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To produce Wet Clay Jugs requires Clay; but to gather Clay you need Water in Jugs! To get started, you can get a free jug by trying to learn pottery at a School of Thought. Or you can trade for some initial jugs with another player.
While standing near a source of water with empty jugs in inventory you get the "fill jug with water" action icon. Using that icon will turn your Jugs into Water in Jugs. While carrying Water in Jugs there is an option in your "Skills.." menu "Empty Jugs.." to get the empty jugs back.