Water: Investing in the Most Crucial Resource

Back in antiquity and halfway around the world, the superpowers of the ancient world consistently fell to one foe...

The Tang Dynasty ruled from 618 A.D. to 907 A.D., during what is widely considered a Golden Age in Chinese history.

But the beginning of the end came in 873 A.D., when an illegal salt trader organized starving peasants and started a decade-long war following a disaster. By 880, he had seized the capital and throne.

The next year, the salt trader was driven out by the Tang emperor — but his dynasty was doomed. The empire withered and suffered for years. Eventually, the last Tang emperor was deposed by a general.

The Five Dynasties and Ten Kingdoms period followed, with chaos, violence, and fragmentation in power vacuums lasting for 53 years.

Fast-forward to modern day, and not much is different. If anything, what brought the Tang Dynasty (along with the Yuan and Ming Dynasties years later) to its knees is more of a threat today than ever before.

I'm talking about water — specifically, a lack of it.

By studying stalagmites, a joint Chinese and American team found a significant decrease in deposits correlated with the beginning of the end of a Golden Age in Chinese history.

The cave was in an area completely dependent on monsoon water for sediments to slowly drip down and build up the spike, just like tree rings. In 873 A.D., the deposits showed a profound lack of growth because there was very little water to deposit materials. The same correlation appeared for the fall of the Yuans and Mings as well.

Droughts and the subsequent lack of water destroyed all three powerful dynasties.

Seemingly simple and boring, water is so easy to take for granted. But it is essential to life on this planet. Every man, woman, and child would kill for it if needed.

Unfortunately, over a thousand years of progress hasn't solved the problem.

And to make matters worse, the modern world's problems now go far beyond rain cycles.

Just ask Ashley Yost...

Dry Wells

Ashley Yost's grandfather sank a well for his family farm in Kansas 49 years ago that pumped 1,600 gallons per minute.

Last year, Yost's well managed 300 gallons per minute — along with a whole lot of sand that degraded his topsoil.

The High Plains Aquifer is rapidly running dry. The former site of a massive inland sea has virtually disappeared as center-pivot irrigators with half-mile radii pull hundreds to thousands of gallons per minute from underground.

Since the start of the 20th century, the equivalent of two Lake Eries has been sacrificed for our amber waves of grain. In Kansas the aquifer fell by an average of 4.25 feet in 2011 and 2012; some wells fell by as much as 30 feet.

The irrigators fueled 100% larger corn yields, 66% larger soybean yields, and 60% larger wheat yields than did dry land.

An increasing number of American farmers are going to have to switch to dry farming practices and prepare for much lower yields.

One look at a map of groundwater depletion and crop value should clue you in as to how serious this problem is: 

drought and crop value

A whole lot of valuable crops that sustain our country — along with import-dependent countries — are going to disappear. Billions will vanish from already squeezed farmers and our national economy. The problem will worsen as every food product will see rising prices.

This issue is a global one. An article published in the journal Nature last year concluded that the drain on aquifers around the globe averages out to 3.5 times a sustainable rate. 70% of water drawn from freshwater sources support agriculture.

Unquenchable Demand

In addition to water demand sapping aquifers worldwide, there is a profound lack of water security around the globe. Even if there is plenty of water, quality and access often are dismally poor.

Lack of infrastructure, such as running water or purification, lead to sanitation issues and ultimately to disease and death.

Globally, dysentery is the leading cause of illness and death, and 88% of these deaths are due to a lack of access to sanitation facilities, together with inadequate availability of water for hygiene and unsafe drinking water.

63% of the world's population use toilets or another form of improved sanitation. That leaves 2.5 billion people, including almost one billion children, without even basic sanitation.

Asia and Africa are by far the worst areas for water security...

An estimated $59 billion will be needed in the Asia Pacific to satisfy water demand. Another $71 billion is needed for sanitation purposes alone.

In South Africa alone, $76 billion will be needed for water infrastructure over the next decade to sustain agriculture and overall demand.

Chinese officials have openly acknowledged that water shortages are growing, with two-thirds of the cities affected.

Concerns over water have led farmers in India to block roads and rail lines — even committing suicide — to protest coal plant construction that affects irrigation supplies.

War for Survival

Depleting water sources or a lack of water security will cause the same problems droughts did in ancient China. The only difference is that the effect will be permanent.

Take a look a this chart of food prices, food riots, and Arab Spring revolutions, with deaths listed alongside it (and keep in mind the data is a bit outdated, considering deaths from the Syrian civil war are now close to 100,000 and counting):

food and riots

The Middle East, with its scarce and heavily contested springs, is one of the worst hot spots of water scarcity. While it may not be obvious on the surface, it is always just below, fueling the violence and struggles that pop up in the news.

Just last year, a United Nations survey found that of 530 surveyed springs in the West Bank, 30 were taken over by Jewish settlers. Palestinians only had limited access to another 26, where settlers had recently moved.

There are plenty of reasons for the fighting in Israel and the West Bank, but even those who have avoided zealotry and violence would become desperate. Springs are the sole source of water in these areas. Without access, farmers lose their livelihood and land or see their crop yields plummet.

Just to the west is an old Israeli foe from the wars decades ago. Thankfully, peace has been maintained for years, but King Hussein of Jordan identified water as the only reason that might lead him to war with Israel. And he's not alone...

In late 2012, the president of Uzbekistan indicated that efforts by neighboring Kyrgyzstan to build hydroelectric dams could spark war. He has rattled his saber over a similar project in Tajikistan, too.

Hidden Profits

Overdrawn aquifers, woefully insufficient water security in the developing world, and growing tensions over scarce sources all add up to one obvious conclusion...

Inevitably, more water will need to be desalinated and more wastewater will have to be filtered to keep this planet's ever-increasing population alive.

A huge opportunity will come from the companies with the expertise to build the infrastructure required or develop new methods.

You could hunt for small companies with innovative products that could revolutionize water purification...

Membrane-based water filtration is estimated to grow from a $5.54 billion sector to a $12 billion sector by the end of this decade. For now, the cost to produce water is still way too high for it to catch on.

Another option involves the handful of ETFs that track indices of water infrastructure-building companies that you can use for stable exposure.

These include the PowerShares Water Resource (NYSEARCA: PHO), the PowerShares Global Water Portfolio (NYSEARCA: PIO), and First Trust ISE Water Index Fund (NYSEARCA: FIW).

Over the last year, two have beaten the S&P 500, while the other has mostly kept pace. And although their performance ebbs and flows through the years, they are good choices for exposure to this long-term opportunity:

water etfs

It is a good idea to keep these ETFs — as well as companies developing clean water technologies — on your radar.

When it comes to this most precious resource, things are only going to get increasingly dire from here on out. 


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