Three Ways to Invest in Water's Future

08/28/2009 10:37 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

In a warming world, the potential for disruption of historic weather patterns is likely to make water the new oil. Here's how to play it.

Driving through the fields of southern Spain last week, I looked out the right-side window and saw nothing but burnt brown earth and olive trees. Out the left-side window, the fields were a vivid green.

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 what happens to rulers who don't bring water?

Rain and Politics

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 are the main source of irrigation water for the country's 235 million farmers. The government has declared 246 of the country's 600 districts affected by drought.

Recent rains have helped—the monsoon rainfall deficit is now about 29%, while 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 such ban was lifted only in 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 cropland is totally dependent on rainfall because it isn't irrigated at all, and decades of overpumping from underground supplies have left many rural wells high and dry, above sinking water tables.

Already Parched—and it Could Get Hotter

The country isn't alone. China's shortage of farmland is a minor crisis compared with its shortage of water, especially water where farmers need it. Most of sub-Saharan Africa seems to be sunk in a 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 shortsighted 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 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 the 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 airflows that govern everything from India's monsoons to rainfall in Australia and Africa.

(The best book I know on shifts in weather 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 manmade water problems that farmers are already facing much more challenging. In India's wheat-growing regions, for example, pesticide and fertilizer runoff have polluted up to 40% of the available water supply. In China, the country's plans for massive movement 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.

The Case for Delivering Water

Irrigation isn't a long-term global fix. In the long term, we won't be able to irrigate huge regions of farmland 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 rainfall (even if it can't do much about huge permanent swings in rainfall).

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A world that's running out of clean, dependable supplies of water located where and when farmers need it makes irrigation one of the longer-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 (NYSE: GE) and Flowserve Corp (NYSE: FLS), but finding water plays is tough work. (For more on Flowserve, see my August 26 blog post.)

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

  1. Lindsay Corp (NYSE: LNN) isn't a pure play on irrigation, but it's 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 center-pivot and lateral-movement irrigation systems, which makes it a leading player in countries such as the United States, Canada, and Australia, 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.


  2. 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 profits will double this year as a result of a 30% to 50% jump in sales of its drip-irrigation products in countries including 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.) But you'll need to buy Jain Irrigation on the Mumbai stock exchange, because it doesn't trade in the US. That's difficult for a US investor who doesn't have an Indian brokerage account.


  3. Finally, I'd suggest Toro Co (NYSE: 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, buying 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, because Toro has a big business in spray-irrigation systems, too, for everything from the Beijing Olympics to golf courses to home lawns. But Toro certainly qualifies as a major player in this fragmented industry.

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've dug deep enough to have a direction for further research.

At the time of publication, Jim Jubak owned or controlled shares of the following companies mentioned in this column: Flowserve.

View the complete Jubak Picks portfolio here

Jim Jubak has been writing "Jubak's Journal" and tracking the performance of his market-beating Jubak's Picks portfolio since 1997 on MSN Money. He is the author of a new book, The Jubak Picks, and he writes the Jubak Picks blog. He is also the senior markets editor at MoneyShow.com.

 

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