China, the world’s largest wheat producer, is facing a severe drought in areas of the North China plain that account for 67% of the country’s wheat crop. China’s wheat production fell to 114.5 million tons in the 2010 harvest from 115.1 million tons a year earlier. This year the harvest could drop another 4 million tons.
This is a big deal since China is also the world’s largest consumer of wheat and accounts for about 17% of global wheat consumption.
The government is working to provide additional irrigation to mitigate the drought.
In Western Australia—across the continent from Australia’s worst floods—drought has put the wheat crop in Australia’s largest wheat producing state in doubt. The impact of the decade-long drought itself is intensified by a battle for Western Australia’s scarce water supplies between farmers and miners. There are about $170 billion in new mining projects on the books for the next five years. All those mines need water to help dig out and process ore, to remove waste rock and to suppress dust. Mining is already the largest user of water, taking 27% of licensed water, compared to 22% for agriculture. Six years ago the proportions were reversed with farming getting 37% of water and mining 26%.
I think you can see where I’m going with this, right?
No, no. Not more about the increasing global squeeze on food supplies. I’ve dealt with that quite enough recently, thank you. (See my posts https://jubakpicks.com/2011/01/14/food-prices-are-back-to-2008-peaks-here-are-10-stocks-that-tap-into-the-trend/ and https://jubakpicks.com/2011/02/01/egypt-has-escalated-the-food-crisis-and-shifted-global-economic-policy-on-inflation-too/ )
This time I want to talk about water scarcity, the trend that everyone sees but that it is so difficult to invest in. I’m going to give you some stocks to use to invest in water—but not my usual 10 since, as I said, this is a difficult trend to invest in. And I’m going to suggest out how finding investment opportunities in water can serve as a model for other difficult to invest in trends, such as food.
Let’s start with the basic problem—the world on average has plenty of water. But the actual location of supplies, population, pollution controls, and incomes and the very local nature of water make that average meaningless. According to the World Health Organization (WHO), in 2009 about 20% of the world’s population lived in countries without enough water for their needs. The World Bank does the calculations in a different way: 80 countries now have water shortages that are sufficiently dire to threaten health and economic activity.
And the situation is getting worse. Growing populations, rapid urbanization that concentrates more people in less space and that often eats up farm land, rising and competing demands from farming and mining, increasing pollution of water supplies, and climate change that is exacerbating the severity and frequency of droughts—all these will stress water supplies even more in the future.
| According to the UN Food and Agricultural Organization, by 2025, 1.8 billion people will live in countries or regions with absolute water scarcity and two-thirds of global population will be under what the agency calls “water stress conditions.”Human beings being what human beings are all that stress is likely to lead to conflict. More than a dozen countries—including Botswana, Bulgaria, Cambodia, the Congo, Gambia, the Sudan, and Syria—get the majority of their water from rivers that flow across the borders of hostile neighbors.
The biggest potential problem, though, is in Asia. Both China and India face severe water shortages due to fast economic growth, rapid urbanization, and pollution. According to the World Bank, China could face a supply shortfall of 201 billion meters of water by 2030. (That’s about 53 trillion gallons, by the way.) Many of the rivers that supply the bulk of water to India, Cambodia, Vietnam and other countries in the region have their source in mountainous areas inside China’s borders. China has been rapidly constructing dams on many of these rivers and the region does not yet have a mechanism for resolving conflicts over water supplies. And, of course, since most of the world’s water goes to agriculture—about 70%, according to the United Nations with 22% going to industry and 8% for domestic use—the current food crunch is going to raise tensions further. Nothing like being thirsty and hungry to make countries cranky. So how does the world fix (or at least ameliorate) this problem? And where do the investment opportunities lie? First, and most obvious answer: Increase supplies. The easiest—although very expensive—way to do this is to turn sea water into fresh water. It’s easy because constructing a desalination plant is a well-understood engineering task. It’s expensive because building the plant will run $2 billion or so and because it takes about 14 kilowatt hours of electricity to produce 1,000 gallons of water. If you’re looking for a desalination stock look at the big engineering and construction companies. My pick, because desalination is as key business for the company and because it has good penetration in markets in the Middle East and Asia, is Singapore’s Keppel (KPELY in the United States and KEP.SP in Singapore.) Second answer: Move water from where it is to where it’s needed. Hard over extremely long distances but again just an expensive engineering problem over short and medium distances. You’ll need lots of pumps and valves to get the job done: My favorite pick here is Flowserve (FLS). Third answer: Use water more efficiently. Big U.S.-style center pivot irrigation systems are efficient if you’re measuring them against the cost of having your crops dry up and blow away in a drought. My pick here is Lindsay (LNN). (For more on Lindsay, a Jubak’s Pick, see my original buy post https://jubakpicks.com/2010/12/23/buy-lindsay-lnn/ ) If you want a more efficient way to irrigate, drip methods get the nod. The biggest player here is Jain Irrigation Systems. Unfortunately, the stock currently trades only on exchanges in India (JI.IN) and Luxembourg (JAISE.LX.) Those three suggestions make up the simple answers. From here you have to get creative to invest in water. Fourth answer: Change the economics of water. Much of the world’s water supply, especially, most surprisingly in the world’s developed markets, is un-priced because it’s unmetered. (On the other hand, if you buy your water by the gallon from a water carrier in a under-developed economy, it is most certainly priced.) I can’t think of another scarce commodity where the consumer doesn’t pay more for using more. To change this, developed countries have to add more water meters. Two meter makers that I like are Badger Meter (BMI) and Itron (ITRI). Fifth answer: Invest in sectors where the scarcity of water is driving up prices of what that other sector produces. The biggest of these in the case of water is food. Fertilizers, form this point of view, become a secondary play on water shortages because farmers who have water when other farmers don’t see rising revenue and rising incentives to increase production. Among fertilizer producers I like potash producer Potash of Saskatchewan (POT) and, even more, the diversified fertilizer producers Agrium (AGU) and Yara International (YARIY). It’s this last point—my fifth answer—that I’d like you to keep in mind when you’re scouting around not just for a water investment but for an investment in any tough to invest in sector. Scarcity and surpluses ripple out from their sources in one sector to change growth and profitability in other sectors. So water ripples out to food. Or rising aluminum prices ripple out from the aircraft and auto sectors into the carbon fiber industry. These secondary plays won’t go up initially as fast as the more obvious thematic plays, but the fundamentals will eventually assert themselves in share prices. Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Agrium, CVH, Deere, Flowserve, Keppel, Lindsay, Syngenta, Vale, and Yara International as of the end of December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/ |
creativekev:
I live in Chicago and up until about a year ago my water was unmetered. Chicago is in the US and (arguably) developed. If the 3rd largest US city was until recently unmetered (at least for residences), I would not be surprised that many other areas in the US are unmetered as well.
