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South American drought fuels fears of food price shocks, as soya bean harvests suffer

The viability of water supplies throughout key regions of China, India, Pakistan, South Africa and the US are under threat from unsustainable domestic, agricultural and industrial demands, according to a new study that maps water use down to 10km² worldwide.  

The growth economies of China and India, and the world’s largest economy USA are identified by risk analysis company Maplecroft, in its newly released Water Stress Index, as having vast geographical regions and sector areas where unsustainable water use is outstripping supply. Maplecroft states that the situation so serious, it has the potential to limit economic growth by constraining business activities, as well as hampering agricultural outputs. Resulting reductions in crop harvests in these countries will also negatively impact local food supplies and global food prices, while the socio-economic impacts of water shortages, especially in India and China, have the potential to create unrest and affect stability, as populations and business compete for dwindling supplies.

Water stress has major implications for global supply chains, especially within the major growth economies. According to the index, countries such as South Africa and Pakistan are at ‘high risk’ overall, but have large pockets of ‘extreme risk’ areas. Investors in these countries, especially those in the water intensive mining sector in South Africa, need to take steps to ensure the long-term viability of projects and supply partners.    

Maplecroft has calculated levels of water stress in 168 countries by evaluating renewable supplies of water from precipitation, streams and rivers against domestic, industrial and agricultural use. The Water Stress Index also includes an interactive sub-national map, which has been developed to pinpoint areas of extreme water stress that pose significant risks to populations and business operations at a local level right down to 10km² .

The arid Middle East and North Africa region is the most at risk region in the index, with Bahrain (1), Qatar, (2), Kuwait (3), Libya (4) and Djibouti (5), UAE (6), Yemen (7), Saudi Arabia (8), Oman (9) and Egypt (10) categorised as the most water stressed countries.

However, the widespread use of irrigation for agriculture, combined with increasing domestic and industrial water demand in India (ranked 34th in the index), China (50) and the US (61) mean that increasing pressure is being placed on available water resources in these key economies, which may impact the wider world.

Maplecroft CEO Alyson Warhurst advises, “Businesses should undertake impact assessment and monitoring of water stress and water security and other areas of risk that conflate with such pressures including food security, conflict and energy availability. Supply chain risk, if not managed strategically, can lead to business discontinuity and unforeseen costs that undermine the profitability of projects”.

Water Stress Index 2012

Water Stress Index 2012
Legend
Extreme risk
High risk
Medium risk
Low risk
No Data
Rank Country Rating
1 Bahrain Extreme
2 Qatar Extreme
3 Kuwait Extreme
4 Libya Extreme
5 Djibouti Extreme
Rank Country Rating
6 U.A.E. Extreme
7 Yemen Extreme
8 Saudi Arabia Extreme
9 Oman Extreme
10 Egypt Extreme

The populous Northeast Chinese provinces of Beijing, Jiangsu, Shandong and Tianjin are all considered ‘extreme risk’ by the Water Stress Index, due to large scale economic growth and the rapid expansion of cities.

China is taking substantial measures to minimise the risks of water shortages in these provinces through the ambitious South-North Water Diversion Project, which has already cost $22 billion. This aims to pump water from the Yangtze River to Beijing through a series of canals to supply a quarter of the city’s water by 2014. However, due to spiraling costs and uncertainty over the future effects of climate change on water supplies in Southern China, doubts have been raised about the long term sustainability of the project, raising concerns for business with interests in the most water stressed areas.

Agriculture is a key driver of unsustainable water use in India. The country is classified as ‘high risk’ overall, but at a subnational level ‘extreme’ levels of water stress are identified by the Water Stress Index across large swathes of its most important agricultural land. States that are at ‘extreme risk’ of water stress include Haryana, Uttar Pradesh, Gujarat and Rajasthan, while Delhi, Andhra Pradesh and West Bengal are rated at ‘high risk.’

India extracts more groundwater than any other country.  As a global average, 56% of fresh water withdrawals are used for agriculture, however in India this figure is as high as 90%, due to pressure placed on supplies by precipitation patterns and evaporation of surface water by high temperatures. As one of the top producers of rice, wheat, potatoes and sugar cane worldwide, continued unsustainable use of groundwater supplies has the potential to reduce crop harvests with dire implications for global food prices.

“Pumping groundwater is a politically attractive option for alleviating short-term water stress issues, but it has severe long-term consequences,” states Maplecroft Principal Analyst, Dr Charlie Beldon. “Wells can dry up, land can subside and salt water can be drawn into the supply, rendering it useless for domestic, business and agricultural consumption.”

Although the US is classified by Maplecroft as ‘medium risk’ for water stress overall, large areas are already suffering from the depletion of ground water supplies, with states including Arizona, California, Kansas, Nebraska, New Mexico and Texas classified  at being at ‘high’ and ‘extreme risk.’

The Ogallala Aquifer which spreads across the high plains region of the US, supplies many of the most at risk states and makes up approximately 30% of the nation’s total irrigation water. However, the aquifer is being depleted faster than it can be recharged. It supports 15% of national corn and wheat production, as well as 25% of the cotton crop, and it is uncertain how much longer fresh water will be available. The resulting effects on US agricultural outputs could cause significant inflation on the global commodities markets.

The effects of water stress on global food inflation are illustrated by recent price hikes for soya beans, which have been pushing all-time highs. The La Niña weather cycle has caused drought conditions across large areas of the Americas, from Texas, which saw the hottest and driest weather on record in 2011, to the agricultural belts of Argentina (60), Brazil (129), Paraguay (108) and Uruguay (140). Although these countries are rated ‘medium’ to ‘high risk’ in Maplecroft’s index, hot, dry weather, caused by La Niña, will see the lowest global soya bean yields since records began in 1965, according to the US Department of Agriculture.

“The impacts of weather patterns on existing levels of water stress provide a vivid indication of future areas where conflict or unrest may emerge over access to water,” adds Dr Beldon. “For instance, the Argentine government’s plans to increase significantly extraction of natural gas reserves through hydraulic fracturing (‘fracking’) which will require huge amounts of fresh water. Future La Niña events will compound levels of stress in agricultural and energy-producing belts, potentially creating significant tensions between users.”

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