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Thirsty beer companies fight to shore up water supplies

Segment

IFRS 9 Impairment How It Impacts Your Corporation And How We Can Help


Thirsty beer companies fight to shore up water supplies

In 2016, Constellation Brands Inc., maker of Corona and Modelo beer for U.S. consumers, began to build a $1.5 billion state-of-the-art brewery in northern Mexico, which it hoped to finish within five years. Today, the project is in danger of being scuttled because of a bitter fight over an increasingly precious commodity: water.

The brewery project in Mexicali, capital of the Mexican state of Baja California, has become the target of voluble and violent protests by residents who fear the project will suck up a large amount of water in an area that is already water-stressed, meaning that demand outstrips supply. Constellation was dealt a further blow in December 2018 when the state's senate said it would consider a petition to hold a public vote on the brewery's construction. Any such vote that goes against the Victor, N.Y., company could undermine the project.

Constellation's challenge is one that all major beer-makers face: the need to shore up sources of clean water and supply their thirsty breweries across the globe. Danish brewer Carlsberg A/S says it has breweries in 15 "high-risk areas" where it is facing water quality or quantity problems. Anheuser-Busch InBev SA, the world's largest beer company and maker of Budweiser and Stella Artois, says that a "few dozen" of its 200 breweries are in high-risk regions, representing about a quarter of its entire beer volume.

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Heineken NV says 23 of its breweries are in water-stressed locations. When a usually dependable river ran dry in East Africa, the company had to bring water from elsewhere. "It came as a surprise to us," said Willem de Jonge, global director of sustainable development at Heineken, in an interview. "It shows the vulnerability of watersheds."

Agriculture uses 70% of all water extracted from natural sources, much of it going toward the food and drinks supply chain. Water availability is under pressure from soaring industrial demand, population growth, pollution and the specter of more droughts, heatwaves and erratic rainfall linked to climate change. Under current trends, water demand will exceed supply by 40% in 2030, when almost half of the global population will live in areas of severe water stress, according to the International Resource Panel, a group of scientists organized by the United Nations.

High-demand emerging markets "have moved from extracting surface water to plumbing groundwater," said Paul Reig, who oversees corporate engagement on water at the World Resources Institute, in an interview. "If withdrawal rates exceed replenishment rates, it's a very material threat."

Investors are worried. The nonprofit group Ceres, which helps identify water-related risks for investors, said it had signed up only 10 such interested investors in 2015. Today, it has a roster of 117, including large sovereign wealth and pension funds, representing $20 trillion in assets.

Some are keeping an eye on Constellation's tussle in Mexico. In March 2018, a member of the activist group Mexicali Resiste that is fighting the brewery plan told National Public Radio in the U.S. that the brewery would "consume millions of liters of water knowing that water is needed by farmers and more than anything, the city." About 300,000 people in the state live without regular access to water and nearly 6% of households lack running water, NPR reported. For the U.S. brewer "it's a perfect storm of physical risk, an access-to-water issue and reputational risk," said Brooke Barton, a senior director at Ceres, in an interview.

In an emailed response, a Constellation spokesman said: "We remain confident in our ability to continue construction on our new brewery in Mexicali and believe this situation does not warrant a public referendum. ... An independent analysis conducted by the Mexican Institute of Water Technology indicates that our Mexicali brewery, once up and running at full capacity, will consume less than 2% of water available in the region on an annual basis, posing no risk to local water supply and availability."

Long-term risk

Water is a beer company's lifeblood. About 90% of a brewer's water footprint relates to the growing of barley to make malt — something that sets it apart from other big water users such as Coca-Cola Co. Most of the world's barley is rain-fed rather than irrigated, making it vulnerable to climate change and seasonal shift. World weather patterns were partly responsible for the decline of global barley stocks in 2017-2018 to the lowest level since 1981, said AgResource, an agriculture research firm. The longer-term outlook is no better. According to a study published in October 2018 in the journal Nature Plants, extreme drought and heat could trigger a 3%-17% decline in global barley yields, causing prices to jump and beer consumption to decline as much as 16%.

Beer-makers are investing large sums of money to avert future crises. They are raising water-efficiency levels at breweries, recycling wastewater and helping out on local water conservation projects. To highlight the scarcity problem, one small British brand called Brewgooder donates all of its profits to fund clean water projects in poorer countries. (Its beer is produced and supplied at cost by Scottish craft beer company BrewDog PLC.)

In 2015, Carlsberg used 3.4 liters of water for every liter of beer produced. A little less than a liter of that water went into beer; the rest was used to clean and rinse or was lost to evaporation. Today, Carlsberg's figure is 2.5 liters of water and it hopes to lower that to 1.7 liters by 2030. Reusing dirty water is one way. In the fall, Carlsberg launched a beer in Sweden called Purist made from cleaned-up municipal wastewater. "We sold out," said Simon Hoffmeyer Boas, director of group sustainability. "It was done to show what the future might look like. The challenge is to scale this up."

But companies realize that tackling water use at the brewery level can go only so far and that their real task is in the field, among the barley stalks, rivers, lakes and streams. It is not something most brewers are used to.

A few years ago, near the Spanish city of Seville where Heineken makes beers such as Cruzcampo, the water level fell sharply after several lagoons dried up. The local government was slow to fix the problem. So in 2016, Heineken teamed up with local groups to repair dams, replant endemic trees and improve the soil structure, which helped to return 1 million cubic meters of water per year to the watershed. The once-departed flamingos and ducks returned.

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Soon after, the Dutch brewer launched another unusual pilot project in Jaen, Spain: growing barley among vast groves of olive trees. If it works, large-scale adoption of the plan could reduce soil erosion and potentially save 700 million liters of water a year, according to Heineken. "Governments may be surprised we take this responsibility. It's new for us, too," said de Jonge.

In 2015, Brazil was hit by the worst drought in its history and surface water levels plunged. That caused several production interruptions at AB InBev's brewery in the Jaguariúna region, where Skol and Brahma beer are made. To remedy the situation, the company moved to improve water quality on farms and reduce deforestation, which causes erosion and water loss. The Belgian company sends cleaned-up brewery water from its Taquiña, Bolivia, facility to local tomato and onion farmers at no cost. "It contributes to the overall water security in the area and helps the farmers reduce their water extraction," said Andre Fourie, global director of water sustainability at AB InBev.

To overcome the water challenge, Heineken is even getting involved in new irrigation techniques and weather prediction. Two years ago, the company hired 27 agronomists for a pilot project in Mexico. "We are a malt buyer so we don't have much interaction with farmers who grow barley," said de Jonge. "But now we realize we have to improve our grip on that part of the supply chain, too."

In this regard, Molson Coors Brewing Co. may be something of an exception because of its long-standing partnership with 860 growers in the U.S., who produce more than 70% of the barley it uses. In addition to improving water efficiency in breweries, Molson Coors hopes to cut water use by 10% in its agricultural supply chain and malting operations by 2025. It recently introduced a new barley variety that has an 8% higher yield and uses less water and fertilizer.

"We monitor water scarcity as a long-term risk," said Kim Marotta, global senior director of sustainability of the Denver brewer. "We're not just sitting back and letting this happen."