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VIDEOWater: Limited Supply Creates Unlimited Opportunities
By
Ryan Krueger
Jul 30, 2010 8:55 am
Going long on what farmers are running short of.
"Water, water everywhere, nor any drop to drink."
- Samuel Taylor Coleridge, Rime of the Ancient Mariner
When you spend about 15 hours in the family truckster driving from Houston to Mt. Ida, Arkansas, and back, you have some time to think and look around a bit. We saw a lot of crop rows and cattle ranches, and a little bit of water along the way. My oldest daughter had the privilege of going to Camp Ozark, which I just had to see with my own eyes. We saw parts of Texas healing well from last year’s drought which was the worst in over a half century. As I told her brother and sister when we crossed state lines, the number-one crop in Arkansas -- rice -- needs more water than almost any other and they produce more rice than any other state.
At my firm, we designed a portfolio to exclusively focus on natural resources two years ago during the deflationary spiral caused by credit markets, not by a decline in demand for resources or an increase in their supply. If anything has changed in this secular story over the past couple of years of credit problems it's the number of “solutions” printed by the US government handed out as dollars which could serve as icing on the cake. An infinite amount of paper will be chasing a finite amount of resources for many years to come. If I had to only share one page from that playbook we authored, it would be this one below.
The result of this imbalance has been an upward pressure on prices for the most basic food-related commodities. This can be measured quite well in staples like rice since by and large its futures contracts avoid the largest investment funds, and speculators and aren't traded like gold or crude oil for multiple reasons. Keep in mind, for the first time in human history the number of chronically hungry people worldwide exceeds 1 billion according to the United Nations.
For the rice nearby on our drive through Arkansas, I had water on the mind, and I also had a lot of it in the back to keep her brother, sister, mom and dad hydrated during those blazing hot days on the road. One of the top-two rice-producing nations, India, also recently suffered through a drought, which, combined with the fastest growing democratic middle class’ consumption demand, led this historically large exporter to become a net importer of rice in 2009 for the first time in more than two decades.
At a recently held Stockholm Water Symposium an update on the pumps that transformed India’s farming were shared. They've been drawing 200 cubic kilometers of water to the surface annually, while only a fraction is replaced by monsoon rains. At this rate, research suggested groundwater supplies in some areas will be exhausted in five to 10 years, and millions of Indians will see their farmland turned to desert.
There's no more fresh water on Earth today than there was a million years ago. Yet today, 6 billion people share it. Since 1950, the world population has doubled, but water use has tripled. Running out of water is most disastrous in developing regions. The United Nations has calculated that one out of every two hospital beds around the world is filled because of contaminated water. Consider this staggering math, 20% (and growing) of the world lives in China where there is only 7% (and shrinking) of the world’s water. On the other end of the developed spectrum sits neighboring Singapore, which is often hailed as the most advanced nation with the highest per capita wealth in the world. Yet they have one need in common, Singapore imports 100% of its water.
By contrast, there is a country with abundant natural resources that my firm is attracted to. Canada is the only country in the world that has enough water reserves already to self-sustain for more than 200 years to come which is one of many reasons we prefer its currency's “reserves” more than others.
Of the fresh water available today, households use 14%, businesses use 16% and agriculture uses 70%. McKinsey consultants show water demand growing at least 40% in 20 years. In developing countries demand will grow more than 50% and in these countries the amount of water used in agriculture is far higher than the 70% average because of poor farming technology and infrastructure. This opportunity is where my firm gets particularly interested -- the dramatic improvements that are still to come outside of the US. Consider the worldwide staple, corn, which can be used as a benchmark to show below the differences between countries' farming infrastructures.
As I stepped back onto my driveway with my daughter back from camp I was greeted by a neighbor I had never met before on a long walk with his dogs. After a nice visit he told me that his company provides instruments for GPS technology originally used for offshore drilling. Still stinging from the “no oysters because of spill” sign on the Fisherman’s Wharf in Hot Springs the night before, I asked how badly his business has been affected. “Never been busier,” he told me. It turns out the applications for his precision-controlled positioning are even more valuable for irrigating crops. The amount of water wasted is a primary reason for the dramatic differences in the crop yields shown above, and can be improved substantially.
There are a number of different water-related ETFs that are probably worth a look for individual investors, here are just a few (disclaimer: I'm not an ETF expert nor do I own them):
For more on ETFs take a FREE 14 day trial to the Grail ETF & Equity Investor newsletter. Receive specific trades and strategies across many sectors. Learn more.
