Insights & Advice

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Water—Down to a trickle

Given the amount of rain that has flooded our nation’s mid-west over the last month it may be hard to believe that the United States is facing a fresh water shortage. We are not alone. Water scarcity is growing worldwide and at an increasing rate. As it does food prices everywhere will continue to rise. Here’s why.

Seventy percent of world water use, according to the Earth Policy Institute, an environmental think tank, is used for irrigation (farming), 20 % is consumed by industry and 10% goes to residences. At the same time, demographic shifts like expanding population, migration to cities or from one region to another have conspired to increase the demand for human drinking water. Take our own country, for example, where the main growth in population and migration over the last few decades has been to the south and the west. This same phenomenon has occurred in countries as far a field as China, India, Iran and Mexico, to name a few.

While this human development was underway, industry has also expanded tremendously in areas of the world which until recently were largely subsistence Agra economies. China and India are the most obvious examples of this emerging market industrial revolution. As a result, the demand for water in industrial production has also increased (for example, an often-quoted statistic is that it requires 62,000 gallons of water to produce one ton of steel).

Finally, with the increase in global population and wealth the demand for food (farming) has also skyrocketed. All these factors are competing for a very scarce resource when you consider that only 2% of all water worldwide is fresh water. Some areas do have a sufficient supply of fresh water but unlike oil and other commodities, transporting water is not cost-effective and requires much more care in transport.

The trade-off therefore is between three competing variables and the demand for drinking water wins out over both industry and farming. Industry places second because this promises a higher standard of living for most folks then agriculture. Thus by default, irrigation is getting the short end of the stick.

Historically, water shortages, droughts and such were purely local affairs but not today. A drought in say India or a devastating earthquake in China might mean a poor or non-existent grain/rice harvest. Either country can make up that shortfall by buying in the international grain markets at a price. Countries where water is scarce can now satisfy the demands of a growing population, an expanding industrial base and burgeoning cities by diverting water from irrigation while importing grain to offset their loss of food production. Since a ton of grain requires 1,000 tons of irrigation water, importing grain is a great way of importing water.

Today and into the foreseeable future, some of the greatest foods producing areas of the world are running out of water. Central Asia, the Middle East and North Africa, in addition to India, Pakistan and the United States are all big players in this dilemma. As demand for water (food) increases so does the price and that’s one of the reasons you are paying more at the supermarket for everything from meat to mangoes.

Wall Street is quite aware of this water shortage and a thriving market now exists for all sorts of water investments from utilities to desalinization plants to filter companies. My own firm, Dion Money Management, has been investing in an exchange traded fund called PowerShares Dynamic Water Resources (symbol: PHO) (http://seekingalpha.com/article/79478-powershares-water-etf-lacks-focus) for some but not all of our clients which tracks what is called the “Palisades Water Index” a wide array of stocks that are involved in all facets of the water sector. In our work it appears momentum is working in PHO’s favor. There are various individuals stocks listed on the various exchanges as well. If you are interested drop me a note and I can steer you towards some of them although in a fledgling industry such as this my advice would be to diversify as much as possible. As for investments in grain, some clients also have a holding in Powershares DB Agriculture (symbol: DBA) another ETF that invests in corn, wheat, soy beans and sugar (http://seekingalpha.com/article/64790-powershares-db-agriculture-etf-optimum-yield-or-undue-risk).

As in so many other areas where once abundant resources have suddenly become scarce, new methods and approaches will be required. Two keys to stabilizing are above and underground water supplies will be raising the price of water and stabilizing population. The expansion of new communities into scarce water regions will have to slow and in many regions wasteful water practices like lawn sprinkler systems and the Sunday afternoon car washing will have to end. In many locales, initiatives like these are already on the books. I predict that as water scarcity grows you will see more and more regulations and a higher and higher price demanded for another resource that until now most of us presumed was inexhaustible.

Posted in A Few Dollars More, Macroeconomics