Starting this week, farmers can protect themselves against water shortages, while others could make money betting on rising prices.
Water joins gold, oil and other commodities traded on Wall Street, underscoring fears that essential natural resources for life are becoming scarce in more of the world.
Farmers, hedge funds and municipalities will be able to hedge or bet on a possible water scarcity starting this week, when CME Group Inc. launches contracts related to the $ 1.1 billion spot water market. dollars in California. According to Chicago-based CME, futures will help water users manage risk and better align supply and demand.
The contracts, a first of its kind in the United States, were announced in September as heat and forest fires ravaged the west coast of the United States. They are intended to serve as both a hedge for California’s largest water users against soaring prices and a gauge of scarcity for investors around the world.
“Climate change, droughts, population growth and pollution will likely make water scarcity and pricing issues a hot topic for years to come,” said Deane Dray, managing director and analyst at RBC Capital Markets . “We will certainly follow the evolution of this new water futures contract.”
Two billion people now live in countries plagued by water problems, and nearly two-thirds of the world could face water shortages in just four years, said Tim McCourt, global head of the stock market index and alternative investment products at CME, in an interview. “The idea of managing the risks associated with water is certainly taking on increased importance.”
The futures will be financially settled, instead of requiring the actual physical delivery of the water, and are based on the Nasdaq Veles California Water Index created two years ago. The index sets a benchmark weekly spot price for water rights in California, supported by the volume-weighted average of transaction prices in the five largest and most actively traded water markets in the state.
The contracts will include quarterly contracts through 2022, each representing 10 acre-feet of water, or about 3.26 million gallons.
Currently, if a farmer wants to know what water will cost in California six months from now, that’s kind of a “best guess,” said Patrick Wolf, senior director and head of product development at Nasdaq, in an interview.
Futures contracts will allow market participants to see “what is everyone’s best guess,” he said.
CME declined to identify potential market participants except to note that the exchange heard from California agricultural producers, public water agencies, utilities as well as institutional investors such as asset managers and retailers. hedge funds.
Clay Landry, chief executive of consultancy firm WestWater Research, which provides the data used to calculate the water index, said that in addition to the likelihood of “great interest” from Wall Street, it s ‘expects the early adopters of the future of water to be important. and small agricultural businesses.
“Without this tool, people have no way to manage the risks associated with the water supply,” said Landry, based in Boise, Idaho, in an interview. “It may not entirely solve this problem, but it will help lessen the financial shock people will experience if their water supply is cut off.”