Chapter 11
Water Resource Management
While water resource management is intended to encompass ecological precepts, most, if not all, philosophical ecologists would cringe at the notion of combining water resources with the term management. At best, water resource management would be chastised as “shallow ecology”; at worst, indignation would arise from the anthropocentric arrogance implied by the “management” of nature. So-called deep ecology allows only biocentric values, and, ideally, preservation. To the chagrin of investors, the objective of profiting from water becomes oxymoronic. All of a sudden, water resource management doesn’t sound so bad and becomes very useful as the “string theory” between ecology and economics. And, in all candor, this is the best that can be expected at this juncture.
While water resource management is a term of art in the environmental sciences, it has virtually no parallel recognition in the business world as anything close to an industry classification. Needless to say, there is little associated investment analysis of water resource management companies and none that thoroughly encompass the attributes of the sector envisioned herein. There is a great deal of overlap in the existing framework of water stocks analysis between infrastructure, resource management, treatment, and environmental consulting companies. In this respect, new ground is being broken. More will be said in concluding chapters about investing in the Age of Ecology, but for now the objective is to identify a water industry sector of companies that are positioned to assist in bridging the “knowledge” gap between the severe water problems of the present and the ecocentric solutions of the future.
Water Resource Management Defined
Water resource management is, therefore, the term used to describe an interdisciplinary approach to reconciling human needs and activities (human ecology) with the planet’s hydrologic cycle. It represents a systems-oriented approach to the integration of the principles of resource sustainability with complex water challenges. Restated, the rationale behind the resource management sector represents the embodiment of a comprehensive, forward-looking, integrated approach to solving water resource issues and ensuring sustainable use for the benefit of future generations. As forewarned, it is far from a perfect designation and, accordingly, the companies within the category are less than perfectly aligned with the concept. But this topic is far too important for us to avoid the interim state of flux.
The sectors that are tangential to water resource management are delineated by limiting treatment to equipment and systems suppliers, infrastructure as centered on distribution (once the water leaves the plant) and resource management as including the environmental engineering and consulting services (E/C) firms that are theoretically technology and product neutral but are engaged in system design and construction. This makes more intuitive sense because treatment companies are not responsible for plant build-out, infrastructure should be more focused on the delivery network, and E/C companies design and specify the plant systems in concert with environmental considerations. It is important, therefore, to understand not only what the dimensions of water resource management are, but the types of companies, existing and future, that are likely to benefit from capturing the shift to sustainability.
The Principle of Sustainability
There are as many definitions of resource sustainability as there are ideas about how to achieve it.To complicate matters, the notion of sustainability is so overapplied that the value of its intended message has become blurred. It is not that the anthropogenic bias in many definitions is necessarily problematic from an environmental perspective but that sustainability is suggested as an economic activity, the outcome of which is presumed to be satisfactory, rather than focusing on the limitations imposed by the carrying capacity of the environment and then working backwards to avoid that limitation indefinitely. There is no “sustainability” inherent in nature. Only change itself is sustainable; in other words, nature is “kept” sustainable by changing. But before this commendable movement is vilified, recall that sustainability is one of the goals of water resource management.
Economics and Sustainability
Sustainable resource usage cannot be divorced from economic development. Even Aldo Leopold, who laid much of the foundation for modern ecological thought, recognized the inevitability of economic development. In his pivotal essay on the land ethic,
1 Leopold stated that, “a land ethic of course cannot prevent the alteration, management, and use of [these] ‘resources,’ but it does affirm their right to continued existence, and, at least in spots, their continued existence in a natural state.” This speaks to the reality that absolute resource preservation would have a chilling effect on economic development, but falls short of the instantaneous gratification encompassed in the exploitive implications of the “wise-use” principle espoused by early conservationists (discussed subsequently).
A line in the sand must be drawn in order to effectively address the planet’s current water crisis. And while the tide of ecology can erase the demarcation, to be subsequently redrawn, it is logical to expect that much more progress must be made in elevating the level of healthy drinking water available and basic sanitation before preservationist thought will creep into the mainstream. Witness the problems with the Kyoto Protocol that drew a line in front of the economic expansion of developing countries that is proving to be so difficult to gain international consensus, especially from emerging economies.
