If You Love Avocados, You Will Want to Read This

Water is a vital resource that's a lot harder to find than you may think, and shortages are hitting key U.S. farming regions right now.

Feb 9, 2014 at 12:33PM

Iran is painfully short of water. Rationing and buying water from nearby countries are options on the table. But that's Iran, it's in a desert and isn't as high up on the economic scale as the United States. Nothing like that could happen here, right? While the U.S. water infrastructure is impressive, California is facing a severe drought right now and it could impact you sooner than you think.

Ripe avocados
Avocados are an increasingly in-demand product in the United States. One of the largest suppliers is Calavo Growers (NASDAQ:CVGW), which sources avocados from California, Mexico, and Chile. Avocados make up about 60% of the company's sales.

It's a big player in California. In fiscal 2013, the company estimates it handled 30% of all of the avocados grown in the state. And, in addition to selling whole avocados, Calavo also processes them into other products from pulp to guacamole, so its reliance on avocados is heavier than the 60% figure above suggests.

Like all farm related business, however, Calavo is subject to the vagaries of weather, and right now that means a drought in California. The drought is so bad that the California Department of Water Resources is cutting off water supplies to farms. That's bad news for Calavo which could see its supply of California avocados dry up, as well.

While it's easy to look at water problems in foreign countries like Iran and say "that will never happen here," it is happening right now. And it isn't just farmers that are going to feel the heat.

Less water means lower sales
California Water Service (NYSE:CWT) is a prime example. This water utility serves around 470,000 customers in more than 80 California communities. Despite the current drought, the company expects to have enough water to supply its customers.

While California Water doesn't expect to impose mandatory water use restrictions, it is encouraging customers to "continue using water efficiently." In other words, the company is asking customers to use less of what it's selling. That's not good for the top or bottom lines.

Clearly, you can't take water for granted even in a highly developed country with abundant water resources. In fact, California Water has been asking customers to conserve for years, spending $32 million to help its customers use less water—the very product the company is selling. According to California Water, "water use has declined an average of 15% throughout the company's service territories since 2007." Obviously, water supply is a constant issue for California Water.

An opportunity
The drought in California, however, makes one water player look even more interesting. Consolidated Water (NASDAQ:CWCO) uses reverse osmosis desalination plants to turn seawater, which makes up 97% of the world's water, into drinkable water. The company is small ($180 million market cap), but the troubles in Iran and on the West Coast show that there's a market for what it's doing.

Consolidated's big business is operating 13 water desalination facilities in the Caribbean. That said, it has two projects that could provide material growth, one in Asia and the other in Mexico. These are totally new markets for the company, but the Mexico venture is particularly interesting in light of California's drought conditions.

This project is located in Rosarito, Mexico, and could provide water to Tijuana and San Diego. Once completed, Consolidated's Rosarito desalination plant could quickly become a key partner to California water utilities when it comes to ensuring an adequate water supply.

The United States is blessed with natural resources like clean water, but that doesn't mean we can take them for granted. Clean water is a relatively small percentage of the world's total water supply (3%!). The drought in California shows just how material an issue this can be domestically and why you should consider investing in the water space. If you're interested in making money off of water, keep an eye on Consolidated Water's new projects. They could turn this small fry into a big player.  

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Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends California Water Service Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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