California’s Water Market

Back in September when California was being ravaged by wildfires, CME group, the world’s largest financial derivatives exchange, announced that futures contracts for water would be available for trading starting December 7th, 2020. It was announced that the futures would be traded as part of the Nasdaq Veles California Water Index (Ticker: NQH2O), which measures the volume weighted average price of water. This sets water alongside gold, oil, silver, and a number of other scarce, valuable commodities exchanged on Wall Street. 

The new concept of trading water on Wall Street has faced some retaliation. Basav Sen, the climate justice project director at the Institute for Policy Studies shares a sentiment that has been common among many activists since the announcement of the contracts in September. “What this represents is a cynical attempt at setting up what’s almost like a betting casino so some people can make money from others suffering,” he said, “My first reaction when I saw this was horror, but we’ve also seen this coming for quite some time” (Noor 2020). Pedro Arrojo-Agudo, a UN human and water rights expert draws attention to the issue of leaving a resource required for life in the gambling hands of individual investors and corporations, “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...I am very concerned that water is now being treated as gold, oil and other commodities that are traded on Wall Street futures market” (UN HRC 2020). The organizers of the contracts were quick to respond to the wide scale opposition to trading water futures. Lance Coogan, CEO of Veles Water, the London financial firm that created the NQH2O index, stated that “The hysteria is ill-founded.” Clay Landry, a managing director at the consulting firm WestWater Research, recognizes