Sustainability must obviously be defined before there is any chance of achieving it. In this respect, economic theory can serve as a starting point. Granted, the conceptual framework used in economic models to address environmental issues necessarily views the environment as an asset, which may be repulsive to some. But the sustainable use of nature’s capital implies that the asset must not be diminished; if you tap into your capital, you move from a sustainable to an unsustainable condition. You may not have to file for bankruptcy, but your heirs will.This fits nicely with the sustainability criterion that emerges from Rawls’s hypothetical “veil of ignorance” example in deriving a general theory of justice. At a minimum, sustainability requires that future generations are left no worse off than current generations. Despite the subjectivity in defining “no worse off,” this criterion allows a society to judge the fairness rather than the efficiency of water resource usage; if the use or abuse of our water assets in one period impairs the usage by future generations, then that violates this sustainability criterion. Therein lies the importance of the “veil”; all members of present and future generations decide on the rules for allocating resources among generations without knowing which generation they will be a member of. Hypothetically, then, they will not be overly preservationist nor overly greedy.
The intriguing attribute of this definition of sustainability lies in what it does not preclude. Namely, it is not unjust for current generations to avail themselves of resource availability at the expense of future generations as long as they do not make them worse off. This exclusion is particularly timely given the debate over energy policy and the frenzy over dependence on foreign oil; its application to water is not far behind. Accordingly, despite the fact that the present exploitation of a depletable resource precludes its future availability, it is not valid to conclude from the criterion that this violates the sustainability principle. Remember, it would run afoul of sustainability only if the consumption caused future generations to be worse off. To deplete oil reserves while transitioning to renewable sources of energy is a sustainable policy. If, however, the depletion of oil and the burning of fossil fuels alters the atmosphere to the detriment of future generations, then that is not acceptable under the criterion.
The implications for water resource management now become apparent. If the consumption of water interjects scarcity (e.g., the depletion of groundwater or the lack of conservation) or degrades water supplies (industrial contamination) or alters the environment (ecosystem impairment), sustainable management practices must take the marginal cost into account.The oil analogy becomes useful yet again. If we continue to deplete oil reserves through the use of fossil fuels in energy generation, the cost of alleviating global warming must be included in determining the efficient resource allocation. Why not require oil producers to acquire carbon credits for every barrel sold? Otherwise, the maximum sustainable yield is not synonymous with efficiency. With respect to water resource management, sustainable use must incorporate the marginal cost of alternative supplies, advanced treatment, and conservation initiatives.The challenge then comes back to the methods, whether market-based, institutional, regulatory, or altruistic, by which sustainability is achieved.
Water Policy and Sustainability
The critical question, then, is how is sustainability being incorporated into water policy? An example of this is encompassed in the shift in policy emphasis toward managing water resources at a scientifically practical level; that is, based on watershed units. At first blush, this may seem overly broad. But, by definition, watersheds penetrate everywhere, from a backyard to the Mississippi basin. The scalability of watersheds enables policy making to take place on a variety of levels and facilitates many key water resource management initiatives such as nonpoint source pollution, reuse and recycling, and the determination of water quality impairment through the Total Maximum Daily Load (TMDL) program.
Watershed Initiatives. Water quality improvements have traditionally focused on specific point sources of pollution, such as wastewater discharges, or specific water resources, such as a river segment or wetlands. While this approach may be successful in addressing readily identifiable contaminants, it often fails to address the more complex and chronic problems that contribute to water quality. For example, pollution from a wastewater treatment plant may be significantly reduced by advanced treatment technologies, yet a receiving body of water may still be contaminated if other factors in the watershed, such as runoff, go unaddressed . Watershed protection is emerging as a central tenet of water resource management and promises to be a significant area of growth for companies engaged in the business.
Watersheds are the basic land unit of the hydrologic cycle; all land on Earth is in a watershed. Watersheds are defined as the topographically delineated geographic area of land that drains water, sediment, dissolved materials, heat, biota, and the like, to a common outlet. The drainage system (and the watershed) includes the geographic area surrounding the stream system that captures precipitation, filters and stores water, and determines water release into stream systems. Since watersheds are defined by natural hydrology, they represent the most logical basis for managing water resources.
