Price of Water
Water is one resource that touches every industry in the world, and it's often ignored. But as investors, we need to start thinking about it, as it's likely the most undervalued asset in the world.
There is one resource that touches every industry in the world, and it’s often overlooked. Water. From semiconductor production to sanitation, this resource is required by all. For example, an average semiconductor facility uses approximately 20,000 tonnes of water per day. That’s the equivalent of the consumption of a town with 58,000 residents, like Wagga Wagga.
But the overwhelming majority of the world’s water usage goes towards agriculture, as it always has since human civilisation began. Right now, according to the Organisation for Economic Cooperation and Development (OECD), “agriculture irrigation accounts for 70% of water use worldwide”. The OECD believes that Northeast China, Northwest India, and the Southwest United States are the three areas at greatest risk for water scarcity. All three happen to be major sources of the world’s annual food production. With so much at stake and pressure on supply, can investors capitalise on this trend?
The Murray-Darling Basin versus the California water system
We could write a hundred pages and barely scratch the surface of what water represents as an investment. But as an introduction, we can focus on two areas: the Murray-Darling Basin and the California water system.
The Murray-Darling Basin services the water needs of New South Wales, Queensland, South Australia, Victoria and the Australian Capital Territory. The basin supports 7,300 agriculture operations, resulting in $22 billion of primary production annually. In Australia, water rights are packaged in what’s known as perpetual entitlement water contracts. These entitlements, in a nutshell, grant the owner the right to a set portion of the total water set to be distributed from the basin. They don’t guarantee a specific quantity of water; they’re adjusted based on the total water available to the market.
Duxton Water ($D2O) is the only ASX-listed company exclusively involved in the purchasing and management of these contracts, providing monthly updates on both its operations and the contract market. This is how we know that the Victorian (Below Choke) Murray High Reliability entitlement exceeded $8,000/ML in May 2022, as the market in general increased 1.9%. At least one market had a positive May.
Meanwhile, the California water system operates under a very different model – one that has received significant criticism over the last few years for its inefficiency. Instead of having a fully transparent, updating entitlement system, the water futures market prices in a guaranteed amount of water. The main index for this market is the Nasdaq Veles California Water Index (NQH20), which has returned 358% over the last five years and 36.1% over the last six months. In a market where everything is crashing, the price of water keeps flowing upstream.
