Tuesday, June 24th, 2008...8:32 am
The Oracle of Gin Flat
Baltimore, Maryland
Joel Bowman, from another parched corner of the globe, reports…
$140 per barrel oil…$4 a gallon milk…wheat and corn at $10 a bushel. And
now, in case you hadn’t read, $1,000 water. No, that’s not a mistake; the
same water that flows from your tap, the same water you shower in and wash
your car with is now trading at $1,000 per acre-foot on the open market.
Wait. Back up a second. What’s all this about?
Long-tortured Rude readers will recall your editors’ affinity with water and,
more specifically, water-related investments. We’ve monitored droughts from
Turkey to Tucson, AZ. over the past couple of years, banging on about the
issue and identifying a few sector-related companies for you to consider
along the way.
The setting for the latest installment of our ongoing crisis coverage is
California. It seems a fitting backdrop for the issue, too…especially as
the sunshine state battles around 800 wild bushfires, raging through its
parched countryside this very moment.
So how bad is the situation? Adam Satariano delves into the heart of the
crisis in a recent Bloomberg article:
“California farmer Mike Wood has let $150,000 worth of cotton die. Barry
Baker spent $2.5 million to obtain water rights on the open market to salvage
his crops. Shawn Coburn is risking long-term damage to his land by pumping
water from a 1,200-foot well.”
Santariano goes on the reveal how the perilously low H2O reserves have forced
California Governor Arnie Schwarzenegger to declare nine counties disaster
areas. Fresno County, caught smack-bang in the middle of the crisis, is the
largest agricultural county in the U.S. and serves up around $4.8 billion in
crops to American plates every year.
“Along the western edge of the San Joaquin Valley,” writes Satariano, “water
supply has been reduced by about 50 percent, leading farmers to abandon crops
and spend millions of dollars on short-term solutions.”
Shortages of necessary commodities lead, invariably, to higher prices. As we
wrote in yesterday’s Rude, “Way up” will be the trend for all things in short
supply and high demand. We’ll put basic foods, medicines (including
cigarettes and beer), and energy in this basket.”
Add to that basket water. As mentioned above, an acre foot of water now sells
for $1,000 on the open market ñ about a hundred bucks more than an ounce of
gold and ten times the amount charged by the U.S. Bureau of Reclamation.
To clarify, an acre-foot of water is equal to the volume that could be held
in a one-acre catchment area, one foot deep. That’s about 326,000 gallons, or
as much as one thirsty family use in a year. Imagine then, tacking on another
ounce of gold to your yearly grocery bill…and that’s before the inevitable
price hikes of the crops produced in drought-affected areas. The nine
disaster counties in California produce tomatoes, almonds, grapes, melons,
broccoli, cauliflower, lettuce, wheat and onions and garlic, among other
grocery store goodies.
It follows then, that companies engaged in the water industry ñ be it through
treatment, preservation, filtration, infrastructure, or otherwise ñ are
likely to benefit from the situation. We note that as a group, water stocks
have gained about 10% since last August, when the credit crisis first broke.
The S&P 500, meanwhile, has nursed a loss of about 5%.
And this is just the beginning. Following the crisis to opportunity, Chris
Mayer revisits a favorite subject in the column below…
— Attention Executive Series Member —
RE: Important Account Notification
As current Agora Financial subscriber, your account has been flagged for an
upgrade to our premium service where you’ll receive all our finest
research…for life.
You’ll also grab over $6,000 discount to our most elite investment circle if
you choose to take us up on the offer.
But you must act fast, the Agora Financial Reserve is only open for a very
limited time… Read On Here
——————————————–
The Oracle of Gin Flat
By Chris Mayer
About 7,050 feet above sea level, high in the snowy Sierra Nevada Mountains,
lies a little frozen meadow called Gin Flat. It got its name from a speak-
easy that closed long ago. Nestled amid a forest of pine and cedar, a little
scientific outpost measures snowfall - and has done so since the 1930s.
This is important work, because the melting snow from the Sierra Nevada
provides water for millions of Californians. The size of the snowpack at Gin
Flat gives us clues to how much water will flow from the mountains. With the
data gathered at Gin Flat, scientists can divine the future of California’s
water supply.
