When we hear about the weather impacting our economy, many might think of biting cold and winter snow as the factors that stunt retail growth and slow job creation. But here in Southern California, the state’s historic drought is having wide-ranging implications for a variety of sectors, from agriculture to infrastructure to tourism. If it continues, I believe investors must begin to treat the drought not as a passing fad but as a major market factor with broad and lasting effects.
The most immediate impacts are being felt in water markets themselves, and in sectors that rely heavily on water such as agriculture and farming – normally one of California’s economic strengths. As investors continue to treat water more like a commodity than an abundant natural resource, the value of exchange-traded funds that specialize in water are likely to remain high, with few untapped water resources across the state and reservoirs already at dangerously low levels. And the drought might present opportunities to invest in new water technologies, as water districts turn with greater urgency to recycled-water plants that use complex processes to reuse wastewater, and even desalination, previously thought to be too costly for most districts. Companies specializing in the production of the complex chemicals and filters used at these plants could see a boon.
One other key development to watch will be California’s long-discussed water bond, an $11 billion measure on the November ballot to overhaul the state’s massive but aging water infrastructure. Originally thought likely to be postponed to 2016 or beyond, the drought is fueling urgency to pass the current bond proposal or something similar this year. If dry conditions create consensus among lawmakers and voters to support the measure, look for investment opportunities in public infrastructure and companies specializing in water storage, contamination cleanup and large-scale water delivery. The firms that will engineer these water delivery systems and manufacture the large pipes and pumps needed for the effort might experience increased demand.
Mixed bag
When it comes to food production, the drought is a mixed bag. California accounts for almost half of the fruits and vegetables grown in the United States. That production relies on huge amounts of water, with farming responsible for 75 percent of the state’s water use. But with water supplies low, hundreds of thousands of acres are going unused across the state, resulting in lower production and prices that are as much as 20 percent to 30 percent higher than normal for some crops – figures that could rise even further if the drought continues into the summer. In my opinion, though investments in food products could prove to be a viable option, the agriculture sector might be in for a rough spell; the California Farm Water Coalition estimates that the industry could lose as much as $2 billion this year.
There are other, less clear impacts that the drought might have on an array of industries, a rippling effect on parts of the economy usually immune to the temperature spikes of Southern California summers. For example, a recent UCLA report suggests that a prolonged, multiyear dry spell could prove problematic for manufacturing.
Regardless of how this year’s drought ends up ultimately affecting the economy, I believe weather and climate will continue to be crucial factors for investors. A string of new research, most notably the recently released National Climate Assessment, is declaring that climate change is having consequences in every part of the country, resulting in more extreme temperatures and severe weather events. And last month, Gov. Jerry Brown declared that California is at the “epicenter” of climate change. While there are still many questions surrounding climate change, I think the drought will have an impact on key investing decisions as we enter the year’s hottest months.
Larry Palmer is a financial adviser with the private wealth management division of Morgan Stanley in Los Angeles.
