Why All Your Groceries Are Getting More Expensive

If you've been feeling sticker shock at the checkout counter lately, you're not alone. Food prices are, in fact, going up. This week, the Bureau of Labor Statistics reported that food prices had increased by 0.4% from January, the biggest climb since September 2011. This may be just the beginning. Even Chipotle (NYSE: CMG  ) sent half the free world into a panic when the company recently suggested in its 10-K that it might stop selling guacamole if avocado prices kept rising. There is one primary factor behind all of this. I'll give you a hint: Today is World Water Day.

Source: USDA.

Food grows where water flows
Water, or lack of it, is becoming a growing global concern, and it's a primary driver of food-price inflation. Coffee futures are up a staggering 70% this year because of a drought in Brazil, the world's largest coffee producer. Dry conditions in Southeast Asia have driven up the cost of palm oil, which is a major staple food for large swathes of the world's population. Here in the U.S., the biggest price hikes so far have hit meat and dairy products after sustained droughts in Texas and California have given cows a rough go, but we're likely to see many more products follow.

Swan song for the PB&J?
California is the United States' biggest agricultural producer, and right now, 95% of the state is experiencing drought conditions. Some of the hardest hit crops are stone fruits -- I give you the avocado that causes so much consternation in Chipotle's boardroom -- and those that require significant amounts of water, such as peanuts. Peanut butter, that ubiquitous, democratic food we can all afford, may soon be a luxury item.

According to USDA data, U.S. fresh-veggie prices increased by 4.7% in 2013, and they may climb another 3% this year. Fruit got 2% more expensive in 2013, and the USDA figures fruit may cost up to 3.5% more by the end of 2014.

Beyond that, though, it's a bit unsettling to see that corn prices have surged 13.5% this year. Now keep in mind, that's after major corn price drops in 2013 because of a large harvest. Still, corn is an important ingredient in a significant portion of processed food, and cheap corn is the basis for cheap meat in the United States.

The Wall Street Journal notes, "Inflation ... could be tempered if U.S. farmers, as expected, plant large corn ... crops this spring and receive favorable weather during the summer." That favorable weather bit is key, and it's something I'm not sure we can count on at all. The World Economic Forum ranks water crises among the top three risks to human well-being in 2014. Meanwhile, the longer California goes without adequate rain, the more depleted its aquifers will be as the growing season begins. Little seedlings need water to grow, plain and simple.

We are capable of digging our way out of this mess. It would take me a whole book to lay out the political solution, which would involve dousing our current Farm Bill in gasoline and lighting a match. For our purposes here, let's look at three things that we as investors can do.

Source: Daniel Marsula, Pittsburgh Post-Gazette.

1. Invest in clean water
Companies that provide water infrastructure, filtration, and flow control will enjoy strong demand for a very long time to come. Investing in companies across the water cycle -- so, from extraction, to treatment, to distribution, to sanitation -- offers greatest exposure to the theme while helping to diversify across more than one sector.

Xylem (NYSE: XYL  ) is doing great things with water. The company's tag line is, "Let's Solve Water." Xylem has published a white paper on urban water scarcity, and positions itself as a partner with municipal water managers in addressing their challenges in meeting demand for clean water. Beyond providing products and services, Xylem offers thought leadership on the broader water problem, and how best to manage it. Xylem's stock is up almost 30% since I put a CAPS call on it on Oct. 24.

2. Factor in the water-energy nexus
The energy sector is sucking up staggering amounts of the world's fresh water supply, and as we further develop unconventional energy sources, that thirst is never slaked. Problems with water are going to gut-punch the energy sector in a serious way, and in some areas it's already happening. Energy companies that don't have a robust, meaningful water-management plan will suffer, plain and simple. For a treasure trove of information, check out the International Energy Agency's in-depth analysis of the energy sector's water use.

National Grid (NYSE: NGG  ) has undertaken targeted risk assessments in the U.S., including, for example, a yearlong assessment of potential flood risks to all of its Rhode Island electricity substations following damage in 2010 from major river floods. Based on the findings, National Grid plans to invest nearly $23 million over the next five years to rebuild or elevate parts of substations in flood-susceptible areas. The company's gas utility service is conducting similar assessments, and plans to relocate critical assets out of vulnerable floodplains and storm-harden facilities that cannot easily be moved to higher ground.

Open cast coal mine. Source: Geograph/Greg Morss.

3. Vote your proxies
Annual meeting season is almost upon us, and with that comes investors' opportunity to vote on matters that affect how boards of directors run their companies. This year, water is a major topic among shareholder resolutions. Arch Coal, Peabody Energy, and Alpha Natural Resources all face shareholder resolutions seeking detailed company reporting on water use and policy. Management at these companies opposes the resolutions, which is shortsighted. Investors should insist that these companies take better account of their fundamental water risks, and provide that information to shareholders. So vote your proxies, and support these shareholder resolutions.

None of us can solve this problem singlehandedly, but if we all take the steps above, we can help secure a future full of delicious guacamole and delectable peanut butter. And hey, if you want to put them together on a sandwich, no one's going to stop you. Happy World Water Day, everybody.

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