This winter, for most of the country, has been unseasonably warm.  In California, it has not only been warm, but it has been very dry through the latter part of fall and so far this winter.  For residents of the state, this lack of precipitation spells trouble on the horizon.  The lack of a heavy winter snows in the mountain ranges of California will lead to drought conditions this summer as farmers and non-farms find themselves vying for a smaller portion of the vital resource of water.

The weather does have an impact on our environment from what we wear on a daily basis to what we consider as a good investment.  A case in point example is the price of future contracts for natural gas.  If people foresee a brutally cold winter, then futures contracts will be bid up in the hopes that the colder weather will drive up demand and thus cause the value of their contract to increase.   So, if weather does drive some forms of investment decisions, then how should investors consider positioning themselves in a drought environment?

Being from California and growing up in and around various ag related industries, I have a pretty firm grasp of the impact a lack of water can have on the main ag crops of California’s Central Valley.  Last year the mid-west experienced drought conditions that led to many cattle farmers slaughtering their herd because of lack of water.  This situation is not comparable to cattle conditions in California.  Most cattle reside in a feedlot and the sheer acreage that is used for grazing purposes does not compare to the mid-west.  Secondly, the aquifer that is positioned under the Central Valley, which supplies much of the drinking water for humans and animals in the region, is not in the shape that the aquifer in the mid-west was in last year.

In terms of strictly crop based ag, the impact a drought will have on the region’s ability to thrive is interesting.  In 1987-1992 the region survived a prolonged drought.  In addition, since the late 90’s the Valley has seen a trend towards farmers opting for more permanent based crops, such as almonds, walnuts, pistachios, and other crops that are not replaced for many years.  Such crops are not as water dependent as seasonally rotated crops, such as rice, corn, or melons.

If agriculture does not offer any clear investment plays in light of a short-term drought, what else might be considered?  Water that is appropriate for human consumption is becoming a bigger issue as we have more people around and in more centralized locations (cities).  For a place like California, the problem is twofold.  The best example of this problem can be seen on the Central Coast around the region of Monterey.

Monterey and other similar communities on the coast of California face a challenge.  The challenge is providing water to a growing population, while having no major infrastructure changes.  No dams are being constructed to stem the large amount of water runoff that occurs annually in the mountain ranges that are in close proximity to the region.  Consequently, communities near the ocean are turning to desalinization plants to supplement their water supply.

Whether it’s a drought in California or any other region in the world, desalinization plants are becoming increasingly popular as a partial solution to a major problem throughout the world.  While expensive to build and operate, they are often one of the only viable alternatives populated regions near oceans or seas have that need a source of drinkable water.

Here are a few investment ideas around the theme of desalinization.

Tetra Tech (TTEK) – Designs and builds desalination systems that use seawater, brackish water, and reclaimed waste water sources to help increase water supply, and has been designing desalination plants in Florida since the 1990s. It also designed the first California desalination plant, the Corona Temescal Desalter.

Consolidated Water (CWCO) – Operates seawater desalination plants and other water services in the Cayman Islands, the Bahamas, Belize, the British Virgin Islands, and Bermuda, using reverse osmosis technology to convert seawater to drinkable water.

Energy Recovery (ERII) – Serves engineering, procurement, and construction firms, which design and build desalination plants, as well as original equipment manufacturers that supply equipment and packaged solutions for small to medium-sized desalination plants.