- Samuel Taylor Coleridge, Rime of the Ancient Mariner
When you spend about 15 hours in the family truckster driving from Houston to Mt. Ida, Arkansas, and back, you have some time to think and look around a bit. We saw a lot of crop rows and cattle ranches, and a little bit of water along the way. My oldest daughter had the privilege of going to Camp Ozark, which I just had to see with my own eyes. We saw parts of Texas healing well from last year’s drought which was the worst in over a half century. As I told her brother and sister when we crossed state lines, the number-one crop in Arkansas -- rice -- needs more water than almost any other and they produce more rice than any other state.
At my firm, we designed a portfolio to exclusively focus on natural resources two years ago during the deflationary spiral caused by credit markets, not by a decline in demand for resources or an increase in their supply. If anything has changed in this secular story over the past couple of years of credit problems it's the number of “solutions” printed by the US government handed out as dollars which could serve as icing on the cake. An infinite amount of paper will be chasing a finite amount of resources for many years to come. If I had to only share one page from that playbook we authored, it would be this one below.
The result of this imbalance has been an upward pressure on prices for the most basic food-related commodities. This can be measured quite well in staples like rice since by and large its futures contracts avoid the largest investment funds, and speculators and aren't traded like gold or crude oil for multiple reasons. Keep in mind, for the first time in human history the number of chronically hungry people worldwide exceeds 1 billion according to the United Nations.
For the rice nearby on our drive through Arkansas, I had water on the mind, and I also had a lot of it in the back to keep her brother, sister, mom and dad hydrated during those blazing hot days on the road. One of the top-two rice-producing nations, India, also recently suffered through a drought, which, combined with the fastest growing democratic middle class’ consumption demand, led this historically large exporter to become a net importer of rice in 2009 for the first time in more than two decades.
At a recently held Stockholm Water Symposium an update on the pumps that transformed India’s farming were shared. They've been drawing 200 cubic kilometers of water to the surface annually, while only a fraction is replaced by monsoon rains. At this rate, research suggested groundwater supplies in some areas will be exhausted in five to 10 years, and millions of Indians will see their farmland turned to desert.There's no more fresh water on Earth today than there was a million years ago. Yet today, 6 billion people share it. Since 1950, the world population has doubled, but water use has tripled. Running out of water is most disastrous in developing regions. The United Nations has calculated that one out of every two hospital beds around the world is filled because of contaminated water. Consider this staggering math, 20% (and growing) of the world lives in China where there is only 7% (and shrinking) of the world’s water. On the other end of the developed spectrum sits neighboring Singapore, which is often hailed as the most advanced nation with the highest per capita wealth in the world. Yet they have one need in common, Singapore imports 100% of its water.
By contrast, there is a country with abundant natural resources that my firm is attracted to. Canada is the only country in the world that has enough water reserves already to self-sustain for more than 200 years to come which is one of many reasons we prefer its currency's “reserves” more than others.
Of the fresh water available today, households use 14%, businesses use 16% and agriculture uses 70%. McKinsey consultants show water demand growing at least 40% in 20 years. In developing countries demand will grow more than 50% and in these countries the amount of water used in agriculture is far higher than the 70% average because of poor farming technology and infrastructure. This opportunity is where my firm gets particularly interested -- the dramatic improvements that are still to come outside of the US. Consider the worldwide staple, corn, which can be used as a benchmark to show below the differences between countries' farming infrastructures.
As I stepped back onto my driveway with my daughter back from camp I was greeted by a neighbor I had never met before on a long walk with his dogs. After a nice visit he told me that his company provides instruments for GPS technology originally used for offshore drilling. Still stinging from the “no oysters because of spill” sign on the Fisherman’s Wharf in Hot Springs the night before, I asked how badly his business has been affected. “Never been busier,” he told me. It turns out the applications for his precision-controlled positioning are even more valuable for irrigating crops. The amount of water wasted is a primary reason for the dramatic differences in the crop yields shown above, and can be improved substantially.
There are a number of different water-related ETFs that are probably worth a look for individual investors, here are just a few (disclaimer: I'm not an ETF expert nor do I own them):
- Claymore S&P Global Water Index (CGW)
- PowerShares Water Resources Portfolio (PHO)
- PowerShares Global Water (PIO)
- First Trust ISE Water Fund (FIW)
For more on ETFs take a FREE 14 day trial to the Grail ETF & Equity Investor newsletter. Receive specific trades and strategies across many sectors. Learn more.
Position in FXC.
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