Making it Rain: Investing in Water as a Commodity

Making it Rain: Investing in Water as a Commodity

Aqua. H2O. The universal solvent. There are almost as many names for water as there are ways to invest in it as a commodity.

Making it Rain: Investing in Water as a Commodity
Guy Ovadia

Published Mar 24, 2022Updated Mar 25, 2022

Global Markets

Global Markets

Commodities & Gold

Commodities & Gold

Balanced Investing

Balanced Investing

The world is on the cusp of a new financial era as the prospects of the U.S. dollar become weaker and investors begin shifting toward more durable financial assets. For a long time, commodities investments have been a popular way to hedge against the stock market and poor monetary policy, but investors are also increasingly adding alternative assets like fine wine, blue-chip art, and Bitcoin to their portfolios. The common denominator of all these investments is water, so don't miss out, here's how to invest in water commodities.

Water as a commodity

When it comes to commodities, nothing is more abundant, yet, more scarce than water. Despite 70% of the Earth's surface (including your body at this very moment) being composed of water, only 0.3% of that water is consumable, and only a fraction of that is actually accessible to humans. 

With such broad utility, it's easier to determine whether or not to invest in water than to choose how to invest in water.

Water is unique for many reasons: it doesn't fit into either the soft or hard commodities categories, and also it's so vital to our survival yet can't be easily reproduced. People already make good use of the water we can't drink like by turning it into paint for art or by using hydroelectricity to power a data center.

But, the importance of water as a commodity came to light after hedge fund manager Dr. Michael Burry (portrayed by Christian Bale in the 2015 film The Big Short), who successfully predicted the collapse of the housing market and the recession that followed, fully shifted his focus to H2O as a commodity. While the overall importance of water can't be understated, water investors are focused on its pivotal role as a productive commodity.

Water as an investment 

Water is not only biologically necessary but also a huge component of every aspect of agriculture. For example, it takes 1.1 gallons of water to produce a single almond and 84 gallons of water to produce one gallon of almond milk. This pales in comparison to the water that is required for meat and produce: It takes 880 gallons of water to produce one gallon of dairy milk and over 1,800 gallons of water to produce one pound of beef. Meanwhile, it takes 200 bottles of water to produce just one bottle of wine, according to Burry. 

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While demand for agricultural products will increase as the population grows, potable water is steadily becoming scarcer. This dynamic of supply and demand is making the prospects of a water investment all the more lucrative. So, how does one invest in water as a commodity? There are many ways to gain exposure to water as a commodity, either through water-related assets or through water derivatives like funds and futures contracts. One of the best ways to invest is to purchase stock in a water company.

Water commodity stocks

Water stocks are shares in any publicly traded company that provides water as a utility, packages water for retail sale to consumers, or owns rights to a natural water source. While it's rare to find a company that hasn't diversified beyond just water commodities, buying stock in companies with water-related assets on their balance sheet is a good way to gain exposure to water as a commodity. The best water stocks are companies with broad commercial reach in the water market or firms that provide water for specific applications, such as medicine. 

Water commodity ETFs

Another way to gain exposure to publicly traded water companies while curtailing risk is by buying shares in a water exchange-traded fund (ETF).

Water ETFs are securities that represent an actively or passively managed portfolio of stocks in water companies. Water ETFs are great for hands-off investors since they are vigorously managed by firms that try to replicate water indices and maximize profit, but a downside of ETFs is that their expense ratios can cause their share price to become less correlated with the underlying assets. Nevertheless, if you're looking for a simple way to add water companies to your portfolio, you may consider buying a water industry-focused ETF.

Water commodity futures

The final and most risky water investment strategy is buying water futures. Most high-volume natural clean water sources are exclusively owned by a company or government that may sell contracts to buy water at a set price by a certain date. These are known as futures contracts and they're a common mechanism for trading commodities that don't exist yet. Buying water futures can be risky since they're basically a bet on the price of a commodity moving in a certain direction before they expire. While water desalination and filtration could impact the price of water by increasing the available supply, consumer demand for spring water has allowed natural springs to remain lucrative real estate.

Farmland

The preferred water investment strategy by people like Burry and Bill Gates is buying farmland in particularly water-rich areas. As mentioned before, one of the most important use cases of water is agriculture, particularly for foodstuffs like meat, seeds, nuts, as well as textiles like cotton. Water is a fundamental productive commodity that is the figurative fuel powering industrial agriculture, and companies have been acquiring rights to natural water sources for practically forever. 

Obviously, not everyone has the resources to acquire vast swaths of hydrated soil like Burry and Gates. Though owning farmland may seem like a pipedream for most retail investors, alternative investment platforms like Harvest Returns and Acretrader have made it so that almost anyone can add farmland to their portfolio. If you're an accredited investor, Acretrader is a great way to profit from productive farmland. Investors not only make money from rent paid by the farmers but also will profit from long-term land value appreciation.

acretrader
Acretrader

Farmland

If you're not an accredited investor but are looking for a way to invest in productive farmland, then Harvest Returns is great for their lower investment minimum and lower fees. Harvest Returns allows any qualified investor to invest in farms and agribusiness while making passive returns on a quarterly or monthly basis. Harvest Returns is the most accessible way for nearly any investor to gain exposure to productive water-rich farmland.

harvest-returns
Harvest Returns

5.0

Farmland

Is water a good investment?

Water is a great investment, just not as an asset. High demand makes water a very liquid investment (no pun intended) and it's nearly universal in terms of use case. However, with such broad utility, it's easier to determine whether or not to invest in water than to choose how to invest in water. 

While agriculture is by far the most lucrative water investment, the market is highly saturated and other industrial and household water-related applications could have more room for growth than traditional ventures like farmland and natural springs. With emerging technologies like desalination and the harvesting of energy from waves in the ocean, there's no shortage of new water investments.

But whoever drinks the water I give them will never thirst. Indeed, the water I give them will become in them a spring of water welling up to eternal life.

Water has never been more important. Ice caps melting, pollution and contamination, drought and infertility, it seems like mother Earth can't catch a break. Investors need to balance their capitalist ethos with the evermore important issues of conservation and sustainability. So, as an investor, are your thoughts on environmental social governance?

But whoever drinks the water I give them will never thirst. Indeed, the water I give them will become in them a spring of water welling up to eternal life.