As Investment Director, Karim Rahemtulla, showed recently, California is enduring one of its worst-ever droughts.
Last year was one of the driest on record and was the third consecutive year that the state was parched, with significantly lower-than-average rainfall.
As of early February, the state’s reservoirs were at just 60% of their average capacity. And the mountain snow-pack, which supplies most of the state’s water, was 12% below normal for this time of the year.
The situation is very serious and the ramifications are particularly grim for the state’s agricultural sector – and, in turn, American consumers…
The Numbers Don’t Lie: California’s Critical Role in Our Survival
Since 1948, California has held the top spot as America’s leading agriculture producer. The state contributes 15% of the nation’s food supply and is a mammoth $45-billion industry.
By the numbers…
- California’s dairy business is the biggest within California’s agriculture sector. In 2012, revenue totaled nearly $7 billion and provided 20% of U.S. milk output. But the drought has led to a 20% rise in Class III milk futures this year. And in January, the price for the most active contract hit its highest level since January 1996.
- California produces 90% of America’s tomato supply, 95% of broccoli, 74% of lettuce, 91% of grapes and 92% of strawberries. But the impact of the drought is already being felt in the produce aisle. Following a double-digit rise in lettuce and broccoli prices in 2013, prices are at their highest level since 2011.
- Based on 2012 figures from the U.S. Department of Agriculture, California produces 99% of America’s walnuts and almonds, plus 98% of pistachios. But with yields forecast to sink by 25% this year, nut prices are expected to rise.
Crucially, California’s agriculture sector sucks up about 80% of California’s water. But current estimates suggest that California’s farmers will leave at least 500,000 acres unplanted, due to lack of water. That amounts to about 12% of the 2013 crop.
And be warned… this will mean higher prices in the supermarket.
However, you don’t just have to passively accept getting squeezed at the till. You can offset steeper grocery bills by playing companies that could fare well from California’s drought…
Two Investments to Weather the California Drought
There are a couple stocks worth looking at here…
Karim mentioned the first candidate in his article on Pico Holdings (PICO). It acquires and develops water resources and water storage facilities in the Southwestern United States. It’s also involved in agribusiness and real estate.
The second is California-based Limoneira (LMNR). It’s one of the largest growers of lemons and avocados in the United States. Now, that may not sound exciting at first, but the company is also a water company in disguise. It controls some of the most important undeveloped water rights in Ventura County. Talk about savvy diversification.
With no end in sight to California’s drought, these two companies are working to help alleviate the pain for consumers – and provide some upside for investors.
And “the chase” continues,