The last time water seeped into our coverage of the consumer-staples sector, the news involved slack bottled-water sales that were weighing on companies such as PepsiCo
It's more essential to industry and daily life than oil, but much of the developed world nonetheless takes clean, fresh water for granted. Such complacency may soon dry up.
According to The 2030 Water Resources Group, a public-private consortium that includes industry heavyweights and the World Bank, current global water resources are likely to fall short of future demand by a whopping 40% come 2030. Even assuming that we can sustain historical supply and productivity gains in the use of water -- no easy task, given financially cautious governments and industries -- the outlook indicates a still massive 24% supply demand gap.
On the surface, that scenario bodes well for beverage makers: Prices for bottled water, juice, and perhaps even soda and beer would skyrocket. The key question, however, is whether global players such as Diageo
It's tough to imagine that beleaguered governments facing a populist outcry would place corporate profits ahead of the welfare of its citizens, while private holders of water rights would probably wield a mighty upper hand in pricing. In short, an operating environment that includes egregiously high input prices at one end of the supply chain, and consumer outrage at the other, could mean a long profit drought for the liquid-refreshment business.
Finally, consider that water shortages are expected to be the most severe in developing and emerging economies. Compared with current resource levels, China's 2030 water demand is expected to outstrip supply by 32%. The models are more frightening for India, where future demand will climb to levels that are double today's supply.
Problematically, these are some of the very regions that international consumer-staples companies are counting on to drive future growth. Witness, for instance, Kraft's push for greater emerging-markets exposure through its pending, and increasingly desperate-looking, bid for Cadbury.
And it's not just beverage makers that would suffer in such a future. Agriculture sops up about 70% of global water withdrawals, so a water crisis would be likely to trigger a food crisis. Sky-high grain prices would arrive as no friend to packaged-foods producers such as General Mills and Kellogg. Of course, it's hard to imagine an industry that wouldn't suffer through such events.
What, then, is an investor to do, especially when the leading edge of a water shortage may be years or even a decade off?
Within the consumer-staples sector, one can seek out companies that are ultra-efficient users of water. Consulting firm McKinsey & Co., a key party to The 2030 Water Resources Group, identifies Nestle as an industry leader in this area. However, I also recommend looking farther afield, to a handful of companies that may actually emerge from future dystopian days as net winners.
In terms of boosting agricultural yield, fertilizer leader PotashCorp
In addition, several publicly traded companies include water rights among their assets. One such name is PICO Holdings
Of course, no investment makes for a guaranteed hedge. However, holding a selection of the above stocks could help offset losses in the traditionally more stable areas of your portfolio.
The bottled takeaway
There a couple of final points to keep in mind. First, assuming bold action from both government and industry, we may in fact avert or significantly reduce the magnitude of a future water crisis. Through a combination of technology and political will, The 2030 Water Resources Group asserts that the supply demand gap can be closed at an affordable cost.
Second, even though we're not talking about imminent events, investors should keep this topic on their radar screens. I'd say that goes double for portfolios that are heavy with consumer-staples names. Such stocks are popularly imagined to be set-it-and-forget-it investments, but a potential water shortage -- on top of issues such as consumer trade-down and brand extension risk -- is yet one more reason this sector demands plenty of ongoing due diligence.