The story in the article in the url below seems like a big deal:
"Water joined gold, oil and other commodities traded on Wall Street, highlighting worries that the life-sustaining natural resource may become scarce across more of the world."
Specifically:
"Farmers, hedge funds and municipalities alike are now able to hedge against -- or bet on -- future water availability in California, the biggest U.S. agriculture market and world's fifth-largest economy. CME Group Inc.'s January 2021 contract, linked to California's $1.1 billion spot water market, last traded Monday at 496 index points, equal to $496 per acre-foot."
The key, of course, is whether trading water futures will potentially solve the problem of scarcity by allocating the resource more efficiently, or whether it will exacerbate the problem by pricing certain segments out of the market. This issue has become particularly salient in California in recent years due to the increase in frequency of natural disasters:
"The contracts, a first of their kind in the U.S., were announced in September as heat and wildfires ravaged the U.S. West Coast and as California was emerging from an eight-year drought. They are meant to serve both as a hedge for big water consumers, such as almond farmers and electric utilities, against water prices fluctuations as well a scarcity gauge for investors worldwide."
This approach to addressing water scarcity is being trialed in California, but is something that is increasingly relevant to many parts of the world. It is estimated, for example, that "two billion people now live in nations plagued by water problems, and almost two-thirds of the world could face water shortages in just four years":
"The United Nations has long warned that human-driven climate change is leading to severe droughts and more flooding, making water availability increasingly less predictable. In California, the most recent acute dry spell stretched from December 2011 until March of last year, according to the U.S. Drought Monitor. The most dire effects took hold in July 2014, with 58% of the state's land suffering 'exceptional drought,' leading to crop and pasture losses and other water emergencies."
The introduction of these financial instruments into the market for water has been made possible by a "Water Index" that was developed specifically for the California market:
"The futures are tied to the Nasdaq Veles California Water Index, which was started two years ago and measures the volume-weighted average price of water. … The index sets a weekly benchmark spot price of water rights in California, underpinned by the volume-weighted average of the transaction prices in the state's five largest and most actively traded markets. The futures are financially settled, as opposed to requiring the actual physical delivery. Contracts include quarterly ones through 2022, with each representing 10 acre-feet of water, equal to roughly 3.26 million gallons."
The futures, which are intended to "help water users manage risk and better align supply and demand," are particularly valuable for heavy users of water, such as farmers, who would benefit from a more predictable market price. While this sounds pragmatic, the application of market forces to allocate something that many consider to be a fundamental right (access to clean water) raises the stakes. You only have to look at what happened recently to the market for electricity in Texas (when unforeseen events caused widespread outages and exorbitant price increases) to see the potential danger. Given the anticipated ongoing shortage of fresh water, it does not take too much imagination to see something similar happening in California.
Or, as Stephen Colbert put it: https://youtu.be/gnEDF0tTReI
Take care
David
David Chandler
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California Water Futures Begin Trading Amid Fear of Scarcity
By Kim Chapman
December 6, 2020
Bloomberg Businessweek
