California’s four-year drought
Expectations were that California’s four-year drought and the punishing water shortage would have a destructive outcome on the country’s produce supply. The expectations were that it would increase the prices of the products. This hasn’t been the case, as the price of any product is affected by many factors, including processing, transportation, packaging, and distribution.
California produces two-thirds of the country’s nuts and fruits, which has decreased due to the drought. However, demand affects the retail price of a product more than a drought and water shortage would. California’s water crisis is not a major factor for high prices borne by consumers.
Farmers are the most affected by these conditions. A large percentage of California’s agricultural sector experienced severe to extreme drought, with the livestock sector more exposed than the crop sector.
Farmers adapting to the drought
Many farmers are as overwhelmed by the water crisis because ground water pumping has compensated for the lost water. Also, favorable temperatures and growing conditions have been able to mitigate the water shortage. There is a chance that the drought might affect the raw material costs for major packaged food companies, which could reduce their margins. Until now, margins have demonstrated an overall rising trend.
The chart above displays the operating margins of major food packaged companies such as Campbell Soup (CPB) and Diamond Foods.
Lower milk prices should boost the margins for major producers like Ingles Markets (IMKTA), General Mills (GIS), Kraft Foods (KRFT), and Dean Foods (DF). The Consumer Staples Select Sector SPDR ETF (XLP) holds 1.88% of GIS, and the SPDR S&P 500 ETF (SPY) holds 0.17% of GIS.