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Investing in Water: The Hottest Commodity of the 21st Century

April 2, 2012 by · Leave a Comment 

COMMENTARY-ProspectingJournal.com-People are seldom aware that on a daily basis we share the privilege of showering in wealth, quite literally. March 22nd, 2012, was world water day, and the occasion prompted US intelligence services to issue a startling warning. According to their report we are potentially only 10 years away from witnessing water-based conflicts. The report noted, a combination of water scarcity and water pollution, amongst poverty and poor infrastructure, “will likely increase the risk of instability and state failure, exacerbate regional tensions, and distract countries from working with the United States on important policy objectives”. It is somewhat alarming to think that we already live on the brink of an era in which water itself can dictate conflict. It is a tough pill to swallow. But it exemplifies a scarcity of an altogether different type. On the one hand, so scarce that it can provoke conflict. On the other, so undervalued and under-priced that its scarcity is hard to imagine. Water is amongst our most undervalued commodities, and it is this very point that will make it the hottest commodity of the 21st century.

Consider some numbers. The average price of water in the United States falls below one penny per gallon. In terms of commodities it is amongst the cheapest of the cheap. Amy Hardberger, an attorney with the Environmental Defense Fund, notes, “water has been given special status in society…while we pay for water, we don’t pay for its actual value. We pay for access to clean water”. But considering the fact that we live on a planet in which less than 1 percent of our entire water supply is fresh water, and a planet in which our global population continues to soar above 7 billion, we are bound to see some changes. And these changes are going to translate into a more expensive commodity in water. It is predicted that in the US alone the next 25 years will require a massive $1 trillion to repair and expand water infrastructure in order to satisfy growing demand. You can be certain that this would be reflected in prices.

Willem Buiter, chief economist at Citigroup, believes water will become “the single most important physical-commodity based asset class, dwarfing oil, copper, agricultural commodities and previous metals”. Water is intrinsic to almost every industry, including agriculture. Consider some of today’s emerging economies, such as China. China boasts only a fraction of the arable land and water available in places like Canada or the US. As a result China relies on both nations for agricultural imports, with the production of such agricultural goods entailing huge amounts of water consumption. In effect, consumers like China are already heavily reliant on foreign water supplies in order to meet domestic expansion. And with growth forecast to continue, such forces will only continue to exert pressure on prices.

For investors the fact of the matter creates an interesting scenario. Traditionally, there are limits to the price one is charged for access to water, a result of the commodity being deemed intrinsic to life. As a result there is a limit to one’s return when investing in water suppliers. However, in considering the role water plays in the agricultural industry there is the potential for greater returns on agricultural commodities. So if the price and value of water is eventually increased it would produce a trickle down effect towards the cost of each agricultural commodity. In other words, investing in agriculture is investing in water.

For now, we have yet to produce a system that accurately adequates the value of water to its price. But according to Gabriel Eckstein, a law professor at Texas Wesleyan School of Law specializing in water-related issues, it is bound to happen. Professor Eckstein stated, “With both population and water scarcity growing, I don’t see how we can maintain this methodology…the price of water will have to go up, both to promote conservation and efficiency as well as to capture its true cost and value”. In water we are talking about the commodity of the 21st century. It is just a matter of time before its scarcity is reflected in its price. And in agriculture there exists the perfect platform for investment.

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Jason Staeck
ProspectingJournal.com

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