political and economic threats to california citrus: the bottom line timothy j. richards, ph.d. paul...

Political and Economic Threats to California Citrus:The Bottom Line

Timothy J. Richards, Ph.D.Paul M. Patterson, Ph.D.

Jonathan Field, M.S.

Overview Background and Rationale Method of Analysis Objectives of Study Issues Under Consideration Results of Analysis Implications for Future of CA Citrus Points to Take Home

Value of California CitrusSource:USDA-NASS

0100200300400500600700800900

1000

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Year

Valu

e (

$ m

il)

Number of Farms in CaliforniaSource: U.S. Bureau of Census

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

1955 1970 1985 1992 1995 1998 2001

Year

Farm

Num

bers

Retail-Farm Margins: NavelsSource: Calculations from USDA data

00.050.1

0.150.2

0.250.3

0.350.4

0.45

1991 1993 1995 1997 1999

Year

Farm

% o

f R

etai

l

Background California agriculture: $27.0 billion

industry in 2000 Threats:

Population Growth Scarce Resources Waning Political Influence Foreign Competition Over Regulation…

…more? Others…

Changing Consumer Tastes Big Business Attitudes Towards GMOs Corporate Scandals Pests and Diseases Health Care Costs / Workers

Compensation Over Regulation

The Big Question… Consumers, Voters and their

Representatives need to consider what would happen if…?There was no citrus industry in

California…

Role of Legislators Most issues involve some form of

legislative or regulatory action that can: Raise costs Increase competition Deny access to resources, or

.…can also be beneficial Increase demand Improve consumer awareness

Role of Public Policy Market Failures

Public Goods – examples are roads, public defence, education?, health care?

Externalities – examples are pollution, immunization, monopoly?, fraud?

Monopolies – examples are Microsoft? Grocery retailers?

Role of Economic Analysis

Smart decisions need good information Opportunity cost of a decision – “…the

value of the next best alternative foregone…” Example: eliminate heart disease?

Unintended consequences – secondary effects of poor decisions Example: UIC in Newfoundland

Objectives To define issues that have potential

economic impact on CA citrus industry

To provide accurate, objective information regarding the economic impact of public policy issues

To measure impact on: value of output, value-added, employment income, profit, employment, taxes.

Economic Impact Analysis Microeconomic Impact:

Higher costs lead to bankruptcies Bankruptcies lead to lower supply Lower supply means lower value

Macroeconomic Impact: Lower profit, wages, investment Lower retail spending, lower incomes Lower tax revenue

…Impact Analysis Multiplier Effects – the “trickle down”

or ripple effect of removing or adding a dollar to the economy somewhere in the system

Example – another box of oranges adds to worker incomes, which increases retail sales, which increases business profits, which increases employment…

Data Sources Agricultural output: USDA-NASS Input usage: Dept. of Commerce,

Bureau of Census Prices: Bureau of Labor Statistics Costs: U.C. Davis Cooperative

Extension Impacts: Various trade sources

Issues Under Consideration Air quality regulation Raising minimum wage for workers Higher cost of power and water Urban encroachment Increasing health care costs Trade Promotion Authority Greater funding for generic promotion

1. Impact of Citrus Industry What is the economic impact of the

citrus industry on the California economy?

In other words, what if we remove all citrus from California and calculate impact on output, value-added, taxes and employment including all backward and forward linkages?

Economic Impact of Citrus on the California Economy

0

500

1,000

1,500

2,000

$ M

illion

Total CA Citrus

Potential Economic Loss

OutputValue AddedWagesBusiness ProfitTaxes

…California Citrus

0

5,000

10,000

15,000

20,000

25,000

# J

obs

Total CA Citrus

Potential Jobs Lost

…Citrus Industry California economy would lose:

$1.6 billion in output $846.0 million in value added $465.0 million in worker income $101.0 million in business profit $208.0 million in rents, royalties,

other $80.0 million in state and local taxes 24,813 jobs

2. Air Quality Regulation Issue: Air quality regulations limit

agricultural burning, dust creation and diesel engine use

Impact: Equipment operation cost doubles: Costs rise Prices rise Consumers buy less Value of output falls

…Air Quality Regulation

0

20

40

60

80

100

120

$ M

illion

Total CA Citrus

Potential Economic Loss

OutputValue AddedWagesBusiness ProfitTaxes

…Air Quality Regulations

0200400600800

1,0001,2001,4001,6001,8002,000

Jobs

Total CA Citrus

3. Higher Minimum Wage Issue: Range of proposed increase from

$0.15 to $0.75 per hour – assume actual rises $0.45 per hour.

