Next Economy Investing in Agriculture: Solutions Emerge from Understanding Threats. Part I: Water Scarcity

By: Kathleen Chappelear.

What we eat and how we produce our food are inseparably linked to the climate crisis that faces the world. At Green Alpha, we understand that transforming the world’s food systems is not just an environmental necessity, but also a social and economic imperative. Further, with rapidly increasing demand for food systems that don’t poison our bodies and the environment, there are compelling investment opportunities to be uncovered and vetted.

Green Alpha’s core thesis includes that for an indefinitely sustainable economy to exist, an indefinitely sustainable food system must also exist. To achieve this end, we seek investments in the most forward thinking and innovative agricultural systems. Given the importance that we put on investing in this sector, this is the first publication in a blog series on Next EconomyTM Agriculture that will culminate in a capstone white paper.

The Global Dilemma Hits Home

Apart from its fundamental requirement for all forms of life, and agriculture specifically, water raises many issues throughout the global economy. According to the IPCC, as of 2022, approximately 4 billion people struggle for access to water at least one month out of each year. When this number is factored into the 8 billion people population, 50% of people experience material water scarcity.

Given the relative wealth of our country, it’s easy to believe that water scarcity isn’t a pressing concern or that few suffer from lack in the States. Unfortunately, this isn’t the case.

Colorado is experiencing drought and water access issues. In July 2022, the Colorado Water Conservation Board found that “cities, towns and industries in Colorado could be short 230,000 to 740,000 acre-feet of water annually by the year 2050.” To put this in context, that would supply between 500,000 and 1.5 million homes each year. Couple this with the rising population in the state, which is expected to double by 2040, and it poses a real threat. It is estimated that statewide water use will increase 35-77% by 2050.

According to a Desert Research Institute study published in April 2022, “the warming atmosphere is a thirstier one” and some crops in Colorado already need up to 15% more water than the same crops did 40 years ago. Coupling the decrease in water available due to drought, the increasing population, and demand for more water due to warming climate, there is a serious problem right here in our own state.

Warming temperatures are further exacerbating the existing problem by melting glaciers, which is leading to irreversible loss of the water storage that they provide. Rising sea levels are causing salty ocean water to be pushed into coastal aquifers creating a loss in potable water for millions of people. This is directly affecting one of Southeast Asia’s most productive rice growing regions and is likely to also begin affecting Mexico, Australia, Brazil, South Africa, and the southwestern United States.

Conventional Agriculture’s Harmful Effects on Water Supplies

Not least significant on the list of water depletion and degradation is contamination. As Rachel Carson wrote in 1962, “for the first time in history, virtually every human being is subjected to contact with dangerous chemicals from birth to death.”  Mass production of synthetic insecticides that began proliferation during World War II has continued to this day and has infiltrated our “clean” waterways, sometimes at dangerous levels.

The byproducts of conventional farming practices increasingly pollute drinking water and threaten watersheds and aquifers. Heavy rains cause runoff from agricultural fields into nearby streams and creeks, causing nitrogen-rich fertilizers and toxic pesticides to enter what is supposed to be our clean water supplies, and further downstream, in the oceans. This not only affects access to fresh water, but also land and aquatic animals. Agricultural fertilizers contain nitrogen and phosphorus that cause algae to grow much faster than an aquatic system can manage. This in turn lowers the amount of oxygen that marine life has available for survival which leads to oceanic “dead zones.” Atrazine is a commonly used conventional farming herbicide that when leached into ground water causes frogs to become hermaphroditic.

There is a dead zone in the Gulf of Mexico that currently spans over 8,700 square miles, this in large part due to the runoff from Midwestern industrial farming operations. These same chemicals also negatively affect virtually everyone’s drinking water supplies.

These are only a few of the myriad agriculture and farming practices that affect water quality.

A Thirsty Crop Primer: Almond Production

For those who might be thinking, “but I am not a farmer” or “decisions about pesticide use are out of my control,” let’s look at how some of humanity’s demands for specific water-intensive foods and resulting decisions about how and where to grow those foods is causing immediate stress and threats to water supplies. We’re picking on almond production, because it’s an obvious and commonly understood issue, but it’s by no means the only example we could have chosen. A few others that we discussed and passed on describing are: alfalfa, corn, wheat, and other forage crops that are part of a larger food system that includes the beef and dairy industries.