Many water quality issues are better solved at the watershed level than by addressing individual problems within a watershed. Watershed management attempts to comprehensively address natural resource issues in a manner that includes multiple jurisdictions and cuts across political boundaries, integrates concerns about surface water and groundwater quality and quantity, and coordinates insights from the natural and social sciences. A holistic watershed management approach provides a framework for addressing all stressors within a hydrologically defined drainage basin instead of viewing individual sources in isolation. Unique to the concept of watershed management is recognition of the relationship between land use, soil erosion, and productivity; water quantity and quality; wildlife populations and habitat; and social and economic factors. It is a systems approach rather than a single-pollutant approach to solving water quality problems.
The federal budget backs up the economics of this approach with a number of watershed initiatives. The Watershed Protection Approach (WPA) describes efforts within the Environmental Protection Agency (EPA) and other federal, state, and local agencies to use a watershed-oriented approach to meeting water quality goals. The WPA is a comprehensive methodology that takes into account all threats to human health and ecological integrity within specific watersheds. To some extent, this approach requires a departure from the EPA’s traditional focus on regulating specific pollutants and pollutant sources and instead encourages integration of traditional regulatory and nonregulatory programs to support natural resource management. The budget also funds the EPA’s Targeted Watershed Grant program (formerly called the Watershed Initiative) that encourages the implementation of water quality trading programs on a watershed basis.
In addition to these programs, the EPA strongly supports the development and issuance of National Pollutant Discharge Elimination System (NPDES) permits on a watershed basis. The EPA believes that watershed-based permitting can:
• Lead to more environmentally effective results
• Provide greater opportunities for trading and other market-based approaches
• Reduce the cost of improving water quality
• Foster more effective implementation of TMDLs
• Facilitate regulatory integration of key water programs
In fact, there is a great deal of interplay between watershed management initiatives and existing requirements under the Clean Water Act of 1977. For example, water quality standards are the driving force behind state water quality programs, and one goal of any watershed management plan is the ultimate attainment of water quality standards.
Watershed-based permitting is defined as an approach that produces NPDES permits that are issued to point sources on a geographic or watershed basis to meet watershed goals. There are numerous permitting mechanisms that may be used to develop and issue permits within a watershed approach. The most common approach is to reissue NPDES permits according to a rotating basin schedule wherein each source receives an individual permit, and the permits are issued based on basin or watershed management areas. Another approach includes a general permit but to categories of common point sources within a watershed, such as all publicly owned treatment works (POTWs) or all confined animal feeding operations or all municipal stormwater discharges. A variation on this is a general permit that collectively addresses all point sources within the watershed. The most significant difference between a traditional general permit and the watershed general permit for common or collective sources is that permit requirements reflect watershed-specific water quality standards. Several other approaches include a watershed-based individual permit that covers multiple permittees and integrated municipal NPDES permits.
Effectively managing a watershed requires knowledge attainable only through thorough research, monitoring, and evaluation. Since watershed protection is largely an information-based concept associated with planning and management rather than the isolated application of treatment methodologies, it is an activity suited for engineering and consulting companies. These companies include a broad range of specialized water resource management projects: integrated watershed planning, Phase II stormwater permits, hydraulic modeling, surface water management, and professional design and consulting services in support of sustainable water and wastewater infrastructure solutions.
Watershed management focuses on water and its interrelationship with everything else in the watershed. The unique environmental, social, economic, and political scene of a watershed must be combined with traditional natural resource science to successfully manage a watershed. Watershed management is a water quality and quantity tool that is rapidly growing in significance as regulators transition from isolated treatment solutions to total water management.
Table 11.1 presents a list of companies engaged in the water resource management sector.
The Engineering and Consulting segment has a number of different monikers, including Engineering and Environmental Services; Engineering and Consulting (E/C); and Engineering, Procurement, and Construction (EPC). The environmental E/C tag is the one used herein, but the point is made. These are service firms that provide the technical knowledge to address the broad range of water resource management issues. Most grew from the early days of command and control, where remediation response was more prevalent than prevention.
