Back in antiquity and halfway around the world, the superpowers of the ancient world consistently fell to one foe.
The Tang Dynasty ruled from 618 A.D. to 907 A.D., during what is widely considered a Golden Age in Chinese history.
But the beginning of the end came in 873 A.D., when an illegal salt trader organized starving peasants and started a decade-long war following a disaster. By 880, he had seized the capital and throne.
By studying stalagmites, a joint Chinese and American team found a significant decrease in deposits correlated to the beginning of the end of a Golden Age in Chinese history.
The cave was in an area completely dependent on monsoon water for sediments to slowly drip down and build up the spike, just like tree rings. In 873 A.D., the deposits showed a profound lack of growth because there was very little water to deposit materials. The same correlation appeared for the fall of the Yuan and Ming Dynasties as well.
One thing is guaranteed to cause people to riot, rampage, and eventually topple governments. I’m talking about water — specifically, a lack of it.
Seemingly simple and boring, water is so easy to take for granted. But it is essential to life on this planet, and every man, woman, and child would kill for it if needed.
Unfortunately, we aren’t good at learning our lessons. Fortunately, we have the technology to overcome these problems.
Just look at California and the Southwest. People are parched, pissed, and potentially about to hand a whole lot of money to some well-positioned companies.
Neighbors Suing Neighbors
The American Southwest is right on the verge of catastrophic changes.
Lake Mead is almost tapped out. So is the Colorado River. California reservoirs are dipping below 30% of capacity. Now, groundwater — the last remaining stable resource — is the focal point of rancor and rage.
California is an agricultural juggernaut, producing almost half of the produce and nuts grown in the country. With 80% of the state in “exceptional or extreme” drought, the very livelihood of farmers is at stake.
Yet many crops, especially high-value orchards and vineyards, are still sporting lush plants and crops, all due to the insane amount of water being drawn from wells.
The Dept. of Water Resources estimates groundwater use goes up by 50% during droughts, setting off a veritable arms race amongst neighbors.
California is an exception in the Southwest. There is no statewide regulation of groundwater. Therefore, whoever has the deepest well and pumps the most water will collect more profits.
Without a state framework, neighbors have sued each other over the effect of their groundwater use and how it impacted the use and value of property, all while drilling as many new deep wells as possible.
That is about to change. With the clock about to run out on the legislative session, a law was passed to completely overturn the status quo.
Californians retain water rights for their properties, but local agencies will have a much greater role in managing withdrawals. If the local agencies fail to find sustainable solutions, the state can step in and take over.
Earlier in the month, lawmakers also settled on a ballot proposal to issue $7.5 billion worth of bonds to address the water crisis. The measure could fund a number of things — dams, reservoirs, and watershed projects as well as treatment of groundwater for drinking.
Opportunity in a Crisis
I’m certainly not a fan of California’s regulation-heavy approach. Nor am I a fan of watching a failed system crash and burn and hurt people.
However, that is their call to make. I’m far more interested in how this will pan out and what investment opportunities will evolve.
The drillers working in California are making hefty fortunes as farmers drill more deep wells. Unfortunately, there isn’t much exposure to this trend through public companies.
The timeline is too long for volatile commodity futures, and I wouldn’t want to guide people into that cutthroat, risk-heavy arena.
Agricultural ETFs are essentially done for the year, at least for domestic crops, since there are only a couple months left in the growing season.
That leaves us with the potential from the new California laws and that massive $7.5 billion bond package that is up to voters to approve.
Keep an eye on the state election in November and these two pure-play stocks:
American States Water Company (NYSE: AWR): This is a public utility company that purchases, produces, distributes, and sells water to about 250,000 customers in California. P/E ratios are at 21, the market cap is $1.25 billion and it sports a 2.64% yield.
The company has largely traded in lock-step with the S&P 500, but improving balance sheets, the worsening water situation, and the potential billions spent on water infrastructure and efficiency creates a potential to outperform going forward.
Cadiz Inc. (NASDAQ: CDZI): This $214 million company is working on a system to capture groundwater that would evaporate or get locked up in dry lake beds in the Southwest and pipe the water where it can be used.
Quite frankly, the company is a “swing for the fences” play. The company has loaded up on debt to acquire land and build infrastructure. It has survived environmental challenges to proposals, but appeals are possible.
However, if legal challenges dissolve, more supply deals are signed, or funding from the $7.5 billion in bonds or another source is found, this small company could soar.
