Is there profit in water by the drop?

08/28/2009 8:30 am EST


Jim Jubak

Founder and Editor,

Water is the difference between paradise and hell.

As far as I know that isn’t an old Moorish saying, but it should be. Driving through the fields of Andalucía last week, I remember looking out the right hand-window and seeing nothing but burnt brown earth and olive trees. Out the left-hand window the fields were a vivid green. I swear that I even saw the huge leaves of tobacco plants.

The difference was irrigation. Spiders of pipe crawled across those green fields spraying water on the crops.

No wonder that in Washington Irving’s history of Granada’s Alhambra it is the bringing of water that is so often the mark of a great king. Alhamar “introduced abundant streams of water into the city, erecting baths and fountains, and constructing aqueducts and canals to irrigate and fertilize the Vega. By these means prosperity and abundance prevailed in this beautiful city, its gates were thronged with commerce, and its warehouses filled with luxuries and merchandise of every clime and country.”

And rulers who don’t bring water?

Look at India where the failure of the monsoon rains threatens the rule of a Congress party that won a decisive election victory just last year. India’s monsoon rains provide the main source of irrigation water for the country’s 235 million farmers. The government has declared 246 of the country’s 600 districts drought affected.

Recent rains have helped--the monsoon rain-fall deficit is now about 29%; in July it was a startling 44%--but not enough to prevent huge declines in crop yields. Rice production, for example, could fall by 10 million metric tons.

Drought has brought rising food prices and extreme steps from the government. Rice exports were halted in July. The government is talking about banning corn exports—again. The last ban on corn exports was lifted only last October. The government has offered farmers subsidies for diesel fuel to run water pumps, deferred the repayment of farm loans, and cut interest payments on short-term crop loans. In addition the country is working to get farmers to sow winter crops, including wheat—to make up for the 10 million tons of summer-sown rice lost to the drought.

India is an extreme case: About 60% of India’s crop land is totally dependent on rainfall since it isn’t irrigated at all and decades of over pumping from underground supplies have left many rural wells high and dry above sinking water tables.

But the country isn’t alone by any means. Which means long-term investors should be on the lookout for the shares of companies that can "fix" what isa a global water supply problem. In this column IO'll give you three stocks to research.

Beyond India?

China’s shortage of farmland is a minor crisis compared to its shortage of water, especially water where farmers need it. Most of sub-Saharan Africa seems to be sunk in perpetual drought that has fed a numbing series of civil wars. Australia’s wheat belt emerged from a drought just as Argentina entered one.

The crisis is in fact global. In part it’s a result of climate change. In part it’s a result of our own short-sighted depletion of our limited water resources through waste and pollution.

What’s commonly called global warming isn’t going to make the whole earth uniformly warmer. That isn’t the way that the global weather system works. Some parts of the world will actually get cooler—some projections see the United Kingdom, for example, facing a replay of cooling that made the 14th century such a horror of famine and disease across Europe. Warming in other parts of the globe will disrupt the patterns of ocean currents and air flows that govern everything from India’s monsoons to rainfall in Australia and Africa.

(The best book I know on changes in weather than we can expect from global climate change is Tim Flannery’s The Weather Makers: How Man is Changing the Climate and What It Means for Life on Earth.)

That’s going to make some of the other, smaller-scale man made water problems farmers are already facing much more challenging. In India’s wheat growing regions, for example, pesticide and fertilizer run off have polluted up to 40% of the available water supply. In China the country’s plans for massive movements of water from the relatively wet south to the much drier north are, in part, motivated by a need to dilute horribly polluted water supplies with relatively cleaner water.

Irrigation isn’t a long-term global fix. In the long-term we won’t be able to irrigate huge regions of farm land if we don’t have the water to begin with. But it is the kind of medium-term fix that governments are pretty good at promoting and that market forces are pretty good at incentivizing. At the least irrigation can lessen the damage from huge temporary swings in rain fall. (Even if it can’t do much about huge permanent swings in rain fall.)

In a world running out of clean, dependable supplies of water located where and when farmers need it that makes irrigation one of the long term trends that I’d like to invest in.

 I outlined the case for investing in water in my 2008 book The Jubak Picks and suggested a few stocks, like General Electric (GE) and Flowserve (FLS), but finding water plays is tough work. (For more on Flowserve see my August 26 blog post on

I’ve found three irrigation stocks to suggest for further research in this column but none are perfect.

The first, Lindsay (LNN) isn’t a pure play on irrigation but its close—about 79% of revenue in fiscal 2008 came from its irrigation unit. (The rest came from an infrastructure business that includes products such as crash barriers. Lindsay is big in big center pivot and lateral movement irrigation systems, which makes it a leading player in countries such as the United States, Canada, and Australian where farms are big enough to put these large scale automated systems to use. But Lindsay isn’t much of a player in the drip and micro irrigation segments that appeal to small scale farmers in countries such as India.

Second, if you want a pure play in the micro irrigation segment, I’d suggest India’s Jain Irrigation Systems, the second largest irrigation company in the world. On August 21, the company said that profit will double this year as a result of a 30% to 50% jump in sales of its drip irrigation products in countries such as its home market of India. My back of the envelope calculations put the company’s micro irrigation sales at about $307 million in 2008. (About 15% of sales come from the company’s processed-food business, which includes selling mango pulp to Coca-Cola (KO).) But you’ll need to buy Jain Irrigation on the Mumbai stock exchange since it doesn’t trade in the U.S. That’s difficult for a U.S. investor who doesn’t have an Indian brokerage account.

And third, I’d suggest Toro (TTC). You know Toro, if you know the company at all, as a maker of lawn mowers and tractors. Well, embedded in that company there’s a pretty neat micro irrigation business doing about $100 million in annual sales. Toro has been on something of an irrigation acquisition spree in the last decade acquiring James Hardee Industries micro irrigation unit in 1996, Icon in 2001, and Rain Master Irrigation in 2007. Not all these deals have added micro irrigation sales since Toro has a big business in spray irrigation systems too for everything from the Beijing Olympics to golf courses to home lawns, but in this fragmented industry, Toro certainly qualifies as a major player.

I’m not ready to plunk my money into any of these. I’ve got some hard thinking to do on valuation yet and I’m not sure that I’ve caught all the big fish in this business.

But at least now I feel I’ve dug deep enough to have a direction for further research.

(Full disclosure: I own shares of Flowserve in my personal portfolio.)
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