Water Futures Market Launches: Opportunity Or Threat? Workable Or Unworkable?

17 Dec 2020 by Staff - Water Diplomat
CHICAGO IL, United States

Financial futures contracts tied to the spot price of water related to the $1.1 Billion USD California spot water market traded on Wall Street for the first time, opening a market for farmers and investors to hedge against water scarcity.

The contracts, tied to the Nasdaq Veles California Water Index that was launched two years ago, are financial instruments as there is no associated physical delivery mechanism. The index is driven by the volume-weighted average of transaction prices in California's five most active and largest water trading markets.

When the CME Group announced the formation of the new futures market, OOSKAnews reported: “A new first-of-its kind tool will provide information that will more efficiently align supply and demand for water. It is intended to offer municipal, agricultural, and commercial users with improved pricing information, greater transparency, and more flexible risk transfer.”

A contract will represent 10 acre-feet of water and two trades were executed at opening, at a value of $496 per acre foot.

Financial analysts acknowledge that climate change, drought, floods, population growth and pollution are likely to make water pricing issues more important in coming years.

The contracts could function as a hedge against price fluctuations for large water consumers such as farmers and utilities, but they also could offer a scarcity-based gauge for investors, globally. Two billion people live in water-scarce regions almost two-thirds of the world could face water shortages in the next five or so years.

Early estimates indicate that it is more likely that farmers, rather than investors or municipalities, would utilise this mechanism to balance their costs in an increasingly uncertain and erratic climate environment that directly affects their operating costs.

The financial markets view the development of this new commodity trading as an important step in managing the increasing risk of water scarcity. However, it does not change the underlying risks of water availability, quality, and distribution.

An analysis from Bloomberg assesses that water is very different from other openly traded commodities that are used “globally but produced at only a few locations; they’re relatively scarce, and thus command a steep price; and their value is high relative to their mass, so that even at long distances the cost of freight is a small proportion of the ultimate price.”

Water is abundant and relatively easily accessible. Although it needs to be treated for drinking purposes, it does not have to be mined, fertilized or harvested. It is largely available locally and is difficult to transport. Even desalination is considered a relatively low-cost treatment compared to the all-in cost of transportation.

Based on the new water contracts David Fickling, compares the cost of water at about 39 cents USD per metric ton to a ton of gold worth $60 Million USD. Even Australian coal trades at about $77.35 USD.

Privatising a quasi-public commodity has a bad reputation but the development of a mechanism to price low-value public resources is necessary in order to instigate reform.

The newly-appointed United Nations Special Rapporteur for safe drinking water and sanitation has expressed his concerns about the new futures market.

“You can’t put a value on water as you do with other traded commodities,” according to Pedro Arrojo-Agudo. “Water belongs to everyone and is a public good. It is closely tied to all of our lives and livelihoods, and is an essential component to public health,” he said, pointing importance of having access to water in the fight against the COVID-19 pandemic.

He warns that “the risk is that the large agricultural and industrial players and large-scale utilities are the ones who can buy, marginalizing and impacting the vulnerable sector of the economy such as small-scale farmers".

“Water is indeed a vital resource for the economy – both large and small-scale players - but the value of water is more than that. Water has a set of vital values for our society that the market logic does not recognize and therefore, cannot manage adequately, let alone in a financial space so prone to speculation".

“While there are on-going global discussions concerning water’s environmental, social and cultural values, the news that water is to be traded on Wall Street futures market shows that the value of water, as basic human right, is now under threat.”