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TheStreet Open House

California Drought Just a Blip in State's Economy

NEW YORK ( TheStreet) --California may be " on track for having the worst drought in 500 years," but for now at least, the impact on the state's economy will barely register.

Jeffrey Michael, Director of the Business Forecasting Center at the University of the Pacific in Stockton, Calif., expects an impact of no more than one or two tenths of a percent on the overall growth rate.

"It's an urban service economy. The majority of that economy is down in Southern California or in areas that have ample reserves and are not implementing any sorts of restrictions. So it's a big state and the majority of the state -- its economy -- will be unimpacted," he says.

It is indeed a testament to California's size that its overall economy can be barely affected even though it is the nation's top agricultural state, responsible for 11% of all U.S. agriculture according to a Jan. 21 JPMorgan report. The report adds that California was responsible for $50 billion in agricultural sales during 2012.

In a worst-case scenario, University of the Pacific's Michael sees perhaps a $1 billion hit to the agriculture industry from the drought.

Judging from Wall Street research, the impact of the drought on shares of publicly-traded companies appears to be essentially a non-factor -- at least not the kind of thing that would drive a buy or sell decision.

"While the drought probably won't have a meaningful impact in 2014 on most of our universe, we believe heightened awareness will drive increased investment in water infrastructure to promote water reuse, efficiency and desalination," wrote David Rose, water sector analyst at Wedbush Securities, in a Jan. 16 report.

While the JPMorgan report sees potential impact to several food companies, including Kraft Foods Group (KRFT), Whole Foods Market (WFM), WhiteWave Foods Co. (WWAV), The Fresh Market Inc. (TFM), and Campbell Soup Co. (CPB), analysts at the bank haven't adjusted earnings estimates for any of these companies yet.

"It is too soon to draw conclusions, and many crops can be manually irrigated," the report states, adding nonetheless that "the situation bears watching."

Indeed, the lack of any short term share price or macroeconomic impact belies the seriousness of the problem.

"A lot of investors with whom we've spoken in New York say, well, jeez, I can still get a glass of water. I don't see the problem. And I think it really drives home the point that water is a local issue that has a global impact and so in different regions it will happen at different times. And it will have a material impact. Brazil is another great example. There's a significant drought going on right now in Brazil," says Wedbush's Rose.

The analyst adds that water impacts lots of industries people tend not to think about, from semiconductors to energy to mining.

"Water is used in virtually every industry. Almost every factory has a boiler to heat water and a cooling tower to cool. So I think a lot of people overlook the amount of water that's being used."

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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