Yes, You Can Now Trade for Water on Wall Street
For decades, humanity has lived in denial. I am no climate change activist but it’s about time we opened our eyes to the mess we have made. Just like you, my concern for the planet we live in has depended on spikes induced by the occasional nature documentary. School plays depicting dystopian futures where we would have to pay for the air we breathe used to stab me with despair. And today, I wake up to this. Farmers and investors alike can now bet on the future price of water.
I’m not an economist so I can’t tell you how countries will handle water in the near future but it is nonetheless a cause for concern. Sure, some economists see it as a business opportunity. They believe it protects water consumers against rising prices. But academics and investors fear that these derivatives will offer a poor hedge for water users and may end up distorting water prices. And in 2020, I’ve learned that things tend to go wrong pretty much all the time.
A futures contract is effectively an agreement to buy or sell an asset at a specific time in the future at an agreed-upon price. In the past, these contracts have been traded for things like oil, precious metals, and even food. Business Insider notes that these contracts will be financially settled in the event of a contract expiring. This means that, unlike other commodity-based futures like oil, you won’t get your hands on the water you hedge your bets on. You will instead be compensated in cash.
“Nasdaq water index prices for 2019 were based on contracts equivalent to 833m cubic metres of water, enough to fill over a third of a million Olympic swimming pools, but still just 221 transactions.”
- an excerpt from Financial Times
CME (Chicago Mercantile Exchange), the world’s largest futures exchange, will let you bet on water availability in California’s $1.1 billion spot water market later this week. With thousands of acres devastated by forest fires and drastic weather conditions whittling down the American state’s water supply, the development is worrying. Each water futures contract would represent the amount of water it would take to cover an acre over land in one foot of water. The intent is clear, and it has little to do with resolving water scarcity. While only about 4 percent of California’s water supply is traded annually, it sets the tone for where we are heading.
An uncertain future
A drop in supply alongside a growing demand for water is a phenomenon that is becoming all the more common across nations of all sizes. And it isn’t just because of climate change. Urban advancements and growing food demands contribute significantly to our ever-rising water requirements. California is a prime example of an often-parched state that now serves as a dry testbed for water futures contracts. MarketWatch even advocates for water futures, having monitored the meteoric rise in the value of Nasdaq’s Veles California Water Index, responsible for the weekly spot price of water rights in the state. Despite having measures in place to combat severe water shortages, California is still crawling headlong into a water crisis.
“The one asset class that I don’t want to see open to potential manipulation or upward price pressure via financial markets is the one resource that all of humanity needs for its survival.”
- Simon Puleston Jones, former head of Europe at the Futures Industry Association
To account for water shortages in farms and cities, California has often put their needs above those of its fish and wildlife populations. Studies show that the state possesses one of the most sophisticated flood management, water storage and water transport systems in the world. An integrated system of federal, state and locally owned dams, reservoirs, pumping plants and aqueducts transports water across the state. And while these systems have led to water feuds within California, they have been its saving grace. Until now.
Back to the elephant in the room, climate change is also responsible for California’s shrinking water supply. Pointing fingers doesn’t change the fact that these crises are man-made. Environmental preservation efforts have failed to stem the effects of rising temperatures, earlier snowmelt, and higher sea levels. The worst part? None of these problems are exclusive to the American state. Sure, some nations don’t face an imminent crisis but the prospect is no less frightening.
No matter where you are or how you live, water remains an essential part of our lives. Be it for washing your vegetables or your Porsche, it’s everywhere. Before water disputes turn into anarchy farmed by megacorporations, it’s about time we tried doing something about it. Excessive water exploitation by firms across industries has drastically altered how the near future will look like. Those dystopian futures sci-fi authors love to write about? It’s already here.
1. Water futures set to join likes of gold and oil and trade on Wall Street for first time ever | Market Insider
2. Wall Street is about to start trading water for the first time | Euronews
3. California Water Issues Overview | Water Education Foundation
4. California Water Futures Begin Trading Amid Fear of Scarcity | Bloomberg
5. Why we need water futures | MarketWatch
6. Water futures meet cool reception | Financial Times
7. Water Begins Trading on Wall Street in the Futures Market for Fear of Shortages | Entrepreneur