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Industries that are dependent on products with a large virtual water footprint are more vulnerable to major changes in the price of water brought on by a global water crisis. Here’s a closer look at three such industries.
In a future defined by a global water crisis, there will be winners and there will be losers. Today I’ll expose three industries that will be hard hit by rising water prices.
Yesterday we took a look at the concept of virtual water, the measurement of how much water goes into producing the products we love.
Some products require a lot more water than others. For example, the Water Footprint Network reports that it takes an incredible 3,170 gallons of water to produce a single pound of chocolate and only 13 to produce an orange.
Because so much more water goes into producing the pound of chocolate than the single orange, the chocolate maker is essentially leveraged against the price of water.
Much the same as highly leveraged banks saw their losses compound exponentially in the financial crisis, these chocolate makers could see their costs spiral out of control if water prices begin to rise. With consumers unwilling or unable to absorb the rising costs through higher chocolate prices, the chocolate maker could go out of business quickly.
A 10% rise in the price of water would make the cost to produce an orange rise 1.3x. But that same 10% rise in the price of water would make the cost to produce a pound of chocolate rise 317x, an increase of 31,600%.
Of course, the market will find a way to mitigate these costs, perhaps by shifting production of water-intensive resources to regions with more plentiful water resources. Plus, most of the world’s cocoa is grown in relatively wet regions of the world so the effects of water prices on chocolate prices are certainly less than the effects of water prices on products grown with irrigation water.
But there is no denying that certain water-intensive products have only enjoyed such rapid expansion because of ready access to inexpensive water.
Here are three industries that will be the hardest hit by rising water prices in a global water crisis.
1. Candy and Chocolate
Besides my example of the chocolate producer above, refined sugar requires 198 gallons of water per pound of sugar produced. Even as the market finds new ways to sweeten candy and sugary beverages, producers of the world’s sweets could face rising costs like never before.
Companies that would likely get burned by rising costs here include Hershey Co (NYSE: HSY) and the soft drink producers Pepsico (NYSE: PEP), Coca-Cola (NYSE: KO), and the Dr. Pepper Snapple Group (NYSE: DPS).
And if you think soft drinks won’t feel this pain because most of them are sweetened with high-fructose corn syrup, think again. It still takes 108 gallons of water to produce a single pound of corn, the base ingredient for high-fructose corn syrup.
2. Beer, Wine & Spirits
Considering that producing a gallon of wine requires 1,008 gallons of water and a gallon of beer requires 689 gallons of water, the industry as a whole is considerably vulnerable to rising water prices.
Beer companies like Anheuser Busch Inbev (NYSE: BUD), Molson Coors (NYSE: TAP) and Boston Beer (NYSE: SAM) would be hit hard by rising water prices.
Alcohol giant Diageo (NYSE: DEO) is best known for brands like Johnny Walker, Smirnoff and Baileys. But beer and wine together account for 26% of Diageo’s total sales. Constellation Brands (NYSE: STZ) is in largely the same situation.
3. The Coffee Industry
As water scarcity drives the price of water higher, the coffee industry will pay a heavy price. According to the Water Footprint Network it takes 880 gallons of water to produce a gallon of coffee.
That’s 55 gallons of water to produce an 8 ounce cup of coffee.
Like with chocolate, coffee beans are generally grown in regions with abundant natural rainwater. But the effects of changing climates and more expensive irrigation for the plants that are irrigated will certainly be felt.
Starbucks (Nasdaq: SBUX), Green Mountain Coffee Roasters (Nasdaq: GMCR), and Dunkin Donuts (Nasdaq: DNKN) are a few of the bigger coffee brands that would feel the pain if rising water prices spike the price of coffee.
Global Water Crisis: The Bottom Line
If UN forecasts and predictions from the world’s water advocacy community come true then the coming global water crisis will force the price of water to rise. Industries build on products with a high virtual water footprint will surely feel this pain the most, as they are leveraged to the price of water.
Time will tell whether these forecasts come true. But if they do, the coffee, alcohol and candy industries will be hit hard.
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