By Elizabeth Campbell and Megan Durisin

Bloomberg News

Near the confluence of the Merced and San Joaquin rivers, the heart of the California farm belt, Bob Kelley watches the driest year ever erode water supplies and prospects for the dairy business his family began in 1910.

The amount of water available for the 2,800 acres of corn and alfalfa Kelley grows to feed more than 6,500 cows may drop as much as two-thirds, so fewer crops will be planted and some animals will be sold to avoid the expense of buying grain, he said by telephone from Newman, about 83 miles southeast of San Francisco.

“It would impact us for not just 2014, but all of 2015,” said Kelley, 60, who runs a local water district that will cut output by at least half. “I’m anticipating a very difficult time, and I’m probably the best off of anybody I know.”

The drought in California, the top U.S. agricultural producer at $44.7 billion, is depriving the state of water needed to produce everything from milk, beef and wine to some of the nation’s largest fruit and vegetable crops, including avocados, strawberries and almonds. Lost revenue in 2014 from farming and related businesses such as trucking and processing could reach $5 billion, according to estimates by the 300-member California Farm Water Coalition, an industry group.

The state was the driest ever in 2013, a third straight year of little moisture. California Gov. Jerry Brown, D, declared a drought emergency on Jan. 17 as arid conditions he called “unprecedented” continued well into the annual rainy season that runs from October through March. Reservoirs on Jan. 27 were at 61 percent of average, while the mountain snow-pack as of Dec. 30 that supplies most of the state’s water was at 20 percent of normal for that time of year, data show.

Average rainfall in California was 7 inches (18 centimeters) last year, the lowest on record going back to 1895, said Michael Anderson, the state climatologist with the Department of Water Resources in Sacramento. Dry weather and drought will persist through 2014, predicted Drew Lerner, the president of World Weather in Overland Park, Kansas.

Fresno, the biggest city in the fertile San Joaquin Valley, got a record-low 3.01 inches last year, compared with an annual average of 11.5 inches, according to data from Accuweather in State College, Penn. Salinas, a city known as “the Salad Bowl of the World” for its production of lettuce, broccoli, mushrooms and strawberries, recorded 3.27 inches, compared with 15.46 inches normally. Los Angeles got less than 4 inches, compared with 15 normally.

Farmers in the state probably will leave as much as 500,000 acres unplanted, or about 12 percent of last year’s principal crops, because they won’t have enough water to produce a harvest, which will mean fewer choices and higher prices for consumers, said Mike Wade, executive director of the California Farm Water Coalition, a Sacramento-based group of farmers, water district managers and farm-related businesses.

“Any job that’s associated with agriculture is hurting,” Wade said. While some farmers were able to conserve water in years past, they won’t get “any preferential treatment” over uses by municipalities, he said.

Weirdness worldwide

Extreme weather around the world is wreaking havoc with farmers and threatening global food production. Dry weather in China turned the world’s second-biggest corn grower into a net importer of the grain in 2010, and ranchers in Texas have yet to recover from a record dry spell three years ago. One in eight people in the world go hungry, some of which can be blamed on drought, according to the United Nations.

U.S. retail prices for beef, bacon, lettuce and broccoli posted double-digit gains last year, and tomatoes are the most-expensive since May 2011, even as overall food inflation advanced just 1.4 percent, government data show.

California gets most of its rain in December, January and February, when crops are dormant or yet to be planted. A prolonged drought may change the way water is used.

Growers of lower-value seasonal crops, including melons, tomatoes and alfalfa, may make more money selling their water, said Jay Lund, director of the Center for Watershed Sciences at the University of California-Davis. Farmers with higher-value crops from permanent vine or tree orchards including grapes or nuts may be willing to pay a premium, Lund said.

Many of the state’s 4,600 wine-grape growers are irrigating sooner than normal to fend against failing cover crops and the possibility of lower yields, said Ron Lopp, communications manager for the California Association of Winegrape Growers. Farmers produced $4.45 billion of grapes in 2012, data show.

“A lot of the groundwater is being depleted to the point that it’s tough to pump the water out of the ground,” Lopp said by telephone from Sacramento. “We’d need a ‘maybe we should start building an ark’ amount of rain,” to get water levels back to normal, he said.

Economic impact

In 2009, a prolonged drought caused $340 million in revenue losses in the San Joaquin Valley, the center of the state’s agricultural production, said Steve Lyle, a spokesman for the California Department of Food and Agriculture, citing University of California data. About 285,000 acres were left fallow in the valley and 9,800 jobs were lost, he said.

“There’s the potential for higher economic impacts this time around based on an increase in permanent crop acreage and the water situation,” Lyle said by telephone from Sacramento. “We know what happened the last time we were in a drought-type situation. We think in 2014 it could be worse.”

The California Farm Water Coalition, founded in 1989 during a six-year drought, said the state underestimated the impact in 2009. Based on models used by the University of California, direct losses in agricultural revenue in 2014 could be $1.6 billion, with the total economic impact reaching $5 billion when farmworker wages, processing and transportation are included, according to Wade, the group’s executive director.

The dry spell is of immediate concern for cattle ranchers because of a “severe shortage” of grazing land, and some are considering reducing herds, Lyle said. The industry generated $3.3 billion in 2012 revenue. A drought in 1977 generated $566.5 million in agricultural losses, of which three quarters was from livestock, according to a state report.

The drought is another blow to dairies, by far the state’s largest agricultural business with 2012 revenue of $6.9 billion, producing 20 percent of the nation’s milk output. Farmers have been struggling with losses or less profit as feed costs surged to a record two years ago, outpacing milk prices, according to Michael Marsh, the Chief Executive Officer of Western United Dairymen, a Modesto-based trade association.

Cows usually produce less milk during a drought, according to New York-based broker INTL FCStone, and concern for reduced supply from California have contributed to a rally in prices on the Chicago Mercantile Exchange.

Class III milk futures, tracking a variety used to make cheese, climbed to $22.98 per 100 pounds yesterday, the highest for the most-active contract since trading began in January 1996. The commodity has climbed 19 percent this year, the second-biggest gain among 64 commodities tracked by Bloomberg, behind greenhouse gas-emission credits. Cheese, up 16 percent, ranks fourth.

Using lower-quality feed during the drought may curb milk output for another year, until cows go through a new calving and lactation cycle, according to Kelley, who has about 3,000 milking cows. Buying feed from outside California may prove too costly, forcing more dairies to sell or close down, he said.

Ray Souza, 67, a dairyman in Turlock, said he sold about a dozen of his replacement cattle at auction last week from among the 900 Holstein cows he owns to conserve feed and water for the main milking herd.

Souza said he sold the animals about 16 months earlier than normal because he is increasingly concerned about the fate of the corn and oat crops he grows for feed, with the prospect that water supplies will be cut “substantially.”