The droughts the country is facing will affect the Federal Electricity Commission (CFE) and other private companies such as Coca-Cola, Femsa, and Arca Continental bottling companies, as well as Grupo Minsa, warned Moody's rating agency. These effects will be mainly financial and operational, given the nature of their activities and the impact they could have on the general population.
In the report Droughts and Water Stress Present Growing Physical Climate Risks, the firm detailed that Mexico aims to increase its clean energy generation to 35 percent by 2024, but these plans include increased generation through hydroelectric plants by the CFE. According to CFE's Business Plan, the transition towards this goal includes the modernization of eight hydroelectric generation plants to have a capacity of 530 megawatts (MW) by 2025 and reduce carbon dioxide emissions by 42 percent.
However, Moody's said this project is at risk in the face of droughts in the country that will affect the CFE's hydroelectric plants located in Chiapas, Michoacán, Nayarit, and Jalisco. Increasing water scarcity will complicate the country's efforts to reach the 35 percent clean energy target, because the alternatives available for coverage drops in hydroelectric generation require more expensive fuel sources, such as diesel, which ultimately could also result in higher costs for CFE.
The document, published a day after the National Water Commission (Conagua) declared a state of emergency due to severe drought throughout the country, added that the plants in Jalisco and Michoacán face the greatest operational risk derived from the May droughts. The problem could become more complicated if it is considered that the Conagua is obliged to set limits on the use of water for electricity generation based on availability, where the priorities are irrigation and city supply.
For private companies, the most affected sectors will be the food and beverage industry, even if they have water-saving or efficiency plans in place. When corn is scarce in Mexico, even during periods of drought, industrial corn flour producers, which account for about half of the nation's tortilla production, import more corn at higher prices, increasing costs relative to the country's production.
Drought conditions force Minsa to purchase corn in international markets at higher prices and incur greater debt to finance its working capital needs. Drought conditions in the United States also tend to make imports more expensive. Other companies that will be affected, according to Moody's, will be Coca-Cola Femsa and bottling company Arca Continental since they need large amounts of water for their operations and, although they have strategies to obtain water or save its use, droughts will also put raw materials such as sugarcane at risk.
The pressures for Arca Continental will be in the northwestern part of the country, while Coca-Cola Femsa will suffer from droughts in central and southern Mexico. In the event of a severe water shortage, there is a risk that the Mexican government would make beverage and food production a priority for water availability given the essential nature of these products.
Mexico's drought is caused by the Hadley cell phenomenon
The drought crisis that Mexico faced in the first months of the year and that reached almost 85 % of the country's territory under that condition has its origin, among other factors, in the meteorological phenomenon of the Hadley cell. To understand this problem, it is necessary to take into account the location of the country, which coincides with the area of the great deserts of the planet.
The northern part of the country is located between 30 or 35 degrees latitude and this coincides with the same latitude of the Sahara and Arabian deserts, which has to do with the phenomenon known as the Hadley Cell. In this phenomenon, the air rises in tropical zones and descends in subtropical zones and Mexico has this zone of descent in its northern part and therefore has desert zones in the states of Sonora, Chihuahua, and Coahuila and the peninsula of Baja California.
In this area, it rains little, but there are also years when it rains even less than average and that is when a drought condition can be declared, a recurrent but not permanent phenomenon that has to do with the amount of rainfall. According to the National Water Commission's Drought Monitor as of May 31, 72.63% of the country has moderate to exceptional drought conditions.
The United Nations designated this June 17 as the 2021 Day to Combat Desertification and Drought which focuses on transforming degraded lands into healthy lands and has as its slogan "Restoration. Lands. Recovery." In Mexico, according to the Sustainable Rural Development Law, the concept of desertification applies "to all the ecosystems existing in the national territory, due to the fact that the loss of the productive capacity of lands is not restricted to dry areas".
Desertification is the loss of the productive capacity of the land, caused by man, in any of the existing ecosystems, in this case, in the Mexican territory. In 2020, the UN reported that 55% of the Mexican territory was affected by water and wind erosion, so it called on the Mexican government to fight desertification, according to a statement issued by the National Autonomous University of Mexico (UNAM).
A decade ago, the United Nations Convention to Combat Desertification, created in 1996, pointed out that among the most important consequences of desertification were the decrease in food production, infertility, and soil salinization. In addition to the reduction of the land's natural recovery capacity, an increase of floods in the lower parts of the basins, water shortage, health problems, and even the loss of societies' means of subsistence, which could contribute to stimulating migration.
The country suffers from this phenomenon because it is a very large country - two million square kilometers in area - but at the same time, there is a very rainy area in the southern and southeastern states, while in the north there are areas with little or no rain as well as very hot weather. Strict water monitoring is necessary because it is important for Mexico to have a record of how much water resources are available, how much water is falling, and even to know the future outlook, at least for the next few weeks or months.