Your Grocery Bill Is Probably on the Rise Because of California

As California continues to wither under a record-breaking drought, your grocery bill may just keep on climbing.

Feb 15, 2014 at 1:45PM

Mother Nature is doing some awfully strange things lately, especially in California. The situation is so severe that President Obama visited the state on Friday, promising relief in the form of federal aid. Under normal circumstances, California's $44.7 billion agricultural industry yields nearly half of all the fruits, nuts, and vegetables grown in America, earning it the nickname, "supermarket of the world." But plants don't grow without water, and California is parched right now.

California

Source: National Oceanic and Atmospheric Administration

As far back as records go -- 1895, in this case -- California has never been this dry. According to an analysis of tree rings, the state hasn't seen this little moisture in 500 years. Large segments of the state are living under severe water rationing, and some rural communities are literally in danger of running out of water within two months.

Pain at the Piggly Wiggly
The drought's impact is already creating a ton of pain, and it may just be beginning. There is a strong and growing likelihood that food prices will rise, and we may even see shortages of some crops. Already, the prices of broccoli, cauliflower, celery, and artichokes have increased by 10%, as California grows 80% of the United States' supply of these crops. While this news may bring joy to children and a certain ex-president, it could be a harbinger of grim times to come.

The dynamics of the farm cycle mean that the effects will extend well into the future. Right now is when California normally gets rain to top up aquifers and reservoirs. Right now is also when farmers are deciding what annual crops to plant for the coming growing season, a decision that is fundamentally driven by water availability. Some farmers are already in a position where it makes more financial sense for them to sell their water than to plant their fields.

In recent years, many Californian farmers have planted their fields with vine and tree crops, which require water throughout the year. As the drought's severity continues to grow, these farmers are finding themselves forced to rip out some of these crops because they can't keep them alive.

The immediate impact is on low-wage agricultural workers, who are getting less work then they already barely scrape by. A big part of the aid package Obama has proposed will be support for California's soup kitchens, a sad indicator indeed.

Implications -- near term
It looks more and more likely that food prices will rise. U.S. retail prices for beef, bacon, lettuce, and broccoli saw double-digit growth last year, and tomatoes are the most expensive they've been since May 2011. Without a serious dumping of rain in the very near future -- something experts consider extremely unlikely -- ongoing price increases seem highly probable.

While food retailers are going to take a hit, some companies stand to do well in this situation. Where Californian farming used to use extremely inefficient irrigation practices -- simply flooding fields was standard practice -- water scarcity has led many to adopt much more efficient drip-irrigation techniques. In the current water crisis, farmers are willing to pay high prices for high-tech water monitoring equipment that they never would have considered worth the cost before.

Lindsay (NYSE:LNN) makes all the right products to catch the upside of this sad situation. While it's impossible to attribute stock price movement to any single factor, it's still notable that Lindsay's shares are up more than 15% in the past three months.

As Lindsay enthusiastically says on its website, with its offering of "pumping systems to soil moisture sensors, advanced controls to GPS positioning, there's a product for every grower and every field." At this week's World Ag Expo, Lindsay's Fieldnet system was one of the top 10 new products. The Fieldnet system lets growers check soil moisture and operate irrigation systems from their phones or tablets to get the most use possible out of the water they do have.

Syngenta (NYSE:SYT) also stands to benefit. A study released this week from the International Food Policy Research Institute found that technology is key to feeding our growing population in the new reality of climate change. One key technology is no-till farming, a method that Syngenta supports through its product offerings.

Last summer, Syngenta and Lindsay announced a collaboration to provide corn farmers with access to products, technology, and expertise to allow them to use water efficiently in irrigated programs.

Implications -- long term
Sooner or later this drought will end, but the issues it raises are much broader. As a nation, we need to give serious thought to agricultural policies that in many ways work against a sustainable food supply. California's absolutely crazy water laws will need almost total reform. And whether we call it climate change or extreme weather, we need to acknowledge and deal with the fact that these events are increasing in frequency and severity. Otherwise, we may be headed for truly hungry times.

Another changing industry
Agriculture isn't the only sector undergoing massive change. Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, The Motley Fool is offering a comprehensive look at three energy companies set to soar during this transformation in the energy industry. To find out which three companies are spreading their wings, check out the special free report, "3 Stocks for the American Energy Bonanza." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 

Sara Murphy has no position in any stocks mentioned. The Motley Fool owns shares of Lindsay. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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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