Investing in the future of water
If you’ve seen The Big Short, then you probably remember that it ended with the rather ominous message that Michael Burry, the man who bet against the US housing market before anyone else, is focusing his investments on water. This is exactly what came to my mind when water futures began trading for the first time in December.
This news met a mixed response. Some lauded the opportunity for farmers to hedge against price volatility, many described the new derivatives as dystopian. “What’s next… Air?” is asked frequently throughout the now infamous WallStreetBets subreddit. But water for sale isn’t a new idea; privatisation of water utilities has been seen across the globe, often championed by the likes of the IMF and World Bank, and there are countless brands of bottled water available to buy at any time. You can even purchase forward contracts in Australian water markets.
Considering the basics of supply and demand, water as a tradable commodity makes much sense. Demand for fresh water is enormous; not only is it essential for agriculture and industry, but we need it to survive. Its supply, on the other hand, is comparatively small. Less than 3% of the world’s water is fresh, and of that only 1% is readily accessible. Climate change and our inefficient use of water are only contributing to increasing water scarcity. The UN estimates that two thirds of the world’s population will live in water-stressed regions by 2025. Logically, this will drive up the price of water, making the commodity an obvious investment choice. However, the morality of profiting off such a necessity is questionable.
Related concerns have been raised about the new water futures becoming an asset for speculation. One UN expert suggested the futures could challenge the basic human right to safe drinking water. However, these water futures only represent a small market, tracking the Nasdaq Veles California Water Index, and, more importantly, are cash settled, so any such threat is unlikely at present. As Citi’s former Chief Economist Willem Buiter noted in 2011, the appearance of a global water market is what will solidify water’s position as an essential asset in financial markets.
While we wait for global water futures, there are other ways of investing in water. Michael Burry has been investing in agriculture, more specifically almond farms with access water. He has described selling water-intensive food to water-scarce areas as a profitable method of water redistribution, which will be necessary as water scarcity gets worse, but owning land with water rights surely can’t hurt him either. Burry is also not the only one buying up land, Bill Gates was recently revealed as the biggest farmland owner in the US. Farming REITs (real estate investment trusts) like Gladstone Land Corporation provide an investment opportunity for those of us who can’t afford to buy farmland outright. Their portfolio of leasable farmland has the potential to increase in value due to the land’s water rights, especially in regions like California.
Another option is to invest in water-related stocks. There are plenty of water ETFs that cover stocks in water utilities, infrastructure and equipment, including Severn Trent, American Water Works, and Xylem Inc. What is more interesting are the funds that include companies not directly related to water. The Calvert Global Water Fund includes companies that manage water in a ‘sustainable manner’ in its holdings. The chip maker TSMC is one of these. TSMC’s reuse of water in their production process is a significant risk management measure in water-scarce Taiwan. AppHarvest, a mid-cap AgTech company in the US that went public at the beginning of February, is another example of using water efficiently. The indoor agriculture business uses 100% recycled rainwater and requires 90% less water than traditional agriculture. This could put them in a strong position when the US agriculture sector is inevitably hit by increasing water scarcity. Additionally, it sets a good example for conserving water, something that is becoming increasingly important.
Our water scarcity problem is growing, and without drastic action, this isn’t likely to change, however, our attitudes to trading water probably will. Even if you find the ethics of speculating on our most precious resource debatable, there is a vast expanse of opportunities to invest in water, directly and indirectly, which pose less of a moral conundrum. Water futures are only a drop in the reservoir, so to speak.