The first is presented by Chatham House, the Royal Institute of International Affairs. The article is entitled, The Euphrates in Crisis: Channels of Cooperation for a Threatened River.
Euphrates in Crisis
The article provides a very sobering picture of the Euphrates river basin. In brief: demand is outstripping the ability of the basin to supply water. The situation is aggravated by the following conditions:
- Turkey controls 89 percent of the surface water supply to the Euphrates River.
- Iraq and Syria receive 61 and 72 percent of their surface water supply from sources which originate outside their borders and the situation is even more dire with respect to the Euphrates.
- Socio political turmoil has left the operation of dams and the water distribution infrastructure in tatters, exacerbating the misery faced by inhabitants.
- There are no prospects for collaborative management of water resources on a basin-wide scale: no treaties, no viable political institutions to initiate nation-to-nation discussions.
- Turkey is proceeding with an ambitious dam building program which will divert water from downstream areas and greatly modify already profoundly altered flow regimes.
- Climate change will exacerbate the situation by reducing water flows and increasing demand downstream.
In my view, the dislocations caused by current religious/political differences will pale in comparison to competition for water - something that may take place in the absence of mechanisms such as treaties and international forums for dispute resolution.
Parallel scenarios are present elsewhere in the world, although they may be expressed in slightly different ways.
The World Resources Institute has produced an Aqueduct Atlas which provides an interactive tool to appreciate current and future strains on the world's water resources. It is an impressive piece of work.
I spent several hours investigating the application of the model to various parts of the globe. In previous editions, I noted the coincidence of water stress with a host of other human miseries such as poverty, civil strife, poor agricultural productivity and so on. In this sense, water stress can be a fairly accurate predictor of social stress, especially in places where societies do not have the financial resources and social infrastructure to take collaborative measures to meet the challenge of water shortages or issues associated with poor water quality.
I also investigated the model from the perspective of an investor.
Here are a few preliminary findings on the spatial implications of predicted water stresses:
- It appears that agriculture in much of northern Europe and Russia will not be all that adversely affected by climate change in comparison to other places in the world.
- Similarly, much of North America will be comparatively better off for at least three reasons: the presence of a base of skilled farmers supported by government institutions and a vigorous industry with the flexibility to develop new farming techniques, seed stocks and distribution systems to adapt to changing operating conditions; a legal system which provides a stable basis for enterprise; and climatic changes which may be comparatively more benign than elsewhere.
As mentioned in previous editions of The Financial Passage Maker, the pattern of climatic change appears to be well established. As a long-term investor, I am prepared to invest according to my interpretation of fundamental long-term trends.
With respect to agriculture, I have decided to adopt the following strategy for my investments:
- Own a few key, well-established companies with global reach and access to substantial research and distribution networks. This will form the basis of my agricultural portfolio.
- Own a few regional actors with a competitive niche (they could be future take-over candidates and/or provide nice income streams).
- Speculate by investing in a few selected companies with innovative technologies.
- Invest in land in favoured areas. This will be undertaken by investing when I sense that land prices are depressed, as for example, during troughs in commodity prices.
As always, I will look for companies with the following attributes:
- superior, ethical management with a track record of operating during the boom and bust of agricultural markets
- strong balance sheets
- competitive products and services
The Financial Log Book contains a variety of these beasts, both large and small. To a certain extent, I have managed my risk by limiting my stake in the smaller companies.
A key question I am facing is this: does it make sense to invest in fertilizer companies and potash? Investor sentiment is sour on potash. In light of this, does it make sense to establish a position now with the perspective of a ten year horizon? I am exploring a variety of strategies in this regard and may report on them in future postings.
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