R 241629Z MAR 09
FM AMEMBASSY BERN
TO SECSTATE WASHDC 5733
INFO ENVIRONMENT SCIENCE AND TECHNOLOGY COLLECTIVE
DEPT OF AGRICULTURE WASHINGTON DC
DEPT OF COMMERCE WASHINGTON DC
DEPT OF ENERGY WASHINGTON DC

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 
----------------------------------- 
 
¶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 
------------------------------ 
 
¶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 
-------------------------- 
 
¶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