As the world’s consumers increasingly eat their way up a middle class ladder replete with growing portions of meat, dairy, cooking oils and fruits and vegetables, farmers find their jobs growing harder by the day. Facing ever-hotter temperatures, record-busting cycles of drought and flood and finite amounts of irrigation water, farmers have the unenviable task of boosting productivity on a base of declining natural resources.
For many, their biggest challenge is water. Water is of course the most basic and essential element of our food chain and our lives, yet it is rarely priced to reflect market demand or underlying scarcity. This dynamic increases the risk of agricultural price shocks that can ripple through the processed food, livestock, and fuel and retail sectors.
Corn as a Case Study
The mammoth U.S. corn market provides a striking case study for analyzing water-related pressures on agricultural supply chains. A recently released Ceres report elevates three risk factors in particular 1) water stress and related groundwater depletion, and 2) inefficient fertilizer use and related water pollution, and 3) climate change. The report provides recommendations for how corn-buying companies and their investors can catalyze more sustainable agricultural practices, while helping farmers preserve and enhance yields, and protect precious water resources. The research is accompanied by new data and interactive maps that highlight irrigation risks and fertilizer pollution hotspots.
U.S. corn growers are among the most productive in the world, in 2013 harvesting a record 14 million bushels using one-third of America’s cropland (an area twice the size of Florida). Critically, this production supports a lengthy and complex value chain that includes 16 major industries and dozens of publicly-traded companies (Exhibit 1). Most of the corn that courses through this value chain isn’t eaten directly by humans: nearly 40% is served up to feed cows, pigs and chickens, with another 35% sold to ethanol refiners to meet government-mandated blending requirements for gasoline (Exhibit 2).
Two Key Metrics: Water Stress & Groundwater Depletion
Corn is a thirsty plant; although only 20% of U.S. corn is irrigated (the rest is rainfed), that 20% represents the most irrigation water used by any single crop in the country – 15.4 million acre-feet annually. While corn farmers have become more water efficient in recent years, this has not made up for the rapid expansion of corn acreage in areas with high water stress and groundwater depletion over the past two decades. Currently, 87% of irrigated corn is grown in areas with high or extremely high water stress, a measure of competition for water (Exhibit 3).
Compounding matters is the fact that many corn farmers in high water stress regions rely on groundwater supplies that are fundamentally unsustainable – i.e. they are literally being sucked dry. The over-exploited High Plains Aquifer (also known as the Ogallala Aquifer) offers a compelling illustration. Over half of the country’s irrigated corn production – worth $9 billion annually – depends on this groundwater resource. Yet, in western Kansas, for example, more than 30% of the aquifer’s total volume has been withdrawn, with another 39% projected to be pumped over the next 50 years. Our analysis found that $2.5 billion-worth of corn grain is grown in High Plains counties where groundwater levels are rapidly declining, and that 12 ethanol refineries in the region, representing nearly $1.7 billion in annual production, rely on irrigated corn grown in areas of extreme groundwater-level declines (Exhibit 4).
At the root of the issue is that most farmers don’t pay for water. Other than the energy costs associated with pumping groundwater, the price of water is so marginal that farmers in the High Plains have had little reason to invest in water-saving technologies or to improve the moisture retention of their soils. Instead, with thirstier crops like corn in high demand, rates of groundwater pumping have only increased
However, water use does have a cost, and farmers in the Corn Belt and California are increasingly concerned about risks and long-term viability of current groundwater supplies. For instance, many farmers in Kansas are paying thousands to drill ever-deeper wells, while a few are voluntarily committing to cut back on water use. In California’s Central Valley, the richest food-producing region in the world with 7 million acres of irrigated farmland, farmers are paying upwards of $400,000 per well to find water to quench their fields.
Dollars Down the Drain: Fertilizer Inefficiency & Water Pollution
In addition to straightforward depletion of water, corn uses the most fertilizer of all major U.S. crops. Nitrogen run-off from cornfields is the single largest source of nutrient pollution to the Gulf of Mexico’s “dead zone,” an area the size of Connecticut that is essentially devoid of life. Agricultural run-off also leads to algae blooms and related contaminants that impair drinking water, as recently illustrated by the toxic microcystin outbreak in Toledo, Ohio. While water utilities contend with spiraling costs to treat drinking water, farmers also pay a price: we estimate that in 2013 alone, U.S. corn farmers lost $420 million in unused fertilizer that washed off their fields into the Mississippi River basin. The good news? There is ample room to internalize these externalities: according to the USDA, only 34% of corn acres are currently farmed using best practices for nitrogen fertilizer management.
Climate Change, the Great Aggravator
Record-breaking weather events – including prolonged drought, intense precipitation and high temperatures consistent with climate change projections – are increasingly common in the U.S. Corn Belt. The 2012-2013 drought exemplified the vulnerability of corn production to extreme weather by decreasing supply in a year of high demand, thereby reducing the profitability of corn-dependent companies in the meat, dairy and ethanol sectors.
Climate change essentially aggravates the intensity of water stress and agricultural run-off. More frequent and prolonged droughts increase demand on already depleted surface and groundwater supplies, and higher temperatures further increase the amount of water that is needed to irrigate corn. According to the latest National Climate Assessment, these pressures will lead to a northward shift in corn acreage, increasing the risk of stranded agricultural processing, storage and transportation assets. Finally intense precipitation and flooding both hinders farmers’ ability to seed and plow their crop, while also eroding soil and intensifying the loading of fertilizer dumped into rivers and lakes.
A Recipe for Change
Water stress, fertilizer run-off and climate change – though discussed here through the lens of U.S. corn – are important drivers of price volatility, regulatory and stranded asset risk across a wide set of agricultural markets and supply chains. Interventions for mitigating these risks will vary, but can broadly be classified as related to 1) public policy and regulation, 2) voluntary adoption of better farming practices, and 3) demand-side (supply chain) pressure. Our study focuses on the latter two. We identify farming practices – like conservation tillage, cover-cropping and enhanced fertilizer management – that have relatively low levels of adoption but significant potential to help farmers manage water-related risks affordably. We also identify 10 ways that businesses sourcing corn can participate in making it more sustainable while mitigating their own procurement risks.
Seventy percent of global water use goes to agriculture. From that wider view, the 16 business sectors and their multi-billion dollar investments that depend on the U.S. corn crop are just a drop in the bucket. The challenge ahead will be in identifying the data, metrics, pricing and approaches that can help the investment community, business, farmers and government further hone our understanding of the risks and set us on a path toward more sustainable and resilient agriculture.Brooke Barton directs the water program at Ceres, a nonprofit organization working with business and investor leadership on global sustainability challenges. Learn more about Ceres’ research on water risk.