Remediation
With the growing concern of consumers about drinking their own tap water, it would seem logical to assume that such awareness would spill over into the macro environment as well. Consumers are certainly thinking locally, but have seemingly lost interest in the global nature of environmental issues. This partially explains the relatively favorable investment climate for companies engaged in point-of-use water treatment compared to the lagging performance of the broader water remediation stocks.
Perhaps as a result of perceived satisfaction at the individual level, while frustrated about political and regulatory failings, the remediation market has lost the public’s attention over the severity of generalized water quality problems. Following the positive outlook of the late 1980s, when environmental issues were highly visible and investors saw the opportunities in cleanup efforts, economic realities and regulatory stalemates have put a damper on the environmental remediation business. The remediation market continues to decline in light of declining governmental work, the successful resolution of many point sources of contamination, and a shift in regulatory priorities and the political will that drives it. In short, remediation activity is a declining portion of the E/C business mix. For investors, the positive fundamentals of these companies rests with the transition toward sustainability and the role of the E/C firms in linking ecological imperatives with economics.
The environmental remediation industry is comprised of E/C companies that apply a broad range of consulting, engineering, and construction services to environmental projects, as well as the equipment and technology firms that service remediation activity with specific equipment and technology. While the lines are becoming blurred, environmental E/C firms are distinguished from other environmental service companies in their role in project management and product specification and by their contractual relationship with the ultimate customer.
The publicly traded environmental E/C firms are generally national firms that are highly diversified and provide varying levels of engineering, construction, and consulting services. Growth in the 1980s and early 1990s was derived primarily from private sector spending to characterize wastes on Superfund sites, to remediate underground storage tank sites, and to facilitate real estate transfers. But the problem with many Superfund projects is that a significant amount of the federal money set aside for site cleanups is spent deciding who is at fault, rather than on the actual cleanup. Because of this, the market for environmental remediation activity has shifted dramatically from private-sector spending on relatively small-scale site assessment and remediation projects toward large-company and public-sector spending on complex site remediation and cleanup.
Public-sector spending was greatly expanded by the Federal Facilities Compliance Act of 1992, which put federal facilities under the same regulatory and oversight framework faced by the private sector. This prompted a significant amount of government action and has been one of the few bright spots in the otherwise beleaguered environmental remediation sector. The EPA has estimated that the cost to restore federal sites and manage the waste could amount to as much as $400 billion over the next 30 years.
Even now, the Department of Defense (DOD) market remains strong as it attempts to resolve the environmental problems in its installation, restoration and base closure programs. Significant military base closures and the desire to transfer the properties to the private sector have provided the impetus for growth in this remediation activity. The DOD and Department of Energy (DOE) estimate that spending over the next five years could reach $65 to $100 billion. Still, new government contracts are difficult to secure and competition is fierce. Contract opportunities have declined, while the number of E/C firms remains high despite attrition and consolidation.
The list of listed E/C firms has declined dramatically in the last decade. Familiar names that fed the growth of the existing E/C behemoths include Air & Water Technologies, Harding Lawson, ICF Kaiser, Dames & Moore, Stone & Webster, Geraghty & Miller, and Fluor Daniel. The dynamics of the industry have led to a significant amount of consolidation activity and a few full-scale meltdowns (e.g., Morrison Knudsen). The need for growth and diversification is fueling acquisitions by dominant players seeking to expand geographically and into capabilities that complement core businesses or open niche opportunities necessary to replace dwindling revenues. Examples include the Fluor Daniels/Groundwater Technology combination, the purchase of Rust International by U.S. Filter via Wheelabrator Technologies, and the acquisition of Geraghty & Miller by Heidemij N.V.
Firms must aggressively pursue business in new and established selected market sectors focusing on higher-margin, value-added solutions for customers, while controlling costs. International markets, such as the Asia-Pacific region, also hold significant future potential. From an investment point of view, selectivity remains the key to investing in the environmental E/C group.There are many uncertainties associated with the future course of environmental policy as well as the enabling technologies. Many of the small-capitalization stocks, which includes the majority of companies, are experiencing severe earnings deterioration because of technological dependence, niche operations that lack market demand, and the inability to compete with larger firms for full-service procurements. In addition, many of the large-capitalization E/C firms, while of interest because of their exposure to the water industry, also tend to have significant nonenvironmental E/C.
