The West Coast/California drought has finally ended, with Gov. Jerry Brown lifting the drought emergency in most parts of California, barring a few San Joaquin Valley counties. Does this mark the all clear for investors in the agriculture sector?
Not necessarily.
Let's take a look at performance of agriculture-related stocks over cycles of drought.
Driest Ever Drought In California
The most recent drought in California spanned from December 2011 to April 2017 and has the distinction of being the driest in the history of the state. The state has ordered a 25 percent cut in urban water use in June 2015, as a countermeasure to tackle the drought. The worst affected of all are the farmers, as they use about 80 percent of all water consumed.
California is the pivot in the nation's agricultural fabric, as it has been topping the states in agricultural production since 1948, producing almost all of domestic fruits, nuts and vegetables, according to a report in Kapitallwire.
Droughts would have a telling impact on industries exposed to agriculture and allied activities. Agri-input companies such as seed companies and manufacturers of fertilizers and pesticides and farm machinery and equipment makers are among the worst hit.
However, comparing droughts is a tough assignment, given that a drought can be defined in terms of a host of metrics such as rainfall, condition of vegetation, agricultural productivity, soil moisture, levels of reservoir and stream flow, economic impact etc., a Forbes article said quoting scientists at National Oceanic and Atmospheric Administration, or NOAA.
The Forbes article delved on some of the worst droughts in the history of the United States:
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Dust Bowl of 1930s.
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Great Plains/Southwest Drought: 1950–1957.
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Californian Drought: 1977–1978.
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Californian Drought: 1987–1989.
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Turn-of-the-century Drought: 1999–2008.
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Californian Drought of 2011–2016.
How Agricultural Stocks Fared Through Recent Californian Drought
PowerShares DB Agriculture Fund (NYSE: DBA), the iPath Bloomberg Grains Total Return Sub-Index ETN (NYSE: JJG) and the ELEMENTS Rogers Intl Cmdty Agri TR ETN (NYSE: RJA) all fared badly during this six year period.
The DBA has lost 39 percent since 2011; the JJG, 46.9 percent; and the RJA, 41.2 percent.
Source: Y Charts
The Market Vectors Agribusiness (ETF) (NYSE: MOO), which has companies deriving at least 50 percent of their revenues from agricultural business, including fertilizer, seed and food companies, was largely on a consolidation mode, in a broad range, for most part of the drought.
After declining steeply in late 2015, the index has staged a nice recovery, advancing about 16.41 percent since 2016.