TOUR D'HORIZON WITH NESTLE: FORGET THE GLOBAL

UNCLAS BERN 000129


E.O. 12958: N/A
TAGS: SENV SZ TBIO
SUBJECT: TOUR D'HORIZON WITH NESTLE: FORGET THE GLOBAL
FINANCIAL CRISIS, THE WORLD IS RUNNING OUT OF FRESH WATER

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Summary
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1. (SBU) Nestle, the world's largest food company, worries
more about the planet's growing fresh water shortage than the
current financial crisis, which it sees as only a bump in the
road in the firm's long-term development. Nestle estimates
the upper limit on sustainable global fresh water withdrawals
to be 12,500 cubic kilometers per year, with 2008 use running
at about 6000 cubic kilometers. However, rising population,
growing meat consumption, and new biofuel demands are
predicted to absorb the surplus entirely by 2050. On present
trends, Nestle thinks one-third of the world's population
will be affected by fresh water scarcity by 2025, with the
situation only becoming more dire thereafter and potentially
catastrophic by 2050. Problems will be severest in the
Middle East, northern India, northern China, and the western
United States. The company thinks averting a global crisis
will require four strategies: (1) creation of a virtual
market for water; (2) elimination of subsidies and compulsory
preferences for biofuels; (3) universal adoption of more
productive, water-efficient genetically modified plants; (4)
and the liberalization of global agricultural trade.

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A Swiss Institution and Global Success
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2. (U) Embassy officers recently paid a visit to Nestle, the
Swiss food giant headquartered in Vevey. With its 280,000
global employees, $90 billion in annual sales in 2008, and
$120 billion in market capitalization (more than three times
that of 2nd-ranked Kraft),Nestle is the largest food
processing company in the world. In fact, its market value
made it the biggest firm of any kind in Europe in March 2009.
The management of the 143-year old company surveys the
company's world-wide operations from an idyllic Alpine
lakeside setting on lake Geneva. Its glass-facaded
headquarters building (now a historical landmark),was
designed by the renowned Swiss architect Jean Tschumi and is
filled with modern art from around the world. The building
even hosts a private museum dedicated to the history of the
company and its more than one hundred consumer brands.

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Financial Crisis a Bump in the Road
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3. (SBU) According to Herbert Oberhaensli, Nestle's chief
economist and director of international relations, the
company had another excellent year in 2008. Shrugging off
the global financial crisis, global sales rose three percent
in 2008 to CHF 109.9 billion ($90 billion),despite the
strong appreciation of the Swiss Frank -- the reference
currency into which Nestle's sales data are translated.
Profits were up more than 60 percent to CHF 19 billion, as
the firm benefited from rising global demand for its many
high-margin products, which are viewed as "aspirational,
trade up goods" in many emerging markets. Oberhaensli
explained that Nestle operates on a long-term basis, neither
expanding quickly in boom times nor shrinking in recessions.
The company has plans to scale back its investment projects,
which are global in scope. Oberhaensli noted the company's
recent decision to proceed with a $170 million expansion of
its Nesquick and Coffee Mate factory in Anderson, Indiana, in
which the company already invested $360 million between
2006-2008. Contrary to expectations, there is no longer much
specifically Swiss about the Nestle company. None of the
members of the company's managing board are currently Swiss,
and only about 8000 of its 280,000 employees work in
Switzerland. Nevertheless, the company enjoys iconic status
in Switzerland, where it almost doubles as a national
trademark.


4. (SBU) Oberhaensli said that Nestle does not view the
current financial crisis as leading to a depression. Instead
it thinks the world economy is experiencing a severe
recession of which the company has seen many over the
decades. Oberhaensli noted that there is a generational
split among Nestle managers in the degree of nervousness with
which they view the world situation. The younger generation
had never seen anything like the current financial turmoil
and is quite agitated. In contrast, long-serving Nestle
managers are calmly philosophical, pointing out that the firm
has always continued to grow in good times and bad, since
there is always solid demand for the company's food products.
Thus Nestle still expects its sales to grow by roughly 5
percent in 2009, or perhaps only 4.5 percent if the most
pessimistic global growth projections prove true. In a
nutshell, it expects rising demand in emerging markets to
more than offset slower growth or stagnation in US and
European sales. Nestle has no trouble raising cash from
banks, and indeed has been repurchasing its own stock in
recent months, according to Oberhaensli. The company is much
more profitable than most of its competitors, and feels it
has a knack for spotting trends. It developed the Nespresso
coffee capsule business over a decade into an Europe-wide
phenomenon, which is now generating CHF 2-3 billion in annual
revenues for the company even while spawning a range of
imitations.