The shift in emphasis from specialized environmental consulting to full-service project management is a result of competitive and cost-containment pressures. This shift will benefit large-capitalization companies because they possess complex project management expertise and the financial strength to deal with liability challenges. Particularly with respect to DOD and DOE contracts, the complexity and size of the cleanup at many of the sites requires E/C firms with extensive project management experience to provide comprehensive assessment, remediation, and closure expertise. This attribute is especially important given the continuing deterioration in private-sector work.
It is anticipated that the remediation business will continue to experience little, if any, earnings growth due to excess industry capacity, a general lack of projects (especially in the private sector), and regulatory uncertainties. In the short run, new growth initiatives seem limited and the group in general lacks earnings visibility with respect to this component of their business. As a side note, the eventual shift toward actual cleanup operations creates significant opportunities for technology and equipment companies that have specific contaminant removal capabilities and innovative new procedures. Bioremediation, for instance, is increasingly being called upon to clean a broad variety of sites and contaminants. Biochemicals firms should benefit, as would equipment suppliers that market cost and efficiency advantages over traditional treatment techniques. While perhaps the riskiest area for investors, new and innovative remediation procedures offer substantial promise as more technologies are proven and approach commercialization.
Due to the duration of the slump in core remediation businesses, there are fewer E/C firms that focus solely on the cleanup of contaminated water. On the positive side, the adjustment to such a stagnant environment is creating possibilities for leading firms in this segment. Diversification into government outsourcing at federal facilities, leveraging core competencies into high-growth remediation activities and shifting from areas that are dependent on regulatory enforcement, are trends that are sure to transform the traditional E/C remediation business. Although the best investment vehicles remain unclear, the magnitude of the market insures that it will remain a key area of the water industry, gaining respect as the segment adjusts to a changing economic and regulatory environment.
Water Supply: Reservoirs and Dams
The construction of dams on the planet’s rivers and streams is as old as the human need to augment natural hydrologic sinks with water stores. In modern times, dams have become synonymous with development, inextricably linked to the landscape of economic growth. Unfortunately, they are also tethered to the natural landscape, diverting flows and altering ecosystems. The benefits of dams are undeniable but, to many, the costs are simply unacceptable in an age of heightened environmental and social awareness. And, importantly, negative impacts can often be avoided. The critical need for irrigation, drinking water supplies, and hydropower are likely to overwhelm growing objections to the construction of dams. In addition, the effects of global warming serve to exacerbate the spatial and temporal water problems that dams are constructed to ameliorate. This would be a good place for socially responsible investors to turn the page, for despite the seeming contradiction between sustainability and capturing limited freshwater supplies, the damming of easily accessible surface water is often juxtaposed with sustainable water resource management.
It is not the intent to screen any potential investment associated with the water industry, despite any professional position. The construction of dams is big business, and there is a high probability that many parts of the world will see a dramatic increase in activity. Nelson Mandela captured the state of mind in the developing world at the time of the Report of the World Commission on Dams (WCD) in 2000.
2 In his words, “The problem is not dams. It is the hunger. It is the thirst. It is the darkness of the township.” Food plus water plus energy equals economic development. If that was the mentality at that time, you can imagine it is magnified ten-fold in this time of even greater climate change awareness, agricultural demands, and energy volatility.
There has not been a comprehensive study of the number of large dams worldwide since the WCD report. That document put the number of large dams worldwide at a minimum of 45,000. The database of some 80,000 dams of all sizes in the United States was pulled from the web by the Army Corps of Engineers shortly after 9/11. But precision is not required in order to understand the dynamics of the dam and reservoir construction business worldwide. Dams have long been the subject of considerable controversy.
Easily accessible surface freshwater is overappropriated. A majority of the world’s large river systems are encumbered by dams. Half of the world’s dams were built exclusively or primarily for irrigation. Logically, the number of single-purpose dams built for irrigation is highest in the Middle East, at 86 percent, and Africa, at 66 percent.