Impact: Labor cost rises 6.7% 3.16%Lower output $50.0 million lost GDP, $25.0 m in citrus $22.0 million lost value added Lost jobs! 750 in California as a whole

4. Urbanization Issue: Urban encroachment results in a net

loss of orange acreage in Southern California counties.

Impact: Our analysis measures direct loss per 1,000 acres of production.

Result: $3.4 million in lost economic activity $1.7 million in lost citrus production $1.0 lower employment income

Unmeasured loss in recreational, environmental habitat

5. Increasing Irrigation Costs Issue: Increasing energy and water

prices causes increased irrigation costs. Impact: Assume growers face 10% rise

in total irrigation costs. Result:

$18.7 million lower State GDP $9.6 million in lost citrus value 300 total jobs lost Unmeasured loss in competitiveness

6. Increasing Workers Comp Issue: Failure of insurance providers led

to AB 749 and 486 – massive increases in workers comp premiums.

Impact: 120% rise in workers’ comp: Costs rise Lose international competitiveness Consumers switch to cheaper substitutes Some growers exit industry.

…Rising Payroll Costs

0

50

100

150

200

250

300

350

$ m

illions

Total CA Citrus

Potential Economic Losses

OutputValue AddedWorker IncomeBusiness ProfitTaxes

…Rising Payroll Costs

0

1,000

2,000

3,000

4,000

5,000

6,000

Jobs

Lost

Total CA Citrus

Jobs Lost

Can Policy Help Citrus? Provide the Conditions for Success

Level the playing field Help increase demand Assure access to resources Keep taxes low

Address Market Failures Stop monopolies Provide public goods

7. Trade Promotion Authority Issue: Presidential authority to

negotiate free trade deals may mean total increase in exports of $315.0 million (Sunkist)

Impact: New exports are incremental sales: Higher demand Higher prices Higher profit throughout channel

…Trade Promotion Authority

0

100

200

300

400

500

600

700

$ m

illions

Total CA Citrus

Potential Economic Gains

OutputValue AddedWorker IncomeBusiness ProfitTaxes

…Trade Promotion Authority

0

2000

4000

6000

8000

10000

Jobs

Total CA Citrus

Job Gains

8. Domestic Demand Program Issue: Public / private consortium

doubles investment in 5-A-Day program. Impact: Doubling spending causes

demand to rise by 0.5%. Result: Higher demand leads to:

$4.3 million in citrus output $8.5 million in State GDP 130 more jobs in California

Summary of Results Estimated potential impact of

“most likely” outcome in each case Top three impacts by value:

TPA – positive impact Workers Comp – negative impact Air Quality – negative impact Minimum Wage – negative impact

Summary of Results TPA (potential gains):

$624.1 m added output - 5,510 citrus jobs

Workers Comp (potential losses): $170.5 m less output – 2,976 citrus jobs

Air Quality (potential losses): $119.4 m less output -- 1,054 citrus jobs

Minimum Wage (potential losses): $49.8 m in less output -- 440 citrus jobs

Caveat on TPA Although TPA has potential for

highest reward, it also has highest risk: Increased import competition Continued unfair trade Phytosanitary problems Bioterrorism? China???

Conclusions Without impact of TPA, other issues

have potential to cost California 8,063 total jobs and 3,672 in the citrus industry – 25% of total employment.

Development of other activities would likely mitigate these economic losses

Other issues may emerge to be more important eg. Biotechnology?