Friday, April 26, 2013

Water, Water Everywhere

Water, water, every where,
And all the boards did shrink;
Water, water, every where,
Nor any drop to drink.

      Rime of the Ancient Mariner
       Samuel Taylor Coleridge

The last post explored the impact of environmental degradation on the tourism industry.  The discussion was largely confined to the results of global warming on market opportunity, demand trends, asset values and costs.  Business has more to worry about than warming seas and shifting weather patterns.  Humans seem to have an uncanny ability to foul its own next and in no place are the ramifications clear than in the water resources.

Water is an essential element of human life.  The human body is about 60% water in the first place.  We rely on water for transportation, food production and processing our critical supplies for clothing and shelter.  The food and beverage industries are considered the most water intensive.  However, any industry that must process a raw material, water is an essential element.  So in addition to the food and beverage industry the biotech and pharmaceutical, paper and chemicals industries are deeply reliant on source large quantities of high quality water.

To put water into perspective, below is a list of common consumer products and the water requirement for each.

Product                                       Water Requirement

    Pint of Beer                                    75.71 liters             
     2 Liters of Soda                            499.67 liters  
    T-Shirt (250 grams of cotton)         25,000 liters             
     One Apple                                          70 liters
    One Glass of Apple Juice                     190 liters             
     One Kilogram of Cheese                   5,000 liters
    One Sheet of A4 Paper                        10 liters             
     1 Kilowatt Hour of Electricity
     From Coal-Fired Power Plant                 10 liters
    1 Kilowatt Hour of Electricity                                         
    From Nuclear Power Plant                   200 liters             

According to the United Nations Environmental Program, the Earth has about 1.4 billion cubic meters of water, of which 35 million cubic meters or about 2.5% is considered fresh water.  That sounds like plenty of water to go around.  However, it is important to note that approximately 24 million cubic meters or 70% of the freshwater is trapped in the form of ice and snow at the planets poles.  Fresh water stored under ground is a bit more accessible.  About 11 million cubic meters of the fresh water is stored underground.  This resource supplies nearly all of the water we use. 

These numbers are large and mask the stark truth of water scarcity.  In fact, there are incidents of water scarcity on nearly every continent in the world, affecting as many of 40% of people on the planet.  The World Water Development Report reveal that as much 3.5 times the amount of Earth available fresh water would be needed to support the entire world population at rates of consumption set by North America and Europe. 

This means that growth assumptions baked into some competitive or market analysis are likely overstated.  The water requirement of production processes represents a real limiting factor in nearly every industry.  Estimated future revenue simply based on some demographic factor may not be achievable if water resources are not available to support that level of production.

Inadequate water resources to support economic growth or continued economic viability is a real issue for analysis today and is not a problem for future generations.  The U.S. Department of Environmental Protection reports that approximately 46% of the lakes in America are too polluted for fishing, aquatic life, or swimming.  Furthermore, each year 1.2 trillion gallons of untreated sewage, stormwater, and industrial waste are dumped into U.S. waterways.  The Mississippi River carries an estimated 1.5 million metric tons of nitrogen pollution into the Gulf of Mexico each year, creating a “dead zone” in the Gulf each summer about the size of New Jersey. 

What this data tells us is that of the fresh water resources located in the U.S., less of it is available to stretch across a rising population and expanding water demand.  What is more, the waterways and oceans are becoming less productive in terms of food production than in the past.  Thus not only can we expect water resource-related impediments to growth in agriculture production, we can also expect downward pressure on the fisheries segment.

Thus any industry dependent upon water for production is most likely already experiencing some impact on production levels and/or costs.  It is imperative in analyzing these companies and their securities that environmental sustainability is a central point of investigation.  Lip service paid by companies on their corporate websites to sustainability should be challenged.  For example, Umami Sustainable Seafood, Inc. (UMAM:  OTC/BB) reveals in their most recent quarter filing with the SEC that overall fishing results are subject to material changes based on circumstances beyond our control related to fish habits and changes in regulatory requirements and environmental conditions….” 

Umami catches immature tuna, transports them to a farm where they are held through maturity and then sold principally to consumers is Japan.  Dwindling supplies of wild tuna are a risk for Umami.  The company provides data on tuna catches and makes the claim that its version of sea-based aquaculture is commercially viable.  Umami’s most recent annual filing indicated that “…sea-based aquaculture offers many benefits over agriculture, including the ability to farm without harmful fertilizers or the use of fresh water, which is critical in light of the impact many fertilizers have on the environment and the increasing strain on fresh water supplies globally.”

Smart money will not take the pronouncements of Unami or any other agriculture producer lightly.  Future sales volume and profitability has to be weighed against the constraints imposed by environmental degradation and dwindling fresh water supplies.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.


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