Commentary

Water scarcity and opportunity

November 10, 2021

The planet is 70% covered by water. Freshwater, which is what we drink and irrigate our farm fields with, represents 3% of the world’s water; two thirds of that number tucked away in frozen glaciers.

According to the World Health Organization (WHO), 33% of the global population finds water scarce for at least one month of the year, exposing them to diseases such as cholera, typhoid fever, and other waterborne illnesses, resulting in two million fatalities. At the current consumption rate, 66% of the world’s population may face water shortages by 2025. As these changes occur, water consumption will further become a strategic asset negotiated for agriculture, industrial use, and personal consumption.

Many coastal agglomerations have been able to plan personal water consumption with natural gas fueled desalination. This strategy can be onerous given the ongoing present energy crisis. Inland rural developments, which have exploded with COVID-19, are more affected by severe droughts. Australia is the poster child for this situation. Australians have been dealing with economy-changing droughts for decades and are already experts at rationing water. Rural expansion continues to be an important growth driver that further stresses the effects of droughts.

On August 16, the United States (US) federal government declared a Colorado River water shortage for the first time as water basins reached critical levels. This will have a material impact on agricultural goods in North America as the region produces a large percentage of winter crops. Companies with better water strategies will outperform.

Global Alpha holds Limoneira (LMNR:US), a leading citrus grower in California, a state that uses an excess portion of its share of the Colorado River. Their plantings are located in Ventura, Tulare, San Bernardino, and San Luis Obispo Counties in California and Yuma, Arizona and La Serena, Chile. The plantings consist of approximately 5,000 acres of lemons, 900 acres of avocados, 1,600 acres of oranges, and 1,000 acres of specialty citrus and other crops.

Unlike many growers, Limoneira owns important water rights, including rights on 17,000 acre-feet of water in California and 11,700 acre-feet of water sourced from the Colorado River, of which only 8,600 acre-feet are currently used for irrigation. The majority are categorized as priority rights, and these rights will increase in value as we start to restrict the usage of the Colorado River outflow.

Other North American Global Alpha holdings that play an important role in water distribution include Lindsay (LNN:US). The company pioneered crop irrigation with the Zimmatic pivot irrigation systems. We also own Primo Water Corporation (PRMW:US), the leading distributor of non-disposable drinking water in North America.

Continuing on crop performance, Global Alpha holds Sakata Seeds (1377 JT), an agriculture seed developer based in Japan. One of their leading technology efforts is developing seeds that can grow in arid environments. We also hold Horiba (6856 JT), which makes testing equipment, part of their environmental franchise. Also, water testing is set to grow in their portfolio of products.

Droughts not only affect crops but also hydroelectricity generation, which is notably 17% of China’s energy generation, 65% of Brazil’s, and 60% of Canada’s. Norway reached 95% of internal electrical generation (Statista 2021), enough for the country to recently complete large hydro export investments (PowerTechnology, 2021).

Norway had a grand scheme of being the green battery of Europe with its abundant water reservoirs to export electricity. These plans are on hold as droughts has dwindled the Norwegian water supply enough to exacerbate the European energy crisis. Hydroelectric power is critical to base load power.

Global Alpha holds Landys and Gear (LAND SW). The company is a key player in smart metering with the largest install base outside of China. We expect regulations to increase drastically in the future as water and electricity output become highly managed resources. Landys and Gear markets should continue to grow at an above-average rate.

More than a quarter of Australian homes collect and store rainwater for domestic use. It will become interesting how dry countries, such as Australia and Israel, can transfer their expertise to regions who are now experiencing droughts such as Western Europe.

According to a January 2020 report by Markets and Markets, the global smart water management market size is expected to grow to USD 21.4 billion by 2024, at a compound annual growth rate (CAGR) of 12.9%.

Desalination represents a potential solution to many water issues despite its negative environmental footprint from energy usage and residual effluent. Reverse osmosis is also reaching its limits in terms of performance. Inexpensive green power and desalination technologies are therefore required. The use of wastewater has also reduced the cost of desalination to $1,500 per acre-foot from $2,500. By comparison, a San Diego agglomeration needs to pay $1,200 per acre-foot for fresh water from the Colorado River.

Globally, more than 300 million people now get their water from desalination plants, from the Southwest US to China. The Middle East accounts for 47% of all desalination, while East Asia Pacific and North America hold 15% of desalination capacity.[3]

As we can clearly see, water consumption, agriculture, and electricity generation are key interlinked industries that can provide important growth drivers in our investment universe. As always, Global Alpha remains keen to benefit from these growing trends.

Have a nice day.

The Global Alpha team