Abandoned almond orchard in Newman, Calif. Terry Chea/AP

California is the world’s largest supplier of almonds and Almonds are California’s second largest crop by revenue. The last few years of extreme weather events have been tough on this crop. California currently produces about 80% of the almonds worldwide, and 70% of their production are exported overseas. Demand for almonds has skyrocketed in the last 25 years, causing production to jump from 370 million pounds to 3.1 billion pounds. Almonds are an incredibly water-intensive crop, requiring year-round irrigation supplies and efforts, and the rapid expansion of crops came at exactly the wrong time of historic water supply and quality threats.

2021 was marred by a historic drought in the Western United States that threatened many aspects of farming systems, including California’s almond production. As of August 2021, around 88% of the state was suffering from an extreme drought, especially the Central Valley, which is the state’s main area for food production. Growing almonds requires a massive amount of capital investment years before a farmer can expect to see a profit. It takes the trees 7 years to reach maximum production capacity. Droughts causing restrictions on water usage have left many with no choice but to let their trees die despite the high profit potential historically experienced by the almond industry. And that’s occurring despite the state requiring residents to limit water use so that supplies can be diverted to farmers to keep almond trees alive.

Driest Drought in 1,200 Years

2022 was a record-setting year on many fronts, including temperatures and rainfall (both far too much and too little) and corresponding crop yields. According to the Washington Post, this was a very bad year for corn, soybean, tomato, wheat, cattle, and cotton production, just to name a few.

  • Corn is on track for its lowest recorded yield since the then record-setting U.S. drought of 2012.
  • Seventy percent of cotton farmers in Texas have recently made the tough decision to walk away from their crops due to lack of water causing insufficient yields.
  • In California, rice harvests are approximately 50% of what they normally are.
  • Hard red winter wheat, which is the most common wheat variation grown in the U.S., was the smallest harvest since 1963.
  • The USDA estimates that tomato harvests will be 10.5 million tons, which is about 1 million tons less than average.
  • Cattle ranchers across the country are being forced to decrease the size of their herds due to scarce forage, because it is too costly to truck in hay for feed as a result of water shortages that are increasing the cost of hay production. The largest herd decline is in Texas, reportedly down 50%, followed by a 43% reduction in New Mexico, and 41% in Oregon.
  • If these numbers are not enough to see the precipice that we are at, then consider that drought has consumed 40% of the United States for the past 101 weeks (as written on 9/6/2022). The biggest impacts of this drought are being experienced in the Central and Great Plains, from Nebraska to Texas with the two most affected crops being cotton and grain sorghum (animal feed).

The drought that the American West is facing has been building for 22 years and is not showing signs of relenting. The depth of the drought “has deepened so much that it’s now considered the driest in at least 1,200 years.” The same Nature Climate Change journal authors found that human-caused climate change is responsible for 42% of the drought the West is facing. Climate scientists are predicting that through the winter of 2022-23 the western states will continue to experience below-average rainfall and snowpack encompassing California, the southern Rockies, southwest, southern plains, and Gulf Coast states. According to NOAA, this persistent drought is exacerbated by the third year in a row of La Nina weather patterns, which have greatly reduced precipitation. The fact that the La Nina patterns have persisted for three years now is not typical; in fact this has only been recorded twice before.

And it’s not solely a U.S. west coast phenomenon. To cite one east coast example, as of mid-November 2022, a full 38% of the state of Virginia—obviously a very humid state that is assumed to typically have sufficient rainfall—is experiencing abnormally dry conditions. Virginia has fertile land and is counted on by many Americans to produce a variety of vegetables, barley, mushrooms, sunflowers, rye, sorghum, among other vital nutrients. To shine a light on the problem, Virginia’s agriculture sector is estimated to have an economic impact of $70 billion annually.

Diminishing the Lifeblood of the Region

Historically, Arizona and California have been responsible for the production of 90% of U.S. winter leafy greens and other winter vegetables. This made sense, because of the warm climate allowing for year-round growing when the rest of the country is experiencing snow and ice. Unfortunately, that former reality is now being threatened.

