These Key Ingredients May Stunt Your Stocks' Growth

The scarcity of corn is an increasing risk for companies -- including many that may be in your portfolio.

Jun 18, 2014 at 9:36AM

Ample resources are essential to economic prosperity. Investors are just one set of stakeholders who should be aware -- and even pushing to be ahead of the curve -- when it comes to resource preservation.

We're just beginning to see the ill effects of climate change and unsustainable practices. And in this arena, agriculture has the spotlight, as food production is especially vital.

Corn alone represents a massive part of our economy. It's an ingredient in many foods, as well as ethanol. However, that's just the tip of the stalk. Last year, corn represented 38% of animal feed. In fact, it is used in a dizzying array of industries and has a huge influence on the American job market.

The corn industry alone represents $65 billion in revenue, and America's corn yield has nearly doubled in the past 20 years. However, this massive industry's strain on resources like water is connected to climate change, unsustainable irrigation practices, and fertilizer use.

Let's talk about ripple effects and their importance to Americans and investors.

California dreamin' (of solutions)
Ceres, an organization that mobilizes many stakeholders, including investors, in fostering sustainable practices, recently released the report "Water and Climate Risks Facing U.S. Corn Production: How Companies and Investors Can Cultivate Sustainability."

The report provides a detailed rundown of the serious risks at hand, but let's use California as an example. Its drought, and the capacity for adverse effects to its economy and the rest of the country, are striking.

Water scarcity bodes ill for many parts of our economy, and corn particularly requires a lot of water. Ceres breaks it down in a way that's both easy to grasp and disturbing: More than 7 million Olympic pools' worth of water is used in corn production alone every year. And most of our corn (87%) is grown in water-stressed regions, so in states like California, other areas' H2O has to be imported so that crops don't wither and die.

California's protracted drought is a dangerous situation in many ways, representing intense scarcity and massive demand. California uses a lot of corn silage as feed for its 1.8 million dairy cows -- the state is America's largest dairy-producer. California also produces a third of America's fruits and vegetables.

The Midwest drought has fortunately abated, but California's continues without relief, bringing to mind words like "crippling" and "crisis." California's entire agriculture industry represents $44.7 billion, and it could lose $2.8 million in job income and $11 billion in yearly state revenue.

In addition, droughts like California's have resulted in the smallest cattle herd since 1952. It's so serious that California has been sending its cattle to Texas. The California Department of Food and Agriculture has an entire website devoted to drought information and assistance for farmers, ranchers, and farm workers.

Threats to the bluest blue chips
If you check out Ceres' report in detail, it includes a wealth of data about water, corn, and sustainability. Investors might want to check out a detailed infographic that outlines the corn value chain, illustrating 16 industries that rely on the commodity in some way. These companies represent some of the most common stocks in American investors' portfolios. The idea that growth could dry up is a serious concern.

Here are just a few examples of companies on the input side:

  • Monsanto (NYSE:MON) (seeds)
  • Deere & Co. (NYSE:DE) (agricultural equipment)
  • Wells Fargo (NYSE:WFC) (lenders for farm-related credit)

At the opposite extreme of the value chain spectrum, we have some high-visibility household names:

The top 45 companies in the corn value chain represented $1.7 trillion in revenue last year.

Meanwhile, there are externalized costs to the entire public due to weather-related agricultural impacts. The Federal Crop Insurance Program paid out a record $10.8 billion in 2012 to support the struggling farming industry.

Finding ideas in change
Most people are realizing that climate change will only make things worse. Many companies are, too. They can invest in being part of the solution, and in some cases, that will also result in financial opportunity and mitigation of risk. Many investors shun Monsanto due to its work in genetic modification, but the company is at the forefront of this area.

Take Monsanto's acquisition of The Climate Corporation, which monitors weather conditions. Monsanto will use the data to customize its agricultural products. It looks like Monsanto isn't in denial about extreme weather or maybe even climate change.

I recently learned about Lindsay Corp. (NYSE:LNN), which provides irrigation products that use more sustainable techniques than other methods. Howard Buffett, Warren Buffett's son, is on the company's board of directors.

Although recent quarterly earnings have suffered for a variety of reasons, a stock like Lindsay seems like a long-term opportunity as the entire agricultural industry invests in sustainable solutions to protect and preserve their businesses over the time. The company devises and sells self-propelled center-pivot and lateral-move irrigation systems, which are primarily used for agriculture purposes to increase or stabilize crop production while simultaneously saving water, energy, and labor.

Driving forward to protect and prosper
Ceres' report outlines ways for companies to improve their sustainability and reduce the risks associated with our stressed water supplies.

Practices like conservation tillage, nutrient management, and precision agriculture are just a few techniques Ceres recommends. In addition, improved irrigation and reduced water usage by corporations are a huge part of the equation. And of course, innovative new products that improve the outlook for an industry besieged by extreme weather will boost growth for all investors.

Whether we're enjoying corn on the cob or brushing our teeth, we rarely think of how important the required resources are. We will most certainly notice when it's too late. But shareholders can and should push their companies to address these needs, boosting the economy and returns for all.

Check back at Fool.com for more of Alyce Lomax's columns on environmental, social, and governance issues.

Alyce Lomax has no position in any stocks mentioned. The Motley Fool recommends McDonald's and Wells Fargo. The Motley Fool owns shares of Lindsay and Wells Fargo and has the following options: short June 2014 $48 puts on Wells Fargo. 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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