California is now, for the first time in history, under mandatory water restrictions. Governor Jerry Brown is now requiring local water agencies to reduce usage by 25% as the state continues to struggle from the effects of a nasty four-year-long drought.
Yahoo Finance’s Aaron Task notes that while the new rules don’t directly impact big farms in the state, the dearth of H2O that prompted them will affect just about everyone in California agriculture.
“Almonds, avocados-- those are two big crops out of the state of California that use a lot of water,” he says. “Also, anything related to cattle-- beef, cheese. Pork prices, too. Wine prices might go up--there are stories a lot of vintners can’t get the water they need to irrigate the grapes.”
Yahoo Finance Senior Columnist Michael Santoli adds that means all of us will be feeling the effects as well.
“Where it really is going to bite is kick[ing] headline inflation higher,” he explains. “We saw this a couple years ago when it was proteins-- milk, eggs, cheese, meat are the things that went up in price.”
Of course, the Federal Reserve has been saying for months that inflation remains low. But Task points out that when it comes to the official figures the Fed uses to gauge consumer prices, there’s been a disconnect when it comes to food.
“The average American says, ‘What, there’s no inflation? Are you kidding me? I’m paying more at the grocery store,’” he adds. “And they’re going to be paying even more in six months.”
Santoli adds that any problem for California’s economy means a problem in the entire U.S. economy.
“Right now, it doesn’t affect the tech industry, the biotech industry which obviously is driving most of it,” he notes. “But between the drought and the strikes at the ports in Southern California, it just seems like there are these interruptions in the growth rate of California, which-- however you measure it-- is maybe 20% of U.S. GDP. So it’s obviously a big deal.”
The California Department of Agriculture reports agricultural exports from the state in 2013 totaled $21.24 billion. So with that much money at stake, it seems only logical that Wall Street would have a way to play the current situation. It does.
“There’s a water ETF, PHO,” Task points out. “There’s also an agriculture ETF, DBA. There’s not a direct correlation, but if you’re going to bet that prices are going to go up because of this drought, that might be something to look into.”