JOEL - In administering the first Sacrament, Christ himself used emblems readily at hand at the Last Supper—bread and wine. To Joseph Smith the Lord declared "that it mattereth not what ye shall eat or what ye shall drink when ye partake of the Sacrament, if it so be that ye do it with an eye single to my glory—remembering unto the Father my body which was laid down for you, and my blood which was shed for the remission of your sins" (D&C 27:2).
Here God explains that it doesn't really matter what we use for the sacrament as long as we remember Him and what He did for us.
Apparently there was a period of time when some saints had unknowingly purchased wine for the sacrament which had been poisoned by enimies of the church. This explains the next few verses where God tells them:
"Wherefore, a commandment I give unto you, that you shall not purchase wine neither strong drink of your enemies;
Wherefore, you shall partake of none except it is made new among you; yea, in this my Father's kingdom which shall be built up on the earth."(D&C 27:3-4)

The saints therefore made the switch from wine to water so that they were sure of the source of what they were drinking rather than risk buying wine that may have been poisoned by their enemies.