Water. It's the commodity that nobody can live without.
More than half the world is depleting its groundwater faster than it's being replaced. That's why it's one of Ewen Cameron Watt's favorite investment ideas.
"We could just about live without oil. Physically, we cannot live without water," said Cameron Watt, chairman of BlackRock's Central Strategy Group. Also tied to the demand for water is the rise in demand for agricultural commodities, as the world's demand for food grows.
I asked Cameron Watt how one would go about investing in water.
He started off cautioning, "One way you shouldn't do it is the obvious one of investing in a water utility. The reason that's not a good idea is water utilities have a selling price heavily regulated by government because of the social importance of water," he said, adding utilities also have high capital spending plans.
One way to invest might be through an ETF. "There are some exchange traded funds for water that tend to have wide portfolios, that could be as diverse as a bottled water supplier to a chemical supplier used in the water industry," said Cameron Watt, also managing director of BlackRock's Multi Asset Portfolios Strategies team.
There are direct plays and indirect plays. One way to invest in water is through stocks that make pipes, one of the big items the water industry spends money on every year. The industry also buys float controls, chemicals and a wide variety of equipment. There are also companies that manage waste water treatment and make desalinization plants. The industry spends about $500 billion on capital projects every year, he said.
A parallel trend to the diminishing water supply is the rising price of commodities and resulting food inflation. This trend toward higher agricultural commodities could be in place for as many as five more years, he said. As the world eats more, and the rising middle class demands better food, more water will be required for the increased amount of crops grown. Those crops also feed live stock.
Cameron Watt points out that it takes 11,500 liters of water to produce a kilogram of beef, while just 1,000 is needed to produce a lot of bread. "If you go up the scale in diets, as you get richer, you're effectively using more water for the same caloric value," he said.
"The thing with commodities booms is they do tend to stay around longer than people think," he said. "They do tend to be quite long cycle." He said the agricultural commodities boom will continue probably until people start improving land and production.
He said the metals boom has been underway since 2002 and ag commodities only started taking off 2-1/2 years ago. "Along the way, it's become an attractive area for investors and I'm sure there's some financial interest and a certain amount of hoarding when you have such a thing as the Australian drought," he said.
Ethanol has been one driver of demand for corn, which in turn pressured wheat as farmers planted fields with more corn.
"The really killer winner has been milk," he said. Dried skim milk was around $1,600 a ton in 2003, and is now over $5,000 a ton. Butter has risen from $1,200 a ton in the same time frame to $4,000 a ton. China is one of the big buyers of milk.
"These have been winners because of a range of things, including disease in cows and underinvestment in the dairy industry," he said.
"My big guess is the thing that will catch up is the livestock," he said. Cameron Watt said live cattle prices since 2003 have gone from about $75 per cwt in the U.S. to around $92 per cwt now. (adds in price data)
Countries that are big winners when it comes to producing agriculturally have the common thread of having enough water. The U.S., Europe and China are not on that list, but South American countries are and he specifically named Brazil.
Investment Possibilities: Stocks & ETFs
Cameron Watt does not provide stock picks, but I am including some of the types of ETFs and stocks you might find in the space, not with any particular recommendations. If you take a look, you can see that these securities have turned in a mixed performance.
ETFs would include PowerShares Water Resources, PowerShares Global Water Portfolio and Claymore S&P Global Water.
Some other names in water include Flowserve, Lindsay, Mueller Water Products, Pentair, Watts Water Technologies, and Valmont Industries.