The Hetch Hetchy Valley
At no time were the central tenets of sustainability more fiercely debated than in the controversy over the use public lands in the United States in the early twentieth century. The conservationist school, led by Theodore Roosevelt and Gifford Pinchot, advanced the proposition that sustainability meant the “wise use” of wilderness areas. However, the preservationist movement, led by Sierra Club founder John Muir, viewed the absence of human exploitation as the path to sustaining wilderness areas. In other words, to the conservationists, future generations would be best served by wise and scientifically based management of public lands by the current generation. For the preservationists, the legacy was ensured only if left completely untouched.
In 1901, Pinchot and the mayor of San Francisco proposed to dam the Tuolumne River flowing through the Hetch Hetchy Valley (in what is now Yosemite National Park) to supply drinking water for the rapidly urbanizing city of San Francisco. As a geologist and naturalist, John Muir spent many years studying and exploring the wilderness of California’s Yosemite Valley and was adamantly opposed to the dam.The stage was set for the iconic controversy of the early American environmental movement. It is constructive at this point to quote Pinchot’s description of the wise-use principle:
The first great fact about conservation is that it stands for development.There has been a fundamental misconception that conservation means nothing but the husbanding of resources for future generations.There could be no more serious mistake. Conservation does mean provision for the future, but it means also and first of all the recognition of the right of the present generation to the fullest necessary use of all the resources with which this country is so abundantly blessed....
The first principle of conservation is development, the use of the natural resources now existing on this continent for the benefit of the people who live here now. There may be just as much waste in neglecting the development and use of certain natural resources as there is in their destruction.
3Congress passed the Raker Act in 1913, allowing the city of San Francisco to build the dam and flood the Hetch Hetchy Valley. The divisive battle lasted 12 years, and the war continues today. Having been in remission for over 40 years, the construction of massive dams in the western United States is gaining momentum again, fueled by the need for irrigated crops, inexpensive hydropower, and concerns over climate change. Ironically, the consideration of new dams is rising just as older dams are being decommissioned as a result of environmental concerns. Globally, the advent of large dams continued unabated with potentially devastating environmental consequences and few lessons learned.
The Hetch Hetchy Valley Revisited: The Three Gorges Dam
The Three Gorges Dam is the largest hydroelectric power plant in the world with a width of a mile and a half, rising 600 feet, and flooding 630 square miles along the Yangtze River in China. Officials estimate that the dam will save 50 million tons of coal per year, reduce CO
2 emissions by 100 million tons, prevent massive flooding, generate a substantial amount of the country’s electricity requirements, and create a reservoir of 1.4 trillion cubic feet. The dam displaced 1.4 million people to the densely populated hillsides, where landslides and erosion are growing problems. Sedimentation, silting, and nutrient retention not only threaten the dam’s efficiency, but also have potentially catastrophic ecological impacts. See
Table 11.2.
Rooftop Reservoirs: Rainwater Storage
To end the dam discussion on a positive note, innovation in sustainable water resource management is being planned in Queensland in Australia, where homes are harvesting rainwater. The roofs of the homes provide collection for reuse in nonpotable applications and diversion to advanced treatment systems before being fed into the central drinking water system. The rooftops of houses could be the water reservoirs of the future—the so-called urban dam. The bottom line is that the severity of water problems must be lessened before a foothold can be gained for alternatives to the manipulation of the hydrologic cycle through the construction of dams.
Irrigation
Agriculture is by far the largest user of groundwater and surface water throughout the world.The agricultural complex could not come close to meeting the demands of our growing planetary population without the irrigation of crops.While almost 70 percent of the world’s freshwater withdrawals go toward irrigation, the allocation differs widely across regions depending on a variety of factors such as the role of agriculture within the economy.Within the European Union, irrigation of agricultural land represents about 30 percent of the total consumptive water withdrawals, and most of that is in the southern countries of France, Italy, Greece, Portugal, and Spain. In the United States, irrigation withdrawals are about 40 percent of total freshwater withdrawals. Excluding thermoelectric power, the allocation of freshwater withdrawals rises to 65 percent nationwide.
