Can WhiteWave Foods Weather California's Drought?

The prolonged water shortage may cause this high-growth industry to wither.

Mar 29, 2014 at 9:14AM

Unlike much of the rest of the country, which has been inundated with mountains of snow this winter, California is in the midst of a drought that has led to unprecedented restrictions on water use in many areas. From wine to citrus to cannabis, the arid conditions are predicted to have a significant impact on crops that will lead to higher prices at the supermarket (and head shops). The effect on one industry, however, could have global implications.



According to the Almond Board of California, 82% of the global supply of almonds come from California.. The state's almond production has more than doubled from 912 million pounds in 2006 to an estimated 2 billion pounds last year, making it California's second-most important agricultural export after grapes.

Riding this wave of growth has been health and organic food companies such as WhiteWave Foods (NYSE:WWAV)Hain Celestial (NASDAQ:HAIN), and privately held Blue Diamond Growers, which are capitalizing in particular on the popularity of plant-based alternatives to food and beverages, particularly almond milk, which is one of the most common uses for the nut today. It's quickly become one of the fastest growing milk substitutes on the market, challenging even soy for supremacy in no small part because it's a GMO-free alternative (some 94% of all soy on the market today is genetically modified).

Indeed, WhiteWave Foods has topped analyst earnings expectations the past two quarters because of the growth experienced by its Silk almond milk brand, which now commands a 60% share of the plant-based food and beverage market. Overall, WhiteWave's refrigerated almond milk segment accounts for 55% of its plant-based dollar sales, enjoying a 53% compounded annual growth rate between 2011 to 2013. Hain is also finding almonds to be a lucrative niche, saying it will buy as much of this year's crop as anyone except those companies that sell packaged nuts, and that almonds are its biggest crop and the biggest commodity it buys. As regular milk consumption and sales decline, plant-based alternatives including almond, soy, rice, and coconut rise.

About Almond Header

Source: WhiteWave Foods.

Similarly, Blue Diamond, the world's largest almond marketer and processor (and not to be confused with nut grower Diamond Foods), saw sales jump 19% in 2013 as sales of its Almond Breeze almond milk surged 74% and snack almond sales rose 22% globally.

The key to the market's continued expansion, though, will be pricing. The nut was already under pressure from rising costs, and the drought has only exacerbated the situation. In its second-quarter earnings conference call last month, Hain admitted its quarterly pricing for almonds was significantly higher than last year and was going to keep going up throughout 2014., but the real impact may not be felt until 2015.

The bigger worry is the almond trees that California farmers may have to let die due to the water restrictions. Having swapped out annual crops such as lettuce and tomatoes for the higher profitability almonds offered, farmers, whose almond orchards are located in areas experiencing what meteorologists are calling "extreme drought,", now find themselves unable to simply let a field lie fallow until the crisis passes. In an already price-sensitive market, producers may find the coming price hikes severely limiting demand.

Still the long-term outlook remains strong and with an El Nino weather phenomenon forecast for 2014 that could bring relief to drought-stricken California, so I don't plan on selling anytime soon the shares of WhiteWave Foods I received when Dean Foods spun off the organic dairy producer. There may be weakness ahead because next year's crop is affected by current conditions, but I think you'd be nuts if you're able to pick up shares of this industry leader cheaply and you let the opportunity pass by. 

Your turn to be an analyst
Almond milk is enjoying an incredible surge in popularity, but does that still translate into a buy recommendation for WhiteWave Foods? Don't worry if you're not sure how to answer. In our brand-new special report, "Your Essential Guide to Start Investing Today," The Motley Fool's personal finance experts show you why investing is so important and what you need to do to get started. Click here to get your copy today -- it's absolutely free.

Rich Duprey owns shares of Dean Foods Company and WhiteWave Foods. The Motley Fool recommends Hain Celestial and WhiteWave Foods. The Motley Fool owns shares of Hain Celestial and WhiteWave Foods. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.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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