As a resident of Southern California for 25 years of my life, I can certainly tell you a story or two about drought. When I was growing up there, we went some years without any measurable rainfall between spring and fall. Were that not enough, the average temperature where I grew up, in the San Fernando Valley, regularly topped 90 degrees and often hit 100 during summer.
For those who need their vitamin D and love to take a dip in the pool or drive to the beach, it's a great place to live. But for a number of businesses, California's cyclical weather patterns are the stuff of nightmares.
The Grapes of Wrath, version 2.0
Year to date, Los Angeles has received just over 6 inches of rain when normal full-year rainfall totals closer to 15 inches. Practically every other city in California will tell a similar tale.
According to the U.S. Department of Agriculture, 58.4% of California is currently experiencing "exceptional drought," the highest level possible, with an additional 23.5% experiencing "extreme drought" and another 17.9% dealing with "severe drought."
California's bleak outlook for rain and the search for a quick solution to its water problems have drawn comparisons to the 1930s and stirred a panic that we could be on the verge of another Dust Bowl.
As a quick history refresher, the Dust Bowl of the 1930s was an eight-year period of exceptional drought in the Southern Plains of the U.S. that was highlighted by a number of dust storms precipitated by the over-plowing of farmlands in the region. The Dust Bowl drastically reduced crop outputs and displaced of hundreds of thousands of families on a yearly basis.
It's difficult to tell whether a Dust Bowl could happen within the U.S. again, as technology and infrastructure are in place now that simply weren't around in the 1930s. Water can now be routed from one region to another to stave off the effects of drought, for instance. However, that doesn't mean it couldn't happen again -- and if it does, the following three industries could potentially find themselves sucked dry.
Fruit, vegetable, and nut growers
California is often viewed as the land of movie stars and the home of Mickey and Minnie Mouse, but it's also the leading agricultural state within the U.S., and it has been so for about 50 years. While some produce requires very little water to grow, all plants need at least some water to grow. And at the moment they just aren't getting it.
According to Mother Jones, a nonprofit news organization that specializes in investigative reporting, a number of fruit, vegetable, and nut crops could be adversely affected by the drought, which in turn will affect every citizen in the U.S., regardless of where you live. Based on 2012's U.S. crop figures, California was responsible for:
- 99% of all almonds.
- 99% of all walnuts.
- 98% of all pistachios.
- 95% of all broccoli.
- 92% of all strawberries.
- 91% of all grapes.
- 90% of all tomatoes.
- 74% of all lettuce.
In other words, there's a really strong probability that we'll see a shortage of some or all of the above products later this year. And as the rules of supply and demand dictate, it could lead to a drastic rise in prices unless we turn to importing these products from other countries.
For the businesses behind these products, it could mean disaster. Higher prices are normally welcome, but if output is down, then higher prices could simply chase consumers away. Diamond Foods (NASDAQ:DMND), for instance, is a large walnut-grower in California's central valley. Demand certainly hasn't been an issue of late for walnut growers, but a lack of rain could make the ability to meet business and grocer demand impossible, hurting Diamond's profitability.
Craft brewing could be another victim of the drought. I'll take a five-second pause to let you finish your long, drawn-out scream.
With that out of the way, we can get into the nitty-gritty of the beer-making process: hops, barley, malt, and water. That's all it takes! Though the combination of these products has yielded tens of thousands of different beers, water is perhaps the most important component of the beer-making process. In fact, it can take 2 to 5 gallons of water to make a gallon of beer. Therefore, the possibility of having to cut back or ration water could make life difficult for California's more than 460 craft brewers.
As NBC's San Diego affiliate noted in a recent interview with Dan Gordon, co-founder of the Gordon Biersch Brewing Company, subtle changes in the water supply or in the amount of water used to create its beer could have drastic effects on its taste. Lower water supplies tend to have a "hard water" effect, as they're richer in minerals, and if not properly filtered, they can adversely affect the taste of brewers' beer.
Craft brewers would probably see a production drop if they were required to conserve water, which, in turn, could have a similar effect on the farmers who produce those three magic ingredients. Being a beer connoisseur myself, I can't see higher prices being a huge deterrent for the public, but I can see a scenario where reduced production hurts craft brewers' top and bottom lines.
In addition, don't forget that the craft brewing culture relies on individuality and differentiation from larger breweries (e.g., Anheuser-Busch InBev). If California's water consistency changes drastically, it could affect the quality of beer being produced and stymie what has been a rapidly growing craft beer movement.
Crop insurance industry
Tying everything together, the last industry that could be facing strong headwinds from California's record drought is crop insurance.
Crop insurers do exactly what their name implies: They underwrite policies to protect against natural disasters such as hail, drought, floods, freezing, and insects. In return for paying a premium to the insurance company, farmers get financial protection against these disasters. Think of it as a farmer hedging his bets just in case something goes wrong.
As of 2013, there were more than 1.2 million policies in place within the U.S. that covered more than 120 different types of crops across 296 million acres. The overall value of these policies totaled roughly $124 billion. In California as of last year, $1.5 billion in almonds across nearly 666,000 acres was being covered by crop insurance, with another $1.1 billion worth of grapes being protected by policies over 489,000 acres.
The vast majority of cropland is currently protected by insurance -- 86% as of 2011, per Crop Insurance. And this insurance, in turn, is predominantly underwritten by the federal government. In simple terms, what this means is that a substantial loss in crop yield and a spike in crop insurance claims could ultimately leave taxpayers stuck with the bill.
One way the government abates these losses is by allowing private insurers to underwrite crop insurance, though to a lesser degree. There are currently 18 private insurers that help mitigate these costs. Following the huge claims stemming from 2012's Midwest drought and the likely impact of California's extreme drought, it's possible that crop insurers could jack up their premiums, which farmers would probably pass on in the form of higher prices on almost everything.
One easy way to cool off this summer is by picking stocks that regularly hand you income!
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
The Motley Fool has no position in any of the stocks mentioned. 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.