Nearly 70% of the world's surface is covered by water, however, only about 1% is considered fresh and fit for human consumption. More than a billion people currently do not have access to this precious commodity. Add this to our exploding global population and you have a recipe for increasing scarcity. Water, may soon replace oil and natural gas as the most heavily traded commodity. For example, the tiny nation of Kuwait holds about 10% of the planet's oil reserves beneath its soil, it also has the distinction of being the only country without a natural lake or reservoir. Droughts in Las Vegas, India, Mexico and Africa highlight the growing global problem.
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Focusing on Agriculture
While there has been much publicized hype regarding aging water infrastructure, including the $277 billion needed here in the United States, the correlation to agriculture and water is often lost. Investors in the Ag-space usually place their bets on companies such as Monsanto (NYSE:MON) and Syngenta AG (NYSE:SYT) for their innovative seed products or Potash of Saskatchewan (NYSE:POT) for its nitrogen-rich fertilizers. Investors in the water world often focus on availability of clean drinking water.
The agriculture infrastructure build-up, moving water to our crops, will need to be just as large. Roughly 65% of China's total water usage goes into feeding its people, but less than half of that ever reaches the intended soil. The rest disappears through evaporation and leaks in its underdeveloped system. Every year 15.3 million hectares, about 13% of China's total farmland, experiences some form of drought-like conditions. This scenario plays across the globe each season. (For more on China, see Investing In China.)
Finding the Double Play
Small-caps Lindsay Corporation (NYSE:LNN) and Valmont Industries (NYSE:VMI) both manufacture irrigation equipment that affects water, energy and labor. Currently, these two companies provide water for just over two-thirds of the United States harvest and have significant presences in Australia, Africa and parts of Brazil. Lindsay pioneered the use of a central pivot irrigation system, which allows the units to flow up and down steep grades, turn corners and provide greater crop yields. Along with its Zimmatic center pivot system, FieldBOSS computer-aided GPS controls and Watertronics pump systems, Lindsay provides a whole collection of irrigation products suited for almost any agriculture situation.
The company's 2008 sales were up nearly 69% versus full year 2007, however, given the low commodity price environment, the company's recently reported earnings were down. During the three months ended February 28, 2009, Lindsay had an operating loss of $0.4 million versus a $16 million gain the previous year. Total revenue for the quarter was down 40% from the same period in 2008. The company trades at a forward P/E of 12.92 and yields 0.91%.
Valmont has been busy expanding into the emerging markets in the Far East, opening three new plants in China. Combining this with its operations located in over 53 countries, the company is certainly taking advantage of the growing world-wide market. Using advanced technologies, Valmont has been able to design systems that use far less water to irrigate certain crops. For example, Brazilian farmers using a Valmont pivot system to grow rice, a crop that normally requires flooded fields, were able to cut water usage by 50%. The company reported record net earnings on April 16, of $1.37 per diluted share. Valmont, like Lindsay, also trades at a reasonable P/E of 13.63. The company is also passing its record earnings to shareholders by raising its dividend 15.4%, which yields 0.83%.
Bottom Line
Our exploding population and its challenges form a very compelling thesis for long-term investing. While there has been many articles and discussions about the challenges facing global water consumption and that of its infrastructure build up, the water and agriculture correlation goes unnoticed. Both Valmont and Lindsay provide investors a chance to participate in that growth. (To learn more, read our related article, Water: The Ultimate Commodity.)
