Watering Scarcity: Private Investment Opportunities in Agricultural Water Use Efficiency

In many regions around the world, demand for fresh water now outstrips renewable supplies. Water scarcity is projected to worsen considerably due to a combination of factors such as population increase, higher incomes and changing lifestyles, pollution, and climate change.

Agriculture is by far the biggest water user, accounting for more than 70% of global withdrawals. With booming industrial and domestic demands for water, especially in fast-growing emerging economies, the competition for finite water resources is intensifying.

Water scarcity and increasing competition present the agricultural sector with a huge challenge. Farmers are expected to meet the rapidly increasing demand for food, feed, fuel and fibre crops even though most land and water resources have already been committed. Consequently, crop water productivity must increase (‘more crop per drop’), partly through raising irrigation water-use efficiencies, either at the system or at the farm level. This is also an investment opportunity which, we believe, will attract the necessary private capital for at least three reasons.

1. Technologies to improve water use efficiencies are mature and are ready for large-scale adoption. These technologies include automated ‘on-demand’ irrigation, remote-sensing technology to manage soil moisture, low-pressure drip irrigation, as well as drought-resistant crop varieties.
2. Policies are starting to provide farmers and investors with the right incentives to invest in water-use efficiency. Water prices are rising to better reflect the value and delivery cost of irrigation water. Rights to water are formalised and can in some countries be traded from low to high-value uses. The private sector is engaging in providing expertise and capital as investment risks are shared. Farmers’ access to product markets and financial services is expanding. Consequently, water-use efficiency in irrigated agriculture is emerging as an opportunity for private investments.
3. Market signals seem to be favourable. Food and commodity prices reversed their long decline and farmers’ incomes have increased accordingly. Higher water, energy and fertiliser costs may encourage efficient irrigation technologies and practices. Some irrigation technology markets and specialised companies are reporting strong growth. Investors are increasingly aware of the opportunities in the water sector.

However, the current turbulence in the global financial markets (October 2008) may impact private investors’ decision making and their investment options which we cannot oversee at the time of writing. In practise this means that some of the conclusions drawn in this report may be affected although the general picture still holds.