Why Virtual Water Matters to Your Investments

‘Virtual water’ measures the amount of water it takes to produce our favorite things. Here’s why companies with a high virtual water footprint are vulnerable to rising water prices.
“Virtual Water” is a term that will become commonplace in the next ten years.
No, I’m not talking about watering someone’s virtual plants in Farmville and this certainly isn’t a game.
Considering that water is 100% essential to human survival, its price is extremely low compared to its value in our society. In many settings, tap water is the only beverage given out for free. Thus we take the value of water for granted as a culture because its price is nearly zero.
But as water scarcity changes the price of water from nearly-free to not, the price of water will begin to meet the value of water.
Virtual water, also called embedded water, is the amount of water it takes to produce our favorite things. You might not know that a gallon of beer actually takes an incredible 689 gallons of water to produce, according to the Water Footprint Network.
Of course, the consumer never sees this impact, that’s why it is called virtual water. But sure enough, if the price of a gallon of water doubles, the cost of producing that gallon of beer will increase by an incredible 689 times.
Here’s an example of how virtual water works.
The production of beef involves by far the most virtual water of the major meats consumed in the western world. According to the Water Footprint Network, the process of raising and processing beef involves 6.6 lbs of grain and 36.2 lbs of grasses for feed plus related irrigation water. Then the cow itself consumes an additional 18.6 gallons of drinking water for every 1 lb of beef produced.
The process means that it takes 1,799 gallons of water to produce a single pound of beef.
Understanding virtual water involves a close look at what’s involved in each step of the production process. It is what helps us understand the environmental impact of an orange versus a pound of chocolate.
An orange requires 13 gallons of water. A single pound of chocolate requires 3,170 gallons of water. Cocoa butter and cocoa paste are two of the most water intensive foods consumed today and 60% of the average chocolate bar is made up of these ingredients.
The reason you’re reading about this on an investment research site and not an environmental research site is that these numbers will start to have a major impact on the pricing power and profitability of several huge industries.
If the price of producing a chocolate bar rose 3,170 times, what do you think would be the impact on the candy industry? Would consumers simply move on to other ways to satisfy their collective sweet tooth?
Businesses that are more dependent on products with a large virtual water footprint are more vulnerable to major changes in the price of water. Tomorrow we’ll take a closer look at these industries to examine which are most likely to suffer as water prices inevitably rise.

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