Water On Wall Street

15th December 2020

 

Featured Image: bummelhummel

Water has officially joined Wall Street to be traded as a Futures commodity. Water availability is becoming increasingly less as climate change and human activities lead to severe droughts across the world.

Figure 1. LoggaWiggler

A recent flagship report by the Food and Agriculture Organization (FAO) revealed that about 1.2 billion people globally experienced very high levels of water stress. It also noted that the annual amount of available freshwater resources per person had declined by more than 20 percent in the past two decades.

Water is a precious resource in California (USA), which is a state plagued by wildfires and drought. The impact of droughts was driven home recently when California suffered through its worst wildfire season in modern history - 4.3 million acres burned in August and September of this year. It went on for weeks. Water is a commodity. It can be traded now just like oil, gas, gold and other commodities. This proves also the fact, that the water (in California) is a source of great power and wealth.

Figure 2. Mario Schmidt.

"With nearly two-thirds of the world's population expected to face water shortages by 2025, water scarcity presents a growing risk for businesses and communities around the world, and particularly for the $1.1 billion California water market," said Tim McCourt, CME Group Global Head of Equity Index and Alternative Investment Products.

Now with this development, those who need to buy extra water in a dry year, when prices may be higher, can now bet on futures contracts to offset the higher prices they might have to pay in the water market down the line, reported CNN. The CME Group is set to launch futures contracts tied to the spot price of water for the first time ever on 7th of December. The contracts will allow investors, farmers and municipalities to hedge against or bet on the future price of water, a resource that is fast becoming scarce in the world. Traded on Wall Street, the contracts which are tied to the $1.1 billion California spot water market, will be financially settled. This means buyers of the contracts who hold on through expiration won't be greeted by a delivery of millions of gallons of water. The water contracts are tied to the Nasdaq Veles California Water Index which was launched two years ago. The index is driven by the volume-weighted average of the transaction prices in California's five largest and most actively traded water markets.

The CME Group initially announced the launch of water futures back in September. The CME Group, a financial exchange, came up with a way to bet on the price of California water. This may end up helping farmers protect themselves against sudden price changes. This could allow to lock in a price that covers your financial risk for a dry year when the water might become more expensive.

Figure 3. Gerd Altmann

Contracts will each represent 10 acre-feet of water, equal to about 3.26 million gallons. One high-profile investor potentially looking to capitalize on the newly launched water future contracts is Michael Burry of "The Big Short." Burry highlighted water as one of his top investment ideas. As he sees demand for the life-sustaining natural resource to continue climbing as supply falls due to population growth and climate change. Basav Sen, Climate Justice Project director for the Institute for Policy Studies, says the whole notion of profiting off water sales is atrocious.

For the question, who will buy water contracts mostly, the future will answer. Will they be farmers who are trying to hedge out their input costs amid an increasingly uncertain climate environment or will they be investors, trading on the CME exchange in New York, London and all over the world? Probably the contract will be bought and sold without actually ever seeing the water.

Szilvia Kullai

Sources: