Impact of water scarcity on agriculture

The animal agriculture sector uses 30% of the planet’s freshwater resources.^[1] 

As climate change exacerbates droughts and water scarcity in some regions, protein producers’ ability to operate will be impacted by water use availability in medium/high water-stressed areas.

Many of the companies assessed in the Index operate in regions predicted to suffer from extremely high water stress by 2040. The short-term physical impacts of water scarcity include reduced productivity from interruption of operations at processing plants and higher feed costs from lower yields, while the long-term consequences will include soil erosion and higher livestock mortality.^[2] 

How droughts are disrupting agriculture  

Investors who do not account for water risks could be misallocating capital by overpaying for assets expected to underperform financially due to increased material impacts from higher feed costs, operational disruptions in the supply chain and tougher environmental regulations. CDP analysis has estimated that the potential impact of inaction on water risk for the food, beverage and agriculture sector is USD $9.5 billion, while the cost of responses to address these risks would be much lower – USD $1.1 billion.^[3] 

Many regions are already seeing animal protein producers compete with communities and other industries for water, and some predict that this will worsen as demand for water increases with the growing world population.

One example is the American West, which is enduring its driest period in 1,200 years.^[4] 

Cattle herd sizes in the region are expected to fall by 36% in 2022 as farmers sell off parts of their herds in the struggle to find adequate food and water for livestock.^[5] The extreme drought has forced 71% of ranchers to remove their cattle from rangeland due to insufficient forage and to buy feed, whose price has risen.^[6] Farmers are also struggling to transport in water from other sources as it becomes unavailable at their ranches, with the high cost of diesel making this option significantly more expensive.^[7] 

The 2022 drought’s impacts on agricultural production in California are expected to cause a loss of 14,300 jobs and an economic loss of more than US$1.3 billion in the Sacramento Valley.^[8] Regulators imposed water use restrictions on ranchers and growers, forcing them to stop diverting water from the Sacramento River and its tributaries^[9]. Some farmers defied the state's emergency drought order not to divert water, paying US$500 in fines per day for illegally taking supplies.^[10] 

Meanwhile, Europe experienced its worst drought in nearly 500 years in 2022, with conditions worsening in spring 2023. The EU joint research centre found temperatures between 2.5˚C and 4˚C higher than average in some countries in the Mediterranean, impacting water resources, agriculture and energy production^[11]. This severely impacted grain and cereal production, with reduced yields of 8-13% for maize, sunflowers and soybeans,^[12] and left livestock farmers facing a winter in which soaring feed prices could force some to leave the sector.^[13] 

As a result, it was estimated that EU milk production would fall by 0.5%, with reduced forage supply encouraging some farmers to cut herd sizes and hot, dry weather reducing cows’ milk yields. Feed costs were also expected to contribute to a 0.6% drop in beef production^[14]. 

European countries could be forced to restrict water use in the agricultural sector as droughts become more frequent, as seen this year in Catalonia, Spain where regional government introduced a mandatory 40 percent reduction in water consumption for agriculture. Some EU lawmakers have already criticised the current Common Agricultural Policy for being too shortsighted and lacking incentives for water management and the use of technologies.^[15]

How FAIRR evaluates water use and scarcity risk  

FAIRR examines whether a company is assessing and managing its exposure to water scarcity risks in its processing facilities, feed and animal supply chains. Companies should at least identify high-risk locations, set risk-differentiated targets for water consumption and withdrawals, and engage with suppliers to manage water risks. 

More advanced practices entail year-over-year improvements for processing facilities, including an overall decrease in water consumption and withdrawals. To further reduce their risk exposure, companies could also provide comprehensive guidance, technical support and incentives to suppliers to improve water use at animal and feed farms. 

Assessments, targets and policies  

Granular, location-specific data is key for investors and companies to understand their exposure, identify high-risk areas and effectively manage risks.

73% of Index companies now have a ‘High Risk’ rating for this factor in 2023, compared to 82% in 2022, and almost 30% do not report water consumption at facilities. Two companies, one based in Mexico and the other in Japan, provide no discussion in their 2023 reports on how their water use is managed.  

To reduce and mitigate risks, companies can conduct a water risk analysis to set targets in accordance with the water stress level of their operations. 62% of meat and dairy companies have now disclosed time-bound water consumption or withdrawal targets for their facilities in 2023, compared to just 43% in 2022. 

While all companies should have a sustainable agriculture policy that addresses water use in their animal-farming and feed-farming operations, only 14% of meat and dairy producers had one in 2023. Inaction is worst in feed farming, with only four meat and dairy companies disclosing this information.  

Aquaculture companies, particularly the salmon producers assessed within FAIRR’s Index, differ from land-based protein producers regarding freshwater usage because a large period of production occurs at sea. As such, this almost eliminates the need for water at this production phase, with most water usage occurring at the earlier stages of smolt production and then processing. Water usage is still needed for growing feed materials, but despite this, only one aquaculture company addresses water usage in feed farming in its supplier policies. Of similar concern is that only two aquaculture companies address water usage at the smolt production stage within their policies.  

Animal protein producers should also provide comprehensive guidance and support to suppliers and growers to improve water use at animal and feed farms. The Index has identified improvements in this area, with 25% of companies now reporting the provision of support and/or guidance to animal or feed suppliers in relation to water usage. Notably, five companies disclose provision of support for both animal and feed farms: CPF, China Modern Dairy, Danone, Marfrig and Muyuan. 

Land-based protein companies providing comprehensive guidance, support and incentives to suppliers/growers 

Source: FAIRR Initiative 2023