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If you think you know what water is worth … what wheat is worth … and what oil is worth … check out the latest news from Saudi Arabia …
The Kingdom is going to start importing wheat early next year — 250,000 tons by next spring. The reason is simple: They need to save water.
Underground water levels in Saudi Arabia are dropping by at least 16 feet a year in areas of “heavy” cultivation, according to a U.S. government report.
Eventually, the Saudis will probably import all their wheat — about three million tons a year.
This could get expensive — the price of wheat has more than doubled in the past year.
But the Saudis don’t care about the price of wheat because …
Water Is Much More Precious
Than Oil in the Middle East
The Saudis get most of their water from aquifers which are being replenished at only about 10% of the extraction rate. Desalinization has its limits and even though the government picks up the fuel tab, a new desalination plant costs about $200 billion.
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| Saudi Arabia has a big water problem on its hands … |
Most of the Kingdom’s water use — over 80% — is for food. And Saudi Arabia isn’t the only Middle East country with an empty bowl to fill.
Egypt, the world’s second-largest wheat importer, saw its wheat imports jump 43% to 5.2 million tons in the first eight months of the year that began July 1.
The Middle East’s most populous nation imported seven million tons of wheat last year, half its annual consumption. Bread riots in Egypt killed at least two people recently.
Arab countries have less than 5% of the world’s population and control over 40% of the world’s oil supply. However, they get only 2% of the world’s rainfall and have only 0.4% of the world’s recoverable water resources.
Their populations are booming — which means the water has to serve more and more people. So it gets tougher for these countries to feed themselves.
In the end, it’s a global problem:
Worldwide supplies of wheat will fall to 110.4 million tons by the end of the marketing year on May 31, the lowest levels in 30 years.
U.S. stockpiles may drop to 6.6 million tons, a 47% drop from the prior year, according to the U.S. Department of Agriculture.
Other grain supplies are dwindling, too. Soybean stocks are at a 35-year low, and world rice inventories are at the lowest level since the 1970s.
Consequently …
The Era of Cheap Food Is Over
Over the past eight years, the price of food worldwide has increased 75%; the price of wheat has gone up a dramatic 200%.
And the rate of inflation is accelerating. In a recent report, the United Nations predicted that food prices are likely to remain high for a decade.
Here are some facts …
- As of December, 37 countries faced food crises, and 20 had imposed some sort of food-price controls.
- The prices of the world’s three main grains — rice, wheat and corn — have all more than doubled in the past year.
- Part of rising food prices is due to rising fuel prices — as the Saudis raise the price of oil they sell us, we’re going to be raising the price of wheat we sell them.
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- Another part of the equation is weather. Extreme weather shifts over the past two years have reduced the worldwide wheat harvest by nearly 10%. And it’s not just wheat. Since 1971, in the United States, droughts or floods have wiped out up to a third of the Midwest corn crop four times.
- Wheat production in South America and Western Europe has been cut from 5% to 20% in each of the past two growing seasons.
- Australia was once the second-largest exporter of grain, harvesting about 25 million tonnes in a good year. But the worst drought in a century reduced the crop to only 9.8 million tonnes in 2006 and 13.1 million tonnes in 2007.
Now, this year could be different. If good weather holds, we could see a record world wheat crop. And just this week, we saw grain prices tumble as the government reported that farmers are planting from fence to fence.
On the other hand, people in China and India are changing their diets — eating more and better food.
The Chinese ate just 44 pounds of meat per capita in 1985. They now eat over 110 pounds a year. Each pound of beef takes about seven to 10 pounds of grain to produce, which puts even more pressure on grain prices.
In fact, over the next decade, according to tentative UN and OECD forecasts made in February, the price of corn could rise 27%, oilseeds like soybeans by 23% and rice by 9%.
U.S. consumers know that food prices are already rising. The Bureau of Labor Statistics reports that ground beef, milk, chicken, apples, tomatoes, lettuce, coffee and orange juice are among the staples that cost more these days.
At $1.32, the average price of a loaf of bread has increased 32% since January 2005. In the past year alone, the average price of a carton of eggs is up nearly 50%.
Overall, food prices rose nearly 5% in 2007, according to the U.S. Department of Agriculture, and should rise by at least that much this year, too.
A survey by the Food Marketing Institute showed the average number of weekly shopping trips falling below two per household for the first time. Food banks are seeing increases in their overall client loads.
Who Is Going to Feed
A Hungry World? The U.S.!
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Demand for U.S. wheat supplies has increased 51% since June 1, compared with the same period a year earlier, USDA data show. Wheat was the fourth-biggest U.S. crop in 2007, valued at $13.7 billion, behind corn, soybeans and hay.
In fact, the U.S. accounts for a whopping 40% of the world’s grain exports. You can say that we’re “the Saudi Arabia of grain.”
So everything balances out, right? Well, not exactly. You see, as it turns out …
The U.S. Has a Worsening Water Problem, Too!
Agriculture takes a lot of water in the U.S., accounting for 80% of the nation’s consumption, and over 90% in many Western states.
The Colorado River is the main source of water for many people in the West. If its volume decreases due to climate change, 25 million people are going to have a serious problem.
Bad news: Experts expect a warming climate will reduce the flow of the Colorado River. And if we get a serious drought … well, who knows?
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| The Colorado River supplies a lot of water to U.S. Western states. |
And it’s not just the West we have to worry about. The U.S. government projects that at least 36 states will face water shortages within five years because of a combination of rising temperatures, drought, population growth, urban sprawl, and just plain old waste.
Like Saudi Arabia, we have to look beyond household consumers to agriculture. While just 16% of all harvested cropland in the U.S. is irrigated, this acreage generates nearly half the value of all crops sold.
That brings me to the Ogallala Aquifer. This underground reservoir of water was filled up during the last ice age with enough water to fill Lake Superior. The Ogallala is under eight U.S. states — parts of South Dakota, Nebraska, Wyoming, Colorado, Kansas, Oklahoma, New Mexico, and Texas.
There’s another name for the states overlying the Ogallala Aquifer — “America’s breadbasket.” Corn, wheat and soybeans grow in those states, along with herds of livestock.
Now for the troubling news: The Ogallala Aquifer is being drained at a rate of 12 billion cubic meters per year. To date, that works out to a total depletion equal to the annual flow of 18 Colorado Rivers. Some estimates say the Ogallala will dry up in as little as 25 years!
Here’s the Good News: There Are
Great Companies Working on These Problems!
There are firms trying to find grains that will grow with less water, and solve all the other problems I mentioned today. Not only is that good news for the planet, it’s also good news for investors looking to help out and possibly make big profits in the process.
You’ll find some of these innovative companies in the Market Vectors Agribusiness ETF (MOO).
What about the water problems? Well, you could buy one of the water ETFs that hold a basket of stocks of companies involved in the production, treatment and distribution of water.
An example would be PowerShares Water Resources Portfolio (PHO). It holds everything from French water distribution giant Veolia Environment to drilling and construction firm Layne Christensen.
Look, I think oil and water … and wheat … are all in major supply/demand squeezes that aren’t going away anytime soon. I expect them all to trend higher in 2008 and beyond. And I think investors need to position their portfolios accordingly. The pullback we’re seeing now is probably one heck of a buying opportunity!
Yours for trading profits,
Sean
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