One of the most valuable commodities on the planet is water. Safe, drinkable water is difficult to find in many places on earth. Demand is surging for nature’s most important resource.

What do you think is the most important commodity in your life? Yes, oil is important, but not as important as staying alive – after all, you can survive only about a week without water, right? Just look around. How much water do you personally use in a day? And think about how much water you don’t even realize you use. Water is something we take for granted, and it’s a growing crisis that’s beginning to hit traders’ radar screens.

Reports from the World Health Organization show an epidemic problem: A staggering 2.6 billion people – 40 percent of the world’s population – do not have even the most basic sanitation, and more than 1 billion people still drink unsafe water. This can cause a range of diseases and even death. The world is just one natural disaster from a lack of clean water. One example of the devastating impact of nonpotable water was the tsunami in Asia. Many thousands of deaths could have been prevented had there been fresh water supplies.

Water pushed through hydroelectric dams is one of the world’s most efficient and harmless forms of electricity generation. Water is also vital in sanitation, manufacturing, drinking, and more. The water industry is very complex. The list of related companies is long, from water suppliers and bottlers to technology and equipment firms.

Think there’s no real way to play water supply and demand? Think again. The explosion of the world’s population and the dwindling supply of fresh water on the planet are sounding alarm bells for the greatest commodity play of all time. Make no mistake:Water is an increasingly vital commodity. And that hasn’t gone unnoticed by worldwide capital markets.

Very few people know about the Dow Jones U.S. Water Index. This index lists only 23 companies, mainly utilities, but rest assured that there are many, many others. Surprisingly, many experts contend that the way to play water isn’t just through U.S. utilities. Worldwide, the utilities are considered overvalued to some extent.

Even though the utilities are expensive in the United States, one country that offers even better opportunity due to pent-up but exploding demand is China. China’s population of 1.3 billion is more than one-sixth of the world’s total. The sheer numbers are staggering.
And while not everyone there drives a car, everyone does drink water.

Here’s a list of water crisis facts, provided by Summit Global Management:

- The World Health Organization says that 60,000 children die each day from lack of water and/or dirty water, by far the largest health problem in the world.

- Only 20 percent of the world’s population currently enjoys the benefits of running water.

- Every year, according to the World Bank, the amount of global water polluted equals the amount of water consumed: Fresh water is disappearing at an alarming rate, especially when compared to the rising world population.

- Since the turn of the last century (1900), the U.S. population increased 200 percent, while per capita water usage shot up 500 to 800 percent, depending on the region.

- It takes 1,000 tons of water to produce 1 ton of grain; agriculture consumes 75 percent of the world’s fresh water. The World Water Council says we will be 17 percent short of necessary water to feed the global population by 2020.

- Users of the most water in California, in decreasing order, are alfalfa growers, cattle ranchers, cotton farmers, rice farmers, and the city of Los Angeles.

- In the United States there are 58,000 water utilities, 90 percent of which serve less than 4,000 homes and have operating budgets of less than $2 million.

- About 500,000 tons of pollutants pour into U.S. rivers and lakes each day.

- California accounts for 20 percent of all irrigation and 10 percent of all fresh water use in the entire United States.

Opportunities exist in the United States, if you pick the right players. The U.S. water infrastructure, much like the oil refinery situation, is falling apart. The Environmental Protection Agency (EPA) and others estimate that up to $1 trillion will have to be spent to upgrade U.S. water infrastructure over the next few years. That work will fall into the hands of only a few key players in the water market, and the rewards for the shareholders of those that are chosen could be substantial.

It’s unclear as I write this which players will be on top in the next decade; some may not even exist yet, but will be born out of necessity. As I mentioned earlier, the best thing to do is to keep an eye on China, as their need for water will be the most immediate. Take, for example, the grain situation in China in summer 2006. Severe drought afflicted China’s poor western region and underscored how vulnerable the country’s critical ecology was despite its growing wealth, raising concerns among some big commodities traders that China might need to import massive amounts of grain.

A report by the United Nations Food and Agriculture Organization warned in 2006 that some parts of key provinces lost half of their winter wheat crops. Some areas experienced massive food shortages that were on the verge of epidemic.

The cause was lack of water supplies – an ongoing and growing problem in China. In some villages and cities the major water sources have reportedly dried up by more than 70 percent, according to the UN agency’s global information and early warning service. China was the fourth-largest destination for U.S. farm products in 2006, overtaking the European Union, with purchases of $6.8 billion, according to the U.S. Department of Agriculture.

It seems ironic that millions of Chinese are potentially facing food and water shortages, even as the nation’s economy is growing by leaps and bounds. That growth clearly comes at a price worldwide, not just in China.

Speaking of prices, we continue to pay an ever-higher one for our energy. The boom in mining, drilling, foresting, and other resources sectors has a downside, too – a negative effect on our environment. From greenhouse gases and strip-mining to deforestation and drilling in Alaska, the commodities boom is not without casualties.

Energy and mining are on the top of the list when it comes to harming the environment. Just ask anyone who lived in Alaska when the Exxon Valdez disaster occurred. The ecological implications were daunting. Drillers and the oil majors are spending more and more to protect the environment, partly for public relations and partly because they have to. However, measures are being taken in some sectors to stop the destruction – and this is also providing an opportunity for investors.

Various companies that do cleanup and reclamation are set to do well as an ecology-conscious world demands that we be good stewards of the environment at the very same time we are searching for resources. Investing in these companies is a way to further expand a winning portfolio.

The commodities markets are always in flux, and it’s important to keep up with new markets and new opportunities. Always study the markets you want to enter – take an interest in them. One of the most important things in this business is to be interested in what you are trading. Otherwise, trading becomes a chore. Be passionate about the market you choose to follow, but never let emotions cloud your judgment.

Regards,

Kevin Kerr
for The Daily Reckoning

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