s groundwater aquifers are running low. The water table under California has been shrinking since the 1930s, and “effective water management has eluded the region since it opened up for homesteaders in the 19th century”, writes John Kemp.  The naturally arid state has a growing residential population, huge amounts of agriculture, and a dependence on plenty of water to run through its hydroelectric power plants, says Kemp. Just to make things a little worse, Gwynn Guilford says the conflict between state and federal marijuana laws means the state can’t really regulate the water use of pot producers in the northwest of the state.

Though California is investing in technology that might help — desalination plants to make ocean water potable and moisture detectors for the soil to help farmers make more efficient use of the water they have — neither yet seems like a viable long-term solution (desalination is energy-intensive and harmful to fish, while “drought technology” just isn’t that popular with California farmers).

There also may be hope in regulation. While some cities in Northern California are running out of drinking water, Southern California doesn’t even need to ration water, according to Kate Pickert. Through a combination of regulations and rebates given for installing fixtures that use less water, Los Angeles has been cutting its per capita water usage for two decades. Madelyn Glickfeld, a water resources expert at UCLA, tells Pickert that the hard-hit Central Valley farming region doesn’t even have water meters, which is part of its problem. — Shane Ferro

On to today’s links:

Must Read
The French way of treating cancer – Anya Schiffrin

London banks are getting around pay limits by calling bonuses “allowances” – DealBook

“A large portion of China’s $1.8 trillion in trust products may be headed for default this year” –  Gwynn Guilford

Your Retirement Plans
Facebook has never had a 401(k) match – and other new realities of retirement savings – Bloomberg

Matt Taibbi, Wall Street and the silly “everything is rigged” theme – Izabella Kaminska

Old Timey
Can AM radio be saved? – Trent Wolbe
Perfumes that recreate historic stenches – Atlantic Cities

How a “frozen zoo” of genetic material is helping to save endangered species – James Temple

EU Mess
The Eurozone’s recovery may be finally taking hold –  Jason Karaian

The permanent scars of economic pessimism – Antonio Fatas

Crisis Retro
Wells Fargo is tiptoeing back into subprime mortgages – Peter Rudegeair and Michelle Conlin

The most overused analogies in finance – A Wealth of Common Sense

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