Investing In Water Part 2 - [Virtual Water]


The Issue of Global Water Supply
Water is not distributed evenly. There are nations which have a low water footprint and others with high footprints. This crisis in water is therefore confined to countries with a high water footprint. Their issue is a very simple one. In these countries the access to water is diminishing rapidly, their problem is simply one of transport: how do you transport huge quantities of water from water-rich parts of the world to water poor ones? In order to solve this emerging crisis, a solution would need to meet a number of criteria. It would need to be:

• Fast - put into place fast to meet requirement of crisis

• Cheap - require minor capital expenditure

• Ready to go - have an in-built distribution channel. Physically shipping water across the globe could be a solution, however it is impractical - the volume of water transported is limited by the size of the ship.

Another important issue is that the cost of shipping would probably outstrip the value of the water. I have not looked at this issue closely, but it seems very impractical. Transporting the water via pipelines is another solution, however this is very capital intensive and slow. One online estimate for a project connecting the US to Africa forecasted costs of $9.9 billion. It is very unlikely that the federal government would fund this project, especially since America is experiencing a domestic crisis of its own with the rise of Donald Trump. Increasingly nationalistic are unlikely to support extremely generous foreign aid campaigns. Removing water from the sea could also be a solution. This option is however neither fast, nor cheap. Over the past 40 years, the cost of this process (known as “de-salinisation”) has fallen roughly 60-70% according to the ATMA in 2007. Nevertheless, it is still costly. In light of droughts in Australia in 2010, the government spent $13.2 billion on de-salinisation. Considering that the Australian government ran on an operating income of $295 billion in that year, a staggering 4% of their income went towards de-salinisation. Therefore, the question remains: how do you transport water from one part of the globe to the other while meeting the criteria set out above?

Transporting Water Via Virtual Trade
Transporting water via virtual trade is the only solution. If virtual water was transported from water rich areas to water poor areas, the nation importing produce could then use their water resources more efficiently. This solution has no capital intensive costs for governments, it uses a supply chain that already exists and it is cheap (or at least cheaper than the other options). Agriculture is the largest driver of water usage across the globe. Importing products which require excessive volumes of green water content to produce would free up the resources of drought stricken nations. By importing virtual green water, nations could use their green water reserves as blue water reserves. In other words, they could the land previously allocated toward farming to prevent their populations from dying of thirst. An investment in water is therefore an investment in the future of virtual water trade. It is an investment in the idea that water-rich crops will be imported for nations in drought to allow them manage their water resources more effectively. If an investor is to bet on the future of virtual water trade, an investment must meet a certain set of criteria:

• Security of water trade links. An investor must be sure that the country he is investing in has a stable political environment which supports free-market economics and global trade. A study in 2008 on water links found that only 25% of water trade links existed between 1986 and 2008. The majority of links disappeared due to geopolitical drivers, socioeconomic drivers, climate, fluctuations in crop yields, dietary changes and conflicts. During these years, the net virtual water from US, Brazil and Argentina comprised of 40% of global net virtual water exports. The largest exporters of virtual water remained consistent over time.

• Land contains high water content. To capitalise on global virtual water trade, investors must choose land with high water content. It is clearly not practical to visit these locations oneself, it makes far more sense to choose which produces crops need high volumes of green water content to thrive. Here’s one I prepared earlier ( See below:

Looking at the picture above, it is the produce with the highest water-content which would be the most prudent investment - nuts, rubber, gums and stimulants. If these two criteria are met, it is likely that the land values will rise in the future as the need for water and by extension virtual water accelerates. Even if virtual water trade does not occur however, the land is still likely to increase in value as the demand to feed the global population increases. To this end, the investment is low-risk and high-reward.

With any investment opportunity, one has to question why other people are not doing the same. It is unlikely that others have not come across this idea themselves - I have found value investing blogs interested in virtual water related investments and there has also been a land-grab for almond farms in California in recent years. That brings forth the question: what gives me an advantage over the marketplace? In my opinion, one advantage I have is the ability to think long-term. Hedge fund managers are famous for focusing on short-term gains. This is a structural issue as they have investors to answer to and there are two fundamental truths that exist with investors:

  1. Investors like to invest in the “hot stock”.

  2. Investors are resentful when they see others making money and they are not.

These two barriers make it very difficult for hedge fund managers to justify long-term positions to their investors. It is also very difficult to persuade investors about trends based on data alone - very often investors will look for obvious indications of a profitability (e.g. it’s in the news, or it’s the “hot stock”). If they do not see value and others are making money, they are far more likely to put pressure on their managers to cut their positions and their “crazy predictions”. I can hear it already:

“Hey Arnold, Apple has just increased by 50%, why the hell are you still going on about f**king water! I’m pulling my money out of your fund - can’t handle this!”

These conditions make long-term investments based on demographic changes very difficult for hedge fund managers. By taking an extremely long position on virtual water trade, I believe the intelligent investor can realise gains from this opportunity, by exploiting the “markets” primary disadvantage - the inability to think long-term.

The demand for water will increase as the global population rises. This need for water will drive up the value of the commodity. If an intelligent investor invested in an asset which met the following criteria, it would be an astute investment:

• Farmland with water on-site

• Stable political environment

• Stable water links over time •

• Free enterprise system

These are just a few of my ideas - give me a shout and let me know what you think about them!

Here are a few extra thoughts on investing in water and virtual water trade:

Is Farmland A Good Investment 2018?
Why Is Michael Burry Investing In Water?
Investing In Water - Part 1 [Virtual Water]

Interesting, it looks like I’ll need to sit down to really let this sink in. Thanks for sharing!


Update on my water thesis:

The farmland REIT I had been looking at has been made significantly less attractive.

They are taking on more debt and putting their faith into a Brazilian conglomerate with shitloads of debt.

They also keep raising money and diluting shares…

|'m thinking they just don’t know how to sit still. That’s probably problem with REITs, or any rent-seeking business.

It’s very hard to sit still - sometimes that’s the hardest part.

To quote Munger:

The big money is not in the buying and selling. The big money is in the waiting.