5. (SBU) Despite its size and global presence, Nestle
accounts for only about 1.7 percent of global food sales
according to company estimates. Thus it sees plenty of room
for further growth. Nestle believes that emerging economy
dietary patterns are increasingly converging with those of
the US and Europe. Nestle has seen a huge increase in the
demand for milk products such as ice-cream and yogurt in
China, amounting to a cultural shift. Similarly, China and
India are considered to be the key growth areas for the
company's coffee business. Nestle's marketing staff believe
that there is a strong correlation between tea-drinking and
the readiness to switch to soluble coffees, as happened in
Japan in the 1970's. At the moment, a 'coffee culture' is
rapidly developing in Asia. Oberhaensli said that Nestle is
extremely pleased with its partnership with General Mills, in
which it markets the US firm's breakfast cereals outside of
the US market through its unequaled worldwide distribution
system. This is another product where demand preferences and
lifestyles are converging. More and more Asians, Europeans,
and Latin Americans are starting the day with a bowl of
cereal, according to Nestle.

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The Coming Global Water Crisis
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6. (SBU) Nestle sees the world, and global food production,
largely in terms of the water economy. Its management is
convinced that growing shortages of fresh water, rather than
land, will become the Achilles heel of global agricultural
development. This -- and not the current financial crisis,
oil depletion, or global warming -- is the most dangerous
near-term threat to the planet's well-being. The company's
senior managers rarely miss an opportunity to point out the
dangers of present water trends to public audiences at
international gatherings, most recently at the World Economic
Forum in Davos. Nestle starts by pointing out that a calorie
of meat requires 10 times as much water to produce as a
calorie of food crops. As the world's growing middle classes
eat more meat, the earth's water resources will be
dangerously squeezed.


7. (SBU) Nestle reckons that the earth's maximum sustainable
fresh water withdrawals are about 12,500 cubic kilometers per
year. In 2008, global fresh water withdrawals reached 6,000
cubic kilometers, or almost half of the potentially available
supply. This was sufficient to provide an average 2500
calories per day to the world's 6.7 billion people, with
little per capita meat consumption. The company estimates
that continuing population growth and modest further
increases in per capita meat consumption will push annual
water withdrawals to 10,000-11,000 cubic kilometers by 2050.
This amount will be sufficient to provide the then 9 billion
people 2500 calories a day with somewhat higher per capita
meat consumption than today. However, it will require a
level of fresh water withdrawals only 15% shy of the
sustainable planetary maximum.


8. (SBU) Oberhaensli said that Nestle estimates that the
current US diet provides about 3600 calories per day with
substantial meat consumption. If the whole world were to
move to this standard, global fresh water resources would be
exhausted at a population level of 6 billion, which the world
reached in the year 2000. There is not nearly enough fresh
water available to provide this standard to a global
population expected to exceed 9 billion by mid-century.
Nestle has studied water use in crop growing and concluded
that the main reason crops are grown in many dry regions is
subsidies and mis-pricing of water. Growing a calorie of
food crops in a hot dry climate such as California requires
much more water than elsewhere. Current water withdrawals in
some areas of the world are already un-sustainable. The
water table is dropping precipitously in the Western US and
in northern India. In both areas, users are withdrawing more
water than can be replenished and rising salinity is reducing
the productivity of plants.

9.(SBU) Nestle is also concerned by the current political
push to massively subsidize biofuel use and legislate
compulsory blending. The company says that in the best case,
it takes 1000 liters of water to produce 1.5 liters of
ethanol. There is a real danger that biofuels will increase
the price of food in poor nations. Aside from providing
drinking water to a few coastal cities, Nestle also dismisses
desalination as a panacea for water shortages, due to its
expense, pollution, and counter-productivity. The company
points out that it takes four liters of fuel to produce 1000
liters of water. It thus makes more sense to move
agricultural demand for water to regions where it is in most
plentiful supply. Oberhaensli said that Saudi Arabia has
recognized that its water is even more valuable than oil and
it has decided to stop using irreplaceable fossil water to
irrigate food crop fields in the desert in favor of importing
the cereals it needs.

