California agriculture is the most diversified in the world with roughly 400 different commercial crops.

However, there are two elements that intrinsically tie together just about every segment of the state’s No. 1 industry. The obvious is water. The other is not so apparent — the dairy industry.

Dairymen use a wide array of commodities to feed and care for their animals. Dairy cows are fed everything from alfalfa to almond hulls, to rice hulls, cottonseed, byproducts from ethanol production, silages of all sorts, cull vegetables and the list goes on. They use grain straw for bedding and have even been known to use harvested cotton stalks for the same thing.

Dairymen try to supply themselves with much of what they consume; however, they are significant buyers of many of the state’s biggest commodities.

The availability and cost of water to irrigate crops and the economic health of the dairy industry have direct impacts across most of California agriculture. Unfortunately, the outlooks for both water and dairy are not too bright right now, according to a leading water attorney and CPA who watches over the finances of dairies across the West.

(For more, see: US not prepared for growing water crisis)

Water attorney Gary Sawyers of Fresno detailed how dramatically California’s water supply can change at the annual Spring Outlook Conference in Visalia, Calif., sponsored by the California Chapter of the American Society of Farm Managers and Rural Appraisers.

Last year was one of the wettest on record. This year has so far been one of the driest. Without adequate storage to capture excess moisture in years like 2011, water deliveries have fallen dramatically this year compared to last.

To date, promised deliveries from state and federal water projects range from 35 percent to 50 percent of contracted water. Recent storms may result in more water. Last year irrigation districts were just about giving away surplus water.

Snowfall and rainfall have been heavier in Northern California this year, but Sawyers says if growers there are willing to sell water to the Central Valley, it could not move through the Delta due to environmental constraints.

“If growers want to buy supplemental water, they will have to buy it south of the Delta.”

The plight of the state’s water supply is not only impacted by the lack of storage and rain/snow, but by environmental lawsuits, like the one which forced the San Joaquin River restoration settlement. Friant water users gave up 200,000 acre feet for river restoration as part of an environmental lawsuit settlement.

Part of that settlement is an agreement to re-circulate river restoration water back to Friant water users. However, Sawyers says so far that has not happened. Recirculated water gets as far as San Luis Reservoir near Los Banos, Calif., where it is sold to other valley water contractors nearer to the reservoir.

The river restoration has become expensive with the bill expected to be now “well north of $1 billion.” However, there was no money allocated to implement the settlement agreement, and Congress has not provided funds.

“The money is just not there,” says Sawyer. “The settlement is struggling and water is (still) being taken from Friant” for river restoration.

Nunes throws down gauntlet

The settlement has been further muddled by a bill authored by Tulare, Calif., U.S. Rep. Devin Nunes that passed the House recently. It would not only throttle back the ambitious river restoration, it would change the onerous Central Valley Project Improvement Act (CVPIA) that took water away from agriculture and gave it to environmental interests in 1992.

The Nunes bill threw down the gauntlet to the Senate to come up with a solution to California’s growing water crisis. All it did was publicly anger California’s two Democratic senators, Diane Feinstein and Barbara Boxer.

(For more, see: Brash SJV congressman shifts California water wars and Nunes moves forward in California water war)

Feinstein harshly criticized the bill, partly because of her dislike of Nunes who has attacked the San Francisco senator publicly. She has even refused to meet with him. However, it was reported that he sent emissaries to meet with her to see if she would discuss a compromise in the Senate. She was reportedly considering it.

Sawyers says, however, that Feinstein has written a letter denying any agreement to talk. “Boxer and Feinstein are in no mood to talk,” says Sawyers.

Water from nearby Kings River and its major dam, Pine Flat, is not governed by the Bureau of Reclamation, but it has its issues. Water rights to the Kings are locally held, and there are efforts to create an underground water bank with surplus water in wet years for use later.

Sawyers called the approach “progressive,” but there remain “tough” water rights issues to work through.

Groundwater has taken center stage in the California water crisis with the recent release of a study citing groundwater nitrate contamination. It is expected to result in more regulatory and legislative activity to mitigate and manage the problem.

Nitrate action coming

Sawyers says “expect a lot of action over this nitrate problem that could be potentially very significant for agriculture.”

The state has also begun monitoring groundwater levels for the first time in the state’s history. “The only reason to monitor is to regulate. Expect a lot of attention (from regulators and politicians) to groundwater levels in the next few years,” Sawyers predicts.

(For more, see: Fertilizer industry working to reduce groundwater pollution)

The new groundwater monitoring came from a water package passed by the California legislature in 2009. In that parcel, there was a mandate to create water management and pricing plans for anyone who supplies more than 10,000 acre feet annually.  This covers most irrigation districts.

These water issues will be on the table for decades to come.

A more immediate concern is the dairy industry and its impact on what has been an economically sound period for agriculture through the past few seasons.

Cycles are part of agriculture, and CPA Paul Anema of Modesto, Calif., says the Western dairy industry is headed into another down year in what has become a series of three-year cycles of economic pinnacles and troughs.

The Western dairy industry experienced its worse year ever in 2009 as milk prices plummeted and costs soared. Dairymen lost an average $682 per cow in 2009. Before that, the worse year was 2006 when the loss was $155 per cow. “We thought 2006 was as bad as it could get,” he says.

The industry has rebounded since then and “2011, comparatively, was a very good year for dairy,” says Anema.

However, milk prices have dropped sharply in recent weeks and “2012 looks to be good average year. If we break even for the first six months, it will be good.”

However, “there is a lot of nervousness” as milk futures prices hover around what are considered breakeven prices.

The tenseness is because if the third down year in the cycle gets too deep, many smaller dairies may not recover as they did after 2009.

Those who survived that collapse used profits from 2010 and 2011 to repay debt. Some still have lingering debt from that bad year. There is little equity in many dairies.

Anema says banks and suppliers are not inclined to carry struggling dairymen this time around, as they did in 2009.

“Feed companies have gotten dairies back to 30 days,” and they are not cutting any slack.

There is an old dairy joke that when things get bad, dairymen buy more cows to increase production and hopefully increase income. This time around, Anema says “a lot of his clients” are asking what will happen if they sell the cows and go into tree nut farming.

“The tree nut industry has done well and will continue to do well,” Anema predicts.