The latest reading this year is that the snowpack is only 67% of normal. So
California looks like it will have more water troubles this year. “I have not
seen a more serious water situation in my career,” opined one official. “And
I’ve been doing this 30 years.” Some scientists think that we’re overstating
the water content at Gin Flat by 20% or more. If so, we have even less water
than we think.
Across the globe, scientists look to the world’s mountains and watch
carefullyÖ The snow is melting earlier this year. That means water will flow
less freely this summer, when people need it most. The areas most at risk of
lack of fresh water include parts of the Middle East, southern Africa, the
United States, South America and the Mediterranean.
In this piece, we return to a familiar theme: the unfolding water crisis. The
spur that drives me to revisit it once again is the thoughtful annual report
of a publicly traded water company that has purchased water rights in the
western United States. In the shareholder letter, the company’s CEO wrote:
“Arguably, the most critical issue facing the Western United States is the
availability of water to support continued population growth.”
Water scarcity in the West is not new, the CEO admits. At least since the
time of Mark Twain, people have been fighting over it. (”Whiskey is for
drinking and water is for fighting over,” goes the old saying often
attributed to Twain.) But what’s new this time is the sheer amount of water
needed to support the fastest and largest population growth in the union. In
Arizona and Nevada (and Colorado and Idaho), population grows at a pace
double the national average. Yet water is scarcest in these places.
For all that’s demanded of it, water is too cheap. The CEO continues: “Market
prices [for water] have started to appreciate dramatically in recognition of
the actual economic cost of developing new supplies.” Despite constant
threats of shortages, there is a reluctance to allow the price of water to
rise. Lastly, the company’s CEO chides the public’s irrational view of water
as something that ought to be a “freeÖ public resource, not subject to market
forces.”
“Paradoxically, this same public is willing to pay exceptionally high prices
for bottled water,” he writes, “rather than drink inexpensive tap water, in
part due to the often mistaken belief that bottled water is safer to drink.”
This water scarcity issue does not only affect America’s dry Western half.
It’s a global issue affecting many other parts of the globe. In a water-
constrained world, conserving water becomes top priority. Treating existing
water supplies when new supplies are not available becomes especially
important.
On that idea, I’ve held Nalco Holding in my Mayer’s Special Situations letter
since summer 2006. It’s up 46% for us, but I believe bigger gains lie ahead.
Nalco is the world’s largest water-treatment company. Nalco is all about
helping companies treat and conserve water in their manufacturing processes.
A trio of insiders bought the stock in February and March for prices at $19-
22 per share. It’s a steady business that generates plenty of cash flow and
trades for 15 times next year’s estimate of earnings. Nalco is one of the few
water stocks sitting a good 20% or more off its high.
As an investment idea, the water theme is not going away anytime soon. Many
trends in energy and agriculture make the water situation only worse. Take a
recent Tampa, Fla., development. Officials got a shock when the state’s first
ethanol facility put in its request for water - 400,000 gallons per day! That
instantly made it one of the top 10 consumers of water in Tampa, yet there
are plans to double its capacity. All the while, Florida’s rivers and lakes
are at or near record lows.
It’s madness, of course. But at least you can make it work for your portfolio
by putting some money in the water resources arena. Maybe one day, people
will quote the readings at Gin Flat - and its counterparts across the globe -
as they do the Dow Jones industrial average.
[Joel’s Note: If you’re interested in following crisis to opportunity, click
here for the latest report from Chris’ indispensable Capital & Crisis
newsletter here.
—- Breaking Investment Research —-
The Most Aggressive Wealth Creation in History:
47 new millionaires every day… and a new billionaire every month
Imagine investing in General Motors in 1962 just as the interstate highway
system got up to speed… and doubling your money in three years
Better yet, imagine investing in Ford when the Model T came out… and
doubling your money in just over one year
You could do the same thing right now with this $7 billion “Golden
Quadrilateral” — and all you need is this $17 stock. Read On
——————————–
[Rude Endnote: We’ll be reporting from our home in Dubai again tomorrow…if
we catch this train…
Until then…
Cheers,
Joel Bowman
Rude Awakening
aussiejoel@the-rude-awakening.com
Leave a Reply
You must be logged in to post a comment.