4 Surface water accounts for about 58 percent of the total irrigation withdrawals, leaving groundwater accountable for 42 percent. In many western states, however, the allocation to agriculture rises to over 90 percent.
In developing countries, irrigation takes on additional complexities. There are many water allocation, conservation, and management issues facing irrigated agriculture in emerging economies. Irrigation plays a major role in food production and food security. In many developing countries, irrigation represents up to 95 percent of all consumptive water use. Future development not only depends on the basic fabric of agricultural activity as an underpinning of economic sustenance, but also places demands on water resources from uses other than irrigation. Many developing countries are dependent upon flows from outside of their borders, thereby increasing regional tensions and the potential for water conflicts. For example, 97 percent of Egypt’s total water flow originates from outside of its political boundaries.
5 Population growth, climate change, and shifting diets combine to create demand for efficiently irrigated land; harvests can increase only if additional land is cultivated or if higher yields are achieved.
Technological Flow: Low to High
The demand for mechanized irrigation comes from the following sources: conversion from dryland farming, conversion from flood irrigation, and replacement of existing mechanized irrigation machines. The associated metrics of market potential bears this out. First, worldwide, only 17 percent of agricultural land is irrigated. Second, some 85 percent of global agricultural irrigation is accomplished by the flood irrigation method. Mechanized irrigation can improve water application efficiency by 40 to 90 percent compared with traditional irrigation methods. And third, innovation and improvements in irrigation technology have reduced the life cycle of low-tech mechanized equipment, making the replacement market a significant component of demand. According to the Worldwatch Institute,
6 at least a doubling of water productivity in U.S. agriculture is necessary to meet food demand in a sustainable manner.
Quality Considerations. The quality of water used in irrigation is important for the quantity and yield of crops, maintenance of productive soil characteristics, and ecological impacts. Reduced water runoff from advanced mechanization improves water quality in riparian water bodies such as rivers and streams and in underlying aquifers.
Innovation in Irrigation. The demands on groundwater supplies for irrigation are driving innovation, such as the trend away from flood irrigation (principally used in international markets) to center-pivot systems or localized drip irrigation. The impact of center-pivot systems is best visualized as those lush circles that can be seen as we traverse the country at 30,000 feet. These are true “crop signs,” an indication that irrigation is pivotal in squeezing greater yields from crops. While corn-based ethanol is part of the recent irrigation equation, global food demand fueled by rising real incomes in the developing countries is the more permanent fixture. Demand for irrigation is growing rapidly in Brazil, Argentina, and eastern Europe, as well as Australia.
Water and, in some instances, chemicals are applied through sprinklers attached to a pipeline that is supported by a series of towers, each of which is propelled via a drive train and tires. A standard mechanized irrigation machine (“center pivot”) rotates in a circle, although extensions (“corner” machines) are available that can irrigate corners of square and rectangular fields as well as conform to irregular field boundaries (referred to as a “corner” machine). One of the key components of the irrigation machine is the control system. This is the information technology that allows the machine to be operated in the manner preferred by the grower, offering control of such factors as on/off timing, individual field sector control, and rate and depth of water and chemical application. Control system innovation allows growers the option of controlling multiple irrigation machines through centralized computer control or mobile remote control It is these features that allow improvements in productivity and address sustainability issues.
Since the purchase of an irrigation machine is a capital expenditure, the decision is based on the expected return on investment. The benefits a grower may realize through investment in mechanical irrigation include improved yields through better irrigation, cost savings through reduced labor, and lower water and energy usage.
Investment Landscape. While there are no significant barriers to entry, competition has largely been consolidated over the years, making irrigation one of the few subsectors that has reached a market-driven structural state. Valmont Industries and Lindsay Manufacturing are the leaders in the irrigation segment, combining to conservatively account for more than 75 percent of the global irrigation business (see
Table 11.3). Because of the obvious seasonality of the irrigation business, both have diversified outside irrigation, but this is one instance in the water industry where it should not be viewed as a negative; the irrigation component is the major earnings driver and will represent an increasing percentage of the overall mix for the foreseeable future.
Table 11.5 Resource Management: Multi-Business Companies
Tables 11.4 and
11.5 further delineate company groupings engaged in the broad category of resource management.
