California Experiencing Its Worst Drought in 1,200 Years -- Is Your Grocery Bill at Risk?

By Markets Fool.com

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Water, water everywhere . . . not so much. The California drought is taking a toll on lawns all over the state but not the agricultural sector. Source: U.S. Department of Agriculture

The California drought has led the state to impose unprecedented, mandatory restrictions on water usage. Cities and towns are required to cut water use by 25%.

NASA says groundwater in the state is at its lowest level in 65 years, and many reservoirs are at record lows. As California Gov. Jerry Brown stated, "We're in a new era; the idea of your nice little green grass getting water every day, that's going to be a thing of the past."

Good to the last drop
Serving some 90% of California residents, local water utilities like California Water Serviceare charged with carrying out the specific restrictions that will be handed down by the state Water Resources Control Board, Department of Water Resources, and Public Utilities Commission.

Among the restrictions being imposed are:

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  • Replacing 50 million square feet of lawns with drought-tolerant landscaping
  • Banning the watering of grass on public street medians
  • Requiring college campuses, golf courses, and cemeteries to limit watering their expansive landscapes
  • Requiring farms to report their water use to state regulators

Because the state is responsible for almost 70% of all commercially available fruits and nuts grown in the U.S., consumers might be bracing for a further spike in food prices at grocery stores.

But maybe they have no reason to worry.

Brown is the new black . . . or green. Lawns will no longer be watered in California under historic new restrictions on water usage. Photo: Kevin Cortopassi via Flickr

Food fight
Although the U.S. Agriculture Department forecastsfood inflation to rise between 2% and 3% for the rest of 2015, on top of the 2.4% increase seen last year, it is not because the price of produce is going up. In fact, the prices for fresh vegetables fell in 2014.

The biggest causes of food inflation are found along the perimeter of the grocery store, in the meat case where beef, veal, and pork are sold; the dairy aisle where shoppers find eggs and milk, which have experienced above average price hikes; and in the seafood section.

Fresh fruit prices were also higher last year, but the Agriculture Department said prices fell 0.7% in January, though they bounced slightly higher by 0.2% in February.

Rolling back prices
Supermarket chainKroger says its customers are currently benefiting from falling fuel prices, but it further assists them by taking $3.5 billion annually in price investments. Part of that is enabled by cost savings initiated over the years, but the company has also consciously lowered prices for consumers.

According to CEO Doug McMillon, Wal-Marthas been "playing offense on price" by pushing its vendors to further lower prices in a bid to widen the gap between itself and competitors. More recently, the retailer reportedly asked suppliers to help finance its Savings Catcher program, which compares prices from rivals and automatically gives refunds in the form of gift cards to enrolled customers. As of last September, the date for which the most recent information was available, the Savings Catcher program had saved consumers some $2 million.

So why won't the drought have a more significant impact at the grocery store checkout register? The restrictions being imposed in California almost entirely apply to businesses and homeowners. As noted above, farms in the state only need to report their usage. Otherwise, they have been left largely untouched by the new rules.

That might seem a bit incongruous given that the Public Policy Institute of California says agriculture accounts for 80% of the state water usage. However, it is not as if they have been unaffected by the drought, idling over 400,000 acres of agriculture operations in the last year and suffering $1.5 billion in losses in 2014.

Going nuts for water
Certain crops, like almonds and alfalfa, are heavy water feeders. California almonds require 1.1 trillion gallons of water annually, while alfalfa needs even more, sucking up 15% of the state water supply. California provides 99% of almonds in the U.S. and 80% of the world's supply. A lack of control on such agricultural operations can only benefit companies like almond milk producer WhiteWave Foodsand Blue Diamond Growers, the largest almond marketer and processor in the world.

Almond producers like Blue Diamond Foods and users like WhiteWave Foods can benefit from continued water usage by agricultural operations. Source: WhiteWave Foods

Net sales of WhiteWave plant-based foods and beverages, of which its Silk almond milk brand is central, rose 21% in the fourth quarter and were up 15% for the year. Blue Diamond sales grew 25% in its 2014 fiscal year that ended last August.

While fresh fruit prices are rising nationally, overall food costs are up no more than the 10-year historical average, so consumers should not suffer any sticker shock at the supermarket, at least from the produce portion of their basket.

And those grocery stores like Kroger and Wal-Mart that make holding the line on price increases part of their DNA will likely benefit from their efforts to protect consumers from the worst effects of food inflation when it comes to the rest of their shopping cart.

The article California Experiencing Its Worst Drought in 1,200 Years -- Is Your Grocery Bill at Risk? originally appeared on Fool.com.

Rich Duprey owns shares of WhiteWave Foods. The Motley Fool recommends California Water Service Group and WhiteWave Foods. The Motley Fool owns shares of WhiteWave Foods. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.