Monday, February 17, 2014

Profiting From Drought

The California drought is real.  The US Drought Monitor presently shows an alarming concentration of red in the Golden State.  The US cattle herd count is at its lowest since 1951 and drought-impacted ranchers will probably overwhelm the USDA Farm Service Agency with disaster requests under the Livestock Forage Disaster Program (LFP) and other forms of disaster assistance.  The US Drought Portal is going to stay busy for a while.  Exogenous shocks that make markets unstable provide opportunities for entrepreneurs to solve problems.  The shock from drought can force transformations in agribusiness.

The USDA Agricultural Research Service (ARS) operates an Office of Technology Transfer.  Entrepreneurs should start there and cherry-pick (pun intended) innovations from the USDA National Agricultural Library that apply directly to agriculture.  The USDA Agricultural Technology Innovation Partnership (ATIP) is an umbrella initiative to share the government's technical knowledge with multiple private sector partners.

Resources for tech startups in the food sector are rapidly proliferating.  Kitchen incubators are all over the place, like La Cocina in San Francisco.  I like niche incubators because their focus attracts industry-specific expertise.  Incubators serving the broader tech sector have become victims of their own success.  Attracting applicants from mobile, social media, and gaming means the most popular incubators have quickly lost focus.  Maintain the niche focus means food incubators have the luxury of dealing only with food technologies.

Large enterprises can also jump on the drought mitigation bandwagon.  California's drought may lead to significant shortages of popular fruits and vegetables, so agribusiness from the rest of the country now has the opportunity of a lifetime to capture market share.  Activists will have to rethink their opposition to genetically modified crops if drought resistant crops can prevent food shortages in North America.  Desalination is a long-term pipe dream (again, pun intended) for solving California's water problems but it will consume billions of dollars in capital.  Water utility stocks may finally get their time to shine.

None of these options will go anywhere without backing from investors.  The persistence of drought from climate change means a persistent need for market-based solutions.  Investors focusing in the water-energy-food security nexus will find tons of opportunities to make a buck.  They may also find a ton of risk if they focus exclusively on backwardation in the commodity futures markets.   Profiting from drought is a moral good if it drives capital into technological innovations that enhance human quality of life during resource scarcity.