Pakistan and India the only two countries with ‘extremely high’ levels of water stress: Fitch
Monitoring Report
NEW YORK: Agribusiness is highly dependent on water, with 70% of the world’s freshwater supplies used in agricultural production. Climate change (leading to changes in precipitation, flooding and extreme weather events) presents challenges to the industry’s water access, while economic and demographic shifts are likely to increase competition between domestic and industrial users.
As governments and investors focus more resources on water risk management, we evaluate how these trends can affect commercial agricultural producers and processors. In the short-term, we believe that economic and regulatory trends related to water scarcity will be the most relevant to the agribusiness sector.
Corporates involved in the agricultural supply chain will experience the impact of climate change in two main areas: in changes to yield and output, and in changes to water pricing and access. How much these factors will affect long-term financial performance depends on the company’s location in the supply chain, its geographical location and the type of crops it produces, trades or consumes.
The agricultural sector also faces water-resource challenges related to urbanisation and economic growth, particularly in emerging markets. For companies higher in the value chain (for example, in processing and manufacturing), these factors are more immediate risks to water availability as they relate to the cost of and access to water required for their operations.
While the impact of climate change on primary producers will be significant, the long time horizon of 10 to 30 years and beyond means there is time for corporates, governments and investors to respond with mitigating measures and solutions (through regulation, policy and investment) in the short-to-medium term.
Compared to other supply-chain participants, primary producers are the most exposed to physical water risks such as scarcity, stress and flooding. Of the major agricultural producers, only Brazil has low water stress levels both overall and in the agricultural sector. On the other hand, Pakistan and India are two countries that have an extremely high water stress levels in both the aspects.
Fitch expects several economic and policy factors to have a more immediate effect on agricultural water use than climate change. Although farming accounts for the largest use of water globally, water costs for the agricultural sector are extremely low or even non-existent. Farmers’ main sources of water are freely accessible. They can extract groundwater by pump or from wells, and divert surface water from above-ground bodies of water.
Public and Private Investment Needed
Investment into water-management solutions is one of the key differences between commercial and subsistence agriculture. We expect an increase in private investment into this area, given the wider alignment with sustainable finance agendas and in light of new regulatory frameworks.
In a November 2018 survey by Infrastructure Investor of private equity limited partners, 81% of respondents with a sustainability, impact or ESG mandate identified water and wastewater treatment as the most attractive investment strategy.
In a survey about responsible investment by RBC Global Asset Management in 2019, 800 institutional investors ranked water as their third-highest concern after anticorruption and cyber security. While institutional investors have shown increased interest in water utilities in recent years, some are even moving into physical water assets.
In December 2019, Singaporean commodity trader Olam International sold 89,000 megalitres of permanent water rights for almond farming in Australia to Canada’s Public Sector Pension Investment Board for AUD490 million (USD332.5 million).