Global Trade in Virtual Water

economic, financial and marketing analysis

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SUMMARY

Virtual or embedded water is an economic concept that attempts to measure the amount of water used in the production of an agricultural or industrial product.

INTRODUCTION

The water footprint of an individual is defined as the total amount of freshwater that is used to produce the goods and services that the individual consumes. It is a useful indicator of diet and consumption patterns. By way of example the virtual water of some common items is set out below:

– 1 cup of coffee needs 140 liters of water– 1 glass of wine needs 120 liters of water– 1 liter of milk needs 800 liters of water– 1 kg of wheat needs 1100 liters of water– 1 kg of tomatoes needs 180 liters of water– 1 kg of refined sugar needs 1,500 liters of water– 1 kg of rice needs 2,300 liters of water– 1 kg maize needs 900 liters of water– 1 kg of beef requires 22,000 liters of water.

GLOBAL VIRTUAL WATER TRADE

The global average water footprint = 1,243 m3/capita/yr and the global virtual-water trade is estimated at around a thousand km3/year or 20 River Niles. The Middle East and North Africa region was the first area in history to run out of water in the 1970s. Drinking water takes up 1 m3/capita/year in the MENA region, which represents the majority of the available supply. An additional 1,000 m3/capita of low quality water is needed to produce food. Because of this challenging math, the MENA region has been importing 40 million tons of cereals and flour annually since the 1980s and Saudia Arabia is phasing out domestic crop production all together to avoid depletion of its fossil aquifer.

Surprisingly given the amount of rainfall and fresh water available in many of these countries, the developed nations of the world are large net water importers - depending heavily on importing large amounts of virtual water in the form of manufactured goods from the developing world.

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COUNTRY VIRTUAL WATER FOOTPRINTS

The following table contains the per capita water footprint and the net water import position of some key water consuming nations.

India: – Average water footprint = 980 m3/capita/yr– Part of footprint falling outside of the country = 2%

China: – Average water footprint = 702 m3/capita/yr– Part of footprint falling outside of the country = 7%

Brazil: – Average water footprint = 1,381 m3/capita/yr– Part of footprint falling outside of the country = 8%

Russian Federation: – Average water footprint = 1,858 m3/capita/yr– Part of footprint falling outside of the country = 16%

Indonesia: – Average water footprint = 1,317 m3/capita/yr– Part of footprint falling outside of the country = 10%

US: – Average water footprint = 2,483 m3/capita/yr– Part of footprint falling outside of the country = 19%

Canada: – Average water footprint = 2,049 m3/capita/yr– Part of footprint falling outside of the country = 20 %

UK: – Average water footprint = 1,245 m3/capita/yr– Part of footprint falling outside of the country = 70%

CHINA IN DETAIL

As people in the emerging economies of India and China make the transition to western standards of living absolute and virtual water consumption will rise dramatically, exacerbating an already precarious domestic supply situation – from the table above you can see that in absolute terms China and India consume about 40% - 50% per capita of the virtual water consumed in the west.

–China has only 8 percent of the world’s fresh water to meet the needs of 22 percent of the world’s people.

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–In India, urban water demand is expected to double—and industrial demand to triple—by 2025.

Seventy percent of the grain produced in China comes from irrigated land, but the country is seeing its irrigation supply depleted on three fronts: the diversion of water from rivers and reservoirs to cities; the depletion of underground supplies in aquifers; and the increasing pollution caused by rapid industrialization.

Economically, farms can’t currently compete with factories for water. A thousand tons of water produces one ton of wheat, which has a typical market value of around $300, whereas the same amount of water used in industry yields an estimated $14,000 of output - 70 times as much.

The challenge facing China is how to meet the virtual water needs of its swelling urban and industrial sectors without undermining both its own agricultural productivity.

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Clearly, with its booming economy and huge trade surpluses, China is trying to solve its water issues in part by importing more of its food – it has moved from effective self-sufficiency in grain to importing around 15% - 20% of it domestic requirements and growing. We believe this extra demand on the world markets is in the process of creating a new , higher equilibrium price level in the grain markets – as can be seen in the volatility of the agricultural commodity markets over the last 3 years.

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economic, financial and marketing analysis