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Water risk and important investment considerations for 2012 and beyond

Let me begin by stating that I am not a weather man.  However, having moved from Los Angeles to the Washington, D.C. area I was expecting to witness four seasons.  So far the snow fall has been naught!

This abnormal weather caused me to start thinking about what the lack of snow might foretell about 2012 drought risk around the U.S..  Snow packs are a vital source of fresh water that makes its way into streams, rivers and aquifers as it melts in the Spring.  This source of water is critical for farmland among other uses.  With that said, 70% of the world's fresh water is used for agricultural crop irrigation (Source Wikipedia).

Note below the contrast between where the U.S. stood in terms of snow water equivalent metrics in 2011 versus 2012.  The lack of coloration in the corresponding maps is worrisome.

2011 Snow Water Equivalent


2012 Snow Water Equivalent


I worry that if recent trends in the lack of snow pack in key agricultural areas and corresponding sources of fresh water may have disruptive effects on agricultural commodities.  Those that are very water intensive (Source waterfootprint.org) such as Livestock (Beef), Corn, Soybeans, Wheat and many others may suffer volatility as a result of potential shortages.  Note that there is additional speculation about seed shortages in key commodities which may exacerbate any potential supply disruption (E.g. Corn).  A recent Wall Street Journal article mentions this potential seed shortage.

Water is a global risk as noted by the World Economic Forum's Global Risks 2011 Report.  The summary of which is shown below.  Water is a critical asset that has a broader reach than just Agriculture as you can gather from the summary below.



Some tail-risk insurance on agricultural commodities could be a strategy worth contemplating as this water risk may still be under appreciated by many.  Note however, that given the above mentioned rationale the fattest tail may be positively skewed with more upside risk than downside risk.

Enjoy the weather!