AgLifeNW Magazine, April 2004 issue, Klamath Basin Update.

Economic Update from Dick Carleton, 3rd generation Merrill farmer

written 1/27/04.

When irrigation water was restored to the Klamath Project irrigators in 2002, most people not directly affected by the curtailment of water in 2001 assumed everything was back to normal. However, for those of us directly affected by the water shutoff, that is not at all the case. For us, life since then has been, and continues to be, a roller coaster ride both emotionally and financially.

My family first started farming in the Klamath Project in 1909. My grandfather started with 80 acres, which was passed on to my father and where I was raised. My brother and I continued farming that land, and other land as the operation grew. Since then, my brother has moved on to other pursuits in life and I formed a partnership with my son and my nephew. We then expanded and currently farm about 1500 acres, of which the original 80 is included.

The past two years, even with full water deliveries, has been very stressful emotionally. For example, in the spring of 2003, we were led to believe that we would have a full water delivery for the crop year and would be able to finish our crops. Therefore we moved ahead and invested the time and money and planted our crops as normal. Then in late June, we were told by BOR, with only a few days notice, that delivery of water would be cut for 5 days to meet ESA requirements under the current biological opinion. Five days does not seem like much but with the way our system operates that would have been extended to 10 days to 2 weeks, by the time the canals would have been re-charged. To us that was a crushing blow. That is a crucial time of year for our crops and they could not stand to go without water for that period of time. All our time and investment would have been lost and it would have destroyed us after having faced such a tremendous loss in 2001.

Financially, we, and there are others in the basin like us, are still feeling the effects of the 2001 curtailment. The first big impact in 2002 was the income tax consequence we felt because the established income-expense cash flow was interrupted. We realized most of the income from the 2000 crop in the 2001 tax year. Since we had no water in 2001 and did not plant crops as normal in 2001 we did not have the normal expenditures for fertilizer, seed, fuel, labor, etc. to offset that income. Also we spent only what was necessary to recover what crops we could. Therefore we were left with a $120,000 tax bill, collectively, between state and federal taxes, and no income from 2001 crops to pay it. ( Our normal income tax bill would be between $20,000 and $30,000, collectively)

The other big financial impact has been the loss of credit and the inability to establish an operating line of credit. Our credit rating with Western Bank dropped from a 6 to an 8 in 2001 and we were told by them in August of 2001 that they would not refinance us in 2002. Therefore we felt our only option was to file a Chapter 11 bankruptcy. Mainly because of that action, and the uncertainty of future water deliveries, banks have been unwilling to establish a line of credit for us. In one case, we were told by a loan officer from outside our area that that particular bank would approve no loans in the Klamath Basin. Locally we were told that primarily because of the reasons mentioned above it would be useless for us to even submit a loan application. Since income from our crops is realized throughout the year, it has been impossible to keep bills paid in a timely manner. Those suppliers where we have large bills such as seed, fertilizer, and fuel have been patient and have carried those bills until such time as we can acquire the capitol to pay them. That allows us to keep bills for the necessities such as health insurance, labor, family living, electricity, heating, etc. paid.

In January of 2003, the status of water deliveries for the 2003 crop year was uncertain at best. We felt that if we were to keep on farming and have a viable operation we had to have assurance of a dependable water supply. With that in mind we chose to drill a well even though we did not have the money. Our suppliers also felt the same way and agreed to let us delay paying them. So, we spent in excess of $100,000 to drill a well. (When I mentioned before that the threatened cutoff of water in June was devastating to us, our well was 2 weeks from being usable) Obviously, we are happy to have an assured water supply, but that money could also could have been used to help pay for fertilizer, fuel etc. That expenditure has carried over into this year in that had we used it to invest in the 2003 crop, our debt this year would be that much less.

These are probably the most noticeable effects of the loss of water in 2001. However, there are other impacts we still feel. Alfalfa crops that went without water in 2001 suffered and a loss of stand occurred. Therefore those fields must be rotated sooner than normal and thus we incur expenses, which would ordinarily be delayed. Expenses associated with weed control are greater than normal since many fields were left un-farmed in 2001. Machinery needed extra repairs in 2002 because of lack of use in 2001 and also because repairs that were not absolutely necessary were not made. In some cases, crops that were planted in the fall of 2000 did not survive 2001. Those crops had to be re-seeded, which meant that ground had to be re-worked as well as re-seeded. Also weed control required more expense as those fields simply went to weeds in 2001. We also could not make payments on long term loans in 2002 or 2003. The lending institutions involved allowed this and did not forclose. However, interest on these notes continued to accrue so instead of decreasing, the amount of the loan actually increased, leaving us with a greater debt load. Family savings were used for living expenses and in some cases these savings were depleted. While these may not seem to have much impact individually, collectively they become greater and require money that would not ordinarily be required and could be invested in the current years’ crop.

These impacts I have listed are just a few we have felt in the Klamath Basin the last 3 years will continue to be with us until life in the Basin, if ever, returns to normal. Probably the most difficult thing we have to face is the uncertainty of the future. Now, in January, we are finalizing plans for the 2004 crop year but we still don’t know if we will have water, or, if so, how much. This uncertainty makes planning for the future, at best, difficult.

Thank you,

Dick Carleton