Worsening Drought Means Higher Food Prices

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Worsening Drought Means Higher Food Prices

By Tim Maverick, Commodities Correspondent

Earlier this month, California Governor Jerry Brown issued a call for a mandatory 25% cut in urban water use compared to 2013 levels. It was a first in state history.

That call prompted the State Water Resources Control Board to set tentative targets for more than 400 California water agencies to reduce their water use by anywhere from 10% to 35%.

Already, one of the state’s largest water wholesalers, the Metropolitan Water District of Southern California, says it would cut water deliveries to places like Los Angeles by 15% starting in July.

All of these actions have been spurred by the unrelenting state-wide drought that’s entering its fourth year.

No Relief in Site

According to the U.S. Drought Monitor, 40% of the state is now in the “exceptional drought” category. That’s up from 23% just a year ago.

This isn’t good news for California citizens, or the state’s vast agriculture industry . . .

So far, the state of California hasn’t imposed any restrictions on agriculture water use. The $45-billion industry accounts for about 80% of water usage in the state.

Governor Brown likely didn’t want to deprive farmers even more, since they’re already facing large cuts in their access to federal and state water project deliveries.

That’s good news for those of us who rely on the more than 400 crops that California produces. California has been our country’s leading agricultural state since 1948 and supplies 15% of our food supply.

But, the lack of water restrictions doesn’t mean we haven’t already felt the effect of the drought at the supermarket. For example, romaine lettuce has jumped about $0.60 per pound over the last year to $2.19 per pound.

There are about 20 fruits and vegetables that California is responsible for providing more than 70% of to the rest of the country.

In addition to romaine lettuce, this list includes celery, cauliflower, broccoli, tomatoes, grapes, plums, prunes, strawberries, apricots, lemons, walnuts, almonds, pistachios, and avocados.

As the drought goes on, prices will rise even more as future crops are affected.

Take almonds, for example. The price will rise a lot more this year because many farmers cut off bunches from almond trees last year due to lack of water. And thanks to the drought, they’re doing so again this year. That means there will be less almonds, which, of course, will raise prices.

Things are looking bleak, for sure. But is there an investment angle to the California drought?

Collecting Some Investments

There certainly is, by investing in companies that own increasingly valuable water rights in the state.

One such company is Limoneira (LMNR). This California-based company is one of the largest growers of lemons and avocados in the United States. But, more importantly, it controls some of the most important undeveloped water rights in Ventura County.

A second California company is Cadiz (CDZI). This firm owns land and water rights in the Cadiz and Fenner valleys of eastern San Bernardino County. It also grows lemons, grapes (and raisins), and vegetables.

As the worst drought in California in modern times rages on, these stocks are likely to do well.

And the chase continues,

Tim Maverick

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By Tim Maverick