From northern Colorado to the Gulf of California, most of the water used for crop irrigation comes from the Colorado River, which is rapidly drying up. The Bureau of Land Reclamation recently reported that the Colorado River is in its 23rd year of drought, as can be seen in aerial photos taken of its two largest reservoirs, Lake Mead and Lake Powell. Restrictions are in place to conserve what little water is left, affecting everyone. The Nature Conservancy reports that for seven western U.S. states, the river accounts for at least half of their gross economic product, with Timothy James, Arizona State professor, summarizing the situation as “the Colorado River is the lifeblood of the entire region.”

This is an increasing concern for agriculture, because about three quarters of the water taken from the Colorado River is used by farmers, equivalent to 5.5 million acres of farmland. Having less water available obviously means farmers will not be able to produce as much. This is already alarming and even more so when you start factoring in additional climate crisis-related threats.

In 2022, the water level in Lake Mead was measured at a record low of 1,042 feet above sea level, it was at 1,200 feet above sea level 20 years ago. The first ever Tier 2 shortage has been declared for Lake Mead with growing concerns about the water level hitting “dead pool” status, meaning that the water won’t be able to travel downstream through the Hoover Dam. If this happens, farmers—and consumers— will have to pay materially more.

Choosing the Priority

Less water means less food. And more expensive food. As we’ve cited in several examples, Farmers are already having to make tough decisions about what to water versus let die. Often the first to go will be annual crops like lettuce, tomatoes, and squash, while tree crops will be preserved because they are inherently longer-term investments with higher upfront costs that farmers will feel incentivized to payoff. The IPCC reported that the “frequency of sudden food production losses has increased,” which contribute to increased food prices and reduced availability.

This leads to the question, should water-intensive crops continue in the driest parts of the country? If farmers switched to crops that weren’t as thirsty, from almonds to grapes, for example, not as much water would be needed. Thinking about this from a farming practices perspective, changing to more environmentally friendly crop selections can help farmers survive extreme heat and drought. Cover crops help “lock moisture in the soil, and switching to an agroforestry-style farm, where trees are integrated into the landscape, can provide valuable shade.” This topic, and these examples, don’t even begin to scratch the surface.

Drought is a serious problem, and it is inherently linked to the vastly greater problem of the climate crisis. According to the most recent IPCC report, the warming climate has altered growing area suitability, causing plant-to-pollinator and plant-to-pest mismatches.

The examples of extreme droughts discussed above do not mean that these are the only parts of the world under threat of water-related agricultural pressures. Europe is also suffering from droughts and hot, dry conditions. Reports are showing that the region’s dried out fields are producing far lower than expected yields. Soybean yields are 15% lower than their five-year average and sunflower yields are close behind at 12% down.

At the same time, we would be remiss to solely highlight drought as the only water-related issue affecting agriculture quality globally. Extreme weather events causing flooding, from torrential rains to hurricanes/typhoons, are rapidly increasing in both frequency and severity. Very recently, one third of Pakistan was hit with heavy rainfall that led to disastrous flooding that took the lives of over 1,000 people.

Wise Investing Starts with Discernment

It should be obvious at this point that water is incredibly critical to everything—including our food production systems—and that nothing could exist without it. Green Alpha’s research and investment process are unique in that they begin by researching and seeking to understand the risks that are most likely to threaten our economy’s stability and growth prospects. And from there we look for the most innovative solutions to those risks and those that are most likely to be deployed at scale.

We are beginning the Next Economy agriculture blog series by highlighting some of our research into the real-world risks threatening the water supply and agricultural production that relies on it. At each point in this article where you see a risk mentioned, you can rest assured that we are proactively looking for (or already investing in) a solution.

We are publishing this article to paint a realistic picture of how systems are interacting, not from a doom-and-gloom perspective, but to help readers gain perspective on why we seek out certain products, services, and technologies for investments in our portfolios. Scaling regenerative agriculture practices to feed everyone cannot be done without utilizing innovative practices and new technologies. As part of these solutions, we as investment managers must invest in the things that we believe are the future of building a regenerative and sustainable food system and thus a sustainable economy.

###

Green Alpha is a registered trademark of Green Alpha Advisors, LLC. Green Alpha Investments is a registered trade name of Green Alpha Advisors, LLC. Green Alpha also owns the trademarks to “Next Economy,” “Investing in the Next Economy,” and “Investing for the Next Economy.” Green Alpha Advisors, LLC is an investment advisor registered with the U.S. SEC Registration as an investment advisor does not imply any certain level of skill or training. Please see additional important disclosures here: https://greenalphaadvisors.com/about-us/legal-disclaimers/