THANK YOU for not recommending Nestle as you did in a previous post about water investing. While we look to profit from our investments, we need to be mindful about the harms of putting our money with socially irresponsible companies that are poor corporate citizens. Some water bottlers like Nestle are draining aquifers across the nation, in Michigan and Florida in particular, which result in sinkholes in local citizens’ backyards and farmers’ wells running dry (not to mention plastic bottle waste in landfills). Please click this YouTube link for more information about the water bottle industry: http://www.youtube.com/watch?v=cucVKZj-c00 Water, or blue gold as the industry views it, is one of the most precious resources in the world. Please be conscious and informed about your investments in this sector.
ianc – Jim probably meant to say CUBIC meters.
1 cubic meter = 1000 liters.
But he did get the gallons right.
201 billion cubic meters =201 trillion liters=53 trillion gal.
Jim:
How about the China Valves you have in your JGEF portfolio? Would that benefit from the water transmission effort in China? Thanks.
If the idea of profiting from thirst makes you uneasy, you’ll be glad to know of CFWAX, the water fund in Calvert’s family of socially responsible investment funds.
rick, he sold all his holdings to put his money where his mouth is…inside JUBAX fund. He doesn’t pay the fee like we do, but it’s worth the 1.75% for someone else to manage it, plus we get ALL the holdings in one swoop.
I’ve noticed in a number of posts recently that Jim may have some recommended postions in his Jubak fund, but almost never in his “personal portfolio.” I wonder why not?
Jim, some years ago someone said, “There will never be a shortage of water; there will only be a shortage of economical water.” Your article is on target to a problem that is going to become immense in the fairly near future–economical water for drinking, farming and industry.
Jim – Good info but I think I’m missing something on one of your points. You wrote:
“Fourth answer: Change the economics of water. Much of the world’s water supply, especially, most surprisingly in the world’s developed markets, is un-priced because it’s unmetered.”
If by developed markets you include the US, my water bill says the water I use is definitely metered and, most importantly, the more water I use, the more I pay. This has been the case for as long as I can remember (here in the US). So, can you (or anyone else) explain how water is unmetered here when it clearly is metered? Unless you don’t include the US as one of the ‘developed markets’, which I would also not understand. Thanks in advance.
Jim:
You wrote couple of articles about copper recently. I remember you said copper will have a long-term shortage, because it’s hard to increase production. David Sterman of StreetAuthority.com wrote just opposite what you said. He used three things as reasons why the extremely high stock prices of FXC and SCCO (which is stock investors’ ultimate concern) can not be justified. He even declared copper is in “bubble”. The three things he cited are (1) future’s contracts which actually declined; (2) China has huge stockpile which was doubled or so; (3) More (10 or so) new mines are being opened (though I remember you once said it takes many years for a new mine to produce copper.)
I have been reading both you and David Sterman for quite some time and I think both you are among the most intelligent, convincing and trustworthy stock experts. But the two of you seem drawing very different conclusions on a very important subject, copper. I understand each expert may look things from different angle, use different methods of analysis, they often draw same consensus. Nothing bothers me more when they are totally opposite! I’d like your comment on Sterman’s conclusion. Thanks.
Link to his article.
http://www.streetauthority.com/a/how-profit-first-bubble-2011-458053
Have owned PHO for awhile. It’s beginning to go higher this week.
ifxeyes, take a look at FIW. Go to ftportfolios.com/retail/etf/etfsummary.aspx?ticker=fiw to see holdings. Many of Jim’s picks are in there.
Have been trying to figure out the best way to invest in water for at least ten years. Thanks for the helpful insight.
A bit all over the map, but the message is there. So, my question is: Is it time to take DGW off the watch list as a pick?
(201 billion ‘litres’?) 😉
Jim, great visionary post!
My only concern with water is that there is no market price for it, as with oil and other mineral resources. Water is more a political thing, than something can be dealt within an economic framework.