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January 28, 2022 MPC Friday Report

Updated: Feb 1, 2022


Keep an Eye on the Colorado River

By Geoff Vanden Heuvel, Director of Regulatory and Economic Affairs

While a lot of focus has been on the drought and its impact on water supplies in the Central Valley, there is another major water source that supports the California dairy industry that deserves some attention. Water from the Colorado River irrigates huge acreages of alfalfa hay in the desert Southwest. The Colorado River watershed has been significantly impacted by a long-term dry period. The two major reservoirs along the Colorado River are Lake Powell and Lake Mead. They have a storage capacity of 24.3 million acre-feet and 25.9 acre-feet, respectively. What that means is when those two reservoirs are full, they contain about 50 million acre-feet of water. The last time they were full was 1999.

By contrast, Lake Shasta, the major source for the Central Valley Project (CVP), has a capacity of 4.5 million acre-feet and is the largest lake

located completely in the State of California. Lake Oroville, the major source for the State Water Project (SWP), has a capacity of about 3.5 million acre-feet. When you compare the two systems you notice that the Colorado River system, which is designed to deliver about 15 million acre-feet per year, has a storage capacity that is about three times its annual delivery requirement. The CVP and SWP together are designed to normally deliver a little over 11 million acre-feet per year and they have a combined storage capacity that is less than a year worth of deliveries. This partially explains why deliveries on the CVP and SWP are severely curtailed in dry years. And it also explains why building more water storage in California is such a priority.

Back to the Colorado River, you can see from these comparisons that the Colorado system has a huge reserve. However, over the 20 years since they were last full, the storage in Lake Mead and Lake Powell has declined to a point where various shortage rules are beginning to kick in. Right now, Lake Mead is less than 35% full and Lake Powell is 26% full.

The Colorado River has a water rights priority system that was established almost a century ago. The States of Nevada, California and Arizona make up the Lower Basin states and are entitled to 7.5 million acre-feet per year. Mexico is entitled to 1.5 million acre-feet per year. The other states with rights to the Colorado River are Utah, Colorado, New Mexico and Wyoming. The 7.5 million allocated to the Lower Basin States is further allocated, with Nevada entitled to 300,000 acre-feet per year, California at 4.4 million acre-feet per year and Arizona entitled to 2.8 million acre-feet per year.

The California allocation is further divided according to a priority system, with districts lined up in this order: The Palo Verde Irrigation District (PVID), the Yuma Project (California portion), the Imperial Irrigation District (IID), the Coachella Valley Water District, and the Metropolitan Water District of Southern California (MWD). The way the priority system works is each entity in line gets to take the water they are entitled to and then the next in line gets their water until all of the 4.4 million acre-feet of California’s allocation is used up. With MWD last in line, it has been very active over the past 30 years in negotiating with the agriculture entities ahead of it to get those entities to use less water.

MWD built the Colorado River Aqueduct to transport their allocation from the river to Southern California. The Aqueduct can carry about 1.3 million acre-feet per year, but MWD only has rights to about 550,000 acre-feet in the fifth priority. You can understand why it is important for MWD to get the agricultural districts ahead of them to use less water, which would leave more water within California’s 4.4 million acre-feet allocation for MWD. Some of the programs MWD has implemented to accomplish this goal are a Palo Verde Land Fallowing program, which pays farmers to fallow land. In addition, MWD has purchased almost 25% of the land in PVID outright. They continue to lease it to famers for agriculture production, but there is no assurance that will continue indefinitely. MWD and San Diego also have executed a substantial water transfer agreement with IID, which moves 200,000 acre-feet of IID water to urban use and quantifies and caps the amount of water IID can use.

All this was going on before the shortages in Lake Mead and Lake Powell became an issue. That shortage now impacts Arizona. The reason Arizona gets cut first is that when Congress passed the Colorado River Basin Act of 1968, which authorized the construction of the Central Arizona Project (CAP), the aqueduct that brings Colorado River supplies to Phoenix and Tucson, the law made Arizona’s CAP water supply subordinate to California’s 4.4 million acre-feet annual share of the Colorado River. As you can imagine, Arizona was not happy with this law, but had to swallow it to get the CAP built. Water interests on the Colorado, particularly MWD and Arizona, have been working very hard to prevent hitting a shortage determination in Lake Mead because of its impact on Arizona and the fact that MWD is fifth priority for the California portion as well. What was recently announced was the 500+ Plan, which aims to cut water demand from the Lower Basin States by 500,000 acre-feet per year for the next two years.

Why does this matter to the California dairy industry? When you read of agriculture land fallowing in the Colorado River watershed that means less hay. Dairy is not the only industry that needs hay. There are 700,000 horses in California as well that all eat hay. In fact, there are probably more horses than beef cows in California. Less water means less hay and scarcity. While we contemplate what less water means for dairy in the Central Valley, it is important to keep an eye on the Colorado River dependent areas as well. Historically we have been able to supplement forage supplies from the Southwest region to make up for lost hay acres in the Central Valley. That assumption can no longer be taken for granted.


Milk, Dairy and Grain Market Commentary

By Monica Ganley, Quarterra

Milk production continues to trail prior year levels according to USDA’s Milk Production report, released on Monday. December output totaled 18.825 billion pounds, a decrease of 0.1% compared to the same month last year. A declining national herd continues to drive the contraction in milk supplies with cow numbers falling by 7,000 head between November and December. U.S. cow numbers have been shrinking since May. Totaling 9.375 million head for the month, December marked the smallest herd since August 2020. The evolution in milk supplies has been uneven across the country with major dairy states such as California, Wisconsin, Idaho, and Texas seeing volumes grow year over year in December, while supply restrictions in other states, such as New Mexico, have stymied output.

The decline in U.S. milk production mirrors the contraction seen in other global dairy supply regions. European production is trailing prior year levels with some of the greatest losses seen in major dairy nations like Germany and France. In the Southern Hemisphere, the New Zealand milk production season continues to disappoint with December output down 5% compared to prior year. Argentina is still posting strong production figures, but the volumes are modest and logistical challenges are preventing the resulting dairy products from making a dent in global demand. As such, global milk supplies are lacking and are generally expected to support prices at higher than historical levels over the coming months.

Read the entire MPC Friday Report below

2022-01-28 MPC Newsletter
Download PDF • 903KB


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