What is water worth?

by Brian Dumaine,

Farmland is parched. Companies are worried. The global demand for water will soon outstrip supply. What’s the solution? Simple, say some business leaders and economists: Make people pay more for the most precious commodity on earth.

… nearly all of Texas is drier than tumbleweed. In April, 240 of the state’s 252 counties were designated disaster areas. Because of the “exceptional drought,” as the U.S. Agriculture Department calls it, folks in Wichita Falls, a city of more than 100,000 people northwest of Dallas, will soon have to bathe and brush their teeth in recycled sewer water. Freshwater is scarce these days in big swaths of Oklahoma, Kansas, Colorado, Nevada, and New Mexico too.

Water, as any physicist will tell you, doesn’t simply vanish from the earth. It exists in a state of flux: as glacial ice, cloud vapor, salted sea, the sweat of a brow. In whatever phase, the water leaving one domain — by evaporation, precipitation, consumption, or flow underground — inevitably shows up someplace else. Drought in California resides in the same earthly sphere as the storms that have battered the United Kingdom this year in the wettest winter on record.

But that said, the water scarcity problem is real … and serious … and global. Since the 1970s, droughts worldwide have gotten longer and more intense over wider areas, according to the UN’s Intergovernmental Panel on Climate Change. Throw in the effects of pollution, overconsumption, and relentless population growth, and there is little for the political left and the right to debate: We have a genuine, burgeoning, boundary-crossing crisis over water.

What’s striking today is the sheer number of gray suits who are sounding the alarm. “Water now gets discussed at the board level. “The world water crisis is one of the most pressing challenges of our age.”

Flip through the latest 10-Ks of companies from Coca-Cola to Campbell Soup and you’ll find water-related worries enumerated among the possible hazards to operations.

The long drought in Texas, for example, forced Cargill to close a beef-processing plant in Plainview last year as the number of cattle in the U.S. herd dropped to its lowest level in more than six decades.

how many other industries depend on water in the supply chain, for their workforce and production and to maintain a healthy environment around where they’re operating?”

The answer may be virtually all of them. Which is why legions of business leaders, economists, and think-tankers are coming to reclassify water as a kind of buried treasure: “blue gold.” Willem Buiter, Citigroup’s chief economist, sums up the thinking of many these days: “Water as an asset class, in my view, will eventually become the single most important physical commodity — dwarfing oil, copper, agricultural commodities, and precious metals.”

And that makes the next question a humdinger: If water is so incredibly valuable, why is it so cheap?

To produce one half-pound cheeseburger, it takes 968 gallons of water, based on data from Water Footprint Network, a nonprofit group in the Netherlands, and Fortune’s analysis.

If all that water somehow came out of a home tap in Atlanta, the cost to produce that cheeseburger would be on the order of $23. Atlanta, you see, charges residential customers $6.30 for each cubic meter of water (equivalent to about 264 gallons) they use. In New York City, the rate is about half that ($3.27 per cubic meter). In Chicago ($1.46) and Miami ($1.15) it’s a lot less.

But most of the water that’s used in the world doesn’t come out of a kitchen or bathroom faucet. Seventy percent of it is consumed in agricultural production — and most of that, in turn, is free or dirt-cheap (provided by rain, well water, and government agencies).

many business leaders, economists, and other academics say water is so inexpensive that there’s no incentive to conserve or protect it.

One could argue that the answer to water scarcity is simple: Let water’s price swim closer to its value. Let the invisible hand do its job, and water prices will rise, demand will fall, and this precious resource will be saved. If water’s price were truly reflective of its value, the argument goes, investors would pour in capital for projects ranging from desalination plants to gray-water recycling systems to repairs on leaky municipal water pipes. These would help us increase the global supply of freshwater as the world’s population soars.

The idea of treating water as a commodity like oil or gold might seem disturbing on its face. Access to clear water ought to be a human right, many contend — and, indeed, the UN passed a resolution in 2010 confirming the same. Letting market forces take over, moreover, could put in jeopardy billions of people who barely have enough clean, drinkable water to begin with.

But supporters of the idea say you can have both human protections and Adam Smith: Preserve a certain amount of water for everyone for free (or at almost no cost) and have a mostly free market for the rest. “Water needed for drinking, cooking, and basic hygiene as a basis for survival must be available even for a person unable to pay,” wrote Nestlé chairman Brabeck-Letmathe on his blog. But “there must be limits: Water to fill a private swimming pool or to wash a car, for instance, is not a free public good; rather, it should be a normal commercial good covering at least the full cost of infrastructure, not subsidized or even distributed for free.”

This is radical talk, no doubt. The question is whether the global water situation is so dire that we need a radical solution to address it.

In China that would seem to be the case. The country has 19% of the world’s population and only 7% of its freshwater.

Rivers in the country, meanwhile, are dying off like black flies. In the 1950s the country had 50,000 rivers. Since then industry and agriculture have siphoned off so much water that only 23,000 remain — and many of them are unfit for drinking.

So China is taking a leap into the water-pricing pool. In early January the government announced that by the end of the year it would roll out a wide-reaching program in which the wealthiest urban consumers would pay higher amounts for water.

Here in the States, drought-racked San Diego … recently put in place a tiered pricing system as well.

Bone-dry Australia is taking a different tack. Its government has established a cap-and-trade system, similar to the one used for carbon, which is encouraging industry to conserve water and invest in water-saving projects.

Whether such local-market price tinkering will make more than a dent in the global water crisis is too early to tell. Water scarcity, caused naturally or otherwise, has already brought businesses and local communities on a collision course.

Many companies are calculating that it’s worth investing in water-conservation efforts even with water’s market price near zero. Asks Will Sarni, a consultant specializing in water practices at Deloitte: “Water might not cost much, but what is its value if the lack of it can shut down your entire operation?”

Most farmers and local governments can’t afford to invest in technologies like desalination and drip irrigation systems.

If there’s one group of optimists on the water front, it’s a handful of big-money investors. The Koch brothers, who own Koch Industries, a $115-billion-a-year energy and chemical company, have been investing in water purification and desalination technologies. Jeremy Grantham, the co-founder of GMO, one of the world’s most successful investment firms, is betting on rising agricultural commodity prices because of future water scarcity.

One challenge with investing in water is that there’s no global market for it as there is with oil, copper, and other commodities. The reason? It’s expensive and difficult to transport. China is in the midst of building an aqueduct to move water from the Yangtze River, in the south of the country, to the water-starved north. Some 2,700 miles long, it is expected to be one of the most expensive civil-engineering projects in history. The price tag? Upwards of $60 billion.

Strangely enough, a number of academics nonetheless view water as an increasingly important commodity in international trade. That’s because when nations trade grain, produce, or even timber, they are in effect trading water, since agriculture is so water-intensive. This concept — dubbed the virtual water trade by Tony Allan, a professor at King’s College London — will become increasingly important as water grows scarcer. Says Allan: “Food security is totally connected to water security. We’re going to have to get it into our heads that if we are going to have cheap food, we have to help farmers save water.”

How do you feed the world without enough water?

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