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Four Mitigating Strategies
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10. (SBU) Oberhaensli said that studying the water
constraint provides Nestle with a lot of insights into the
future of the world food industry. It is clear that current
developed country meat-based diets and patterns of water
usage do not provide a blueprint for the planet's future.
Based on present trends, Nestle believes that the world will
face a cereals shortfall of as much as 30 percent by 2025.
Oberhaensli stated it will take a combination of strategies
to avert a crisis.

(1) Creation of a virtual market for water, so that the
scarce commodity can be traded across borders and so that its
price reflects its actual scarcity value. (In Nestle's view
the most advanced water pricing system currently exists in
some desert areas of Oman, where water has long been scarce
and valued. There water is dug from wells deep inside
hillsides. It is free for humans to drink and for the mosque.
After that, the daily flow is divided up into property
shares, which are sold by minutes of flow. One family may
have rights to 20 minutes of daily flow another to 10
minutes. Repairs to the infrastructure are financed on a
pro-rata basis according to the flow-time owned.)

(2) Elimination of subsidies and compulsory blending rules
for biofuels. The current rules combination of subsidized
water prices combined with subsidized fuel prices distorts
the market for water and fuel. Nestle believes hardly any
biofuel will be produced if it accurately reflects water
costs.

(3) The universal introduction and acceptance of genetically
modified crops. Genetically modified crops are more
productive and can be designed to resist salinity. The
current European public resistance to bio-tech crops is
anti-scientific and un-sustainable. In Nestle's view, the
world will have no alternative but to depend on GMO's to meet
its food needs and conserve water.

(4) Liberalization of agricultural trade. It makes no sense
to grow crops in water-short areas via subsidies. Instead,
the world needs liberal trade in foodstuffs (and correct
water pricing) to allow resources to flow to areas where
production is most economical and efficient. Nestle
therefore supports the resumption of the Doha Round trade
talks.


11. (SBU) Oberhaensli said that all of these strategies are
politically controversial. Sensitive to its public image,
Nestle has maintained a low profile in discussing solutions
and tries not to preach. Instead, it attempts to set a good
example and incentivize best practices in farming. For
example, in India it does not tell farmers supplying milk to
Nestle factories how to treat their milk cows. However, it
pays a premium for low bacteria and high protein counts.
Farmers and offers to assist farmers to introduce advanced
production methods. Nestle has taken GMO's out of certain
products due to market pressure, especially in Europe.
However, internally the company remains convinced that they
represent the future of agriculture.

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Comment
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12. (SBU) Nestle is a Swiss corporate success story par
excellence. With its global reach, its long-term
perspective, and its knack for spotting trends, the firm is
highly admired by its European rivals. From its stunning
corporate headquarters in Vevey, the company exudes optimism
and self-confidence, not surprising considering that this
one-time producer of condensed milk now has a market
capitalization equal to about 25% of Switzerland's GDP. It
believes the present world crisis is a recession, not a
depression, and is continuing with its long-term corporate
investment plans. It is even picking up modern art to add to
its already considerable collection. Despite the economic
downturn, it expects to continue to gain market share at the
expense of its rivals and grow even faster when once times
improve. Though it is the largest food company in the world,
the company has only a 1.7% market share by its own
reckoning. It thus sees plenty of opportunity for further
growth.


13. (SBU) With its warnings about long-term agricultural and
water trends, the company wants to play a useful public role
in the global debate on the environment. Its exceptional
scale and international experience give Nestle credibility
when talking to governments and agricultural policy-makers.
As a result, the company is sometimes called upon to provide
advice to decision-makers in developing countries. Nestle's
concern for the global water supply is genuine. The company
management believes that the current under-pricing of that
scarce commodity will lead to huge problems. It fears that
subsidies for biofuels will potentially push the price of
food out of reach for the poor in some developing nations. It
is strongly opposed to water price subsidies and a strong
proponent of market practices. However, the firm
scrupulously avoids confrontation and polemics, preferring to
influence its audience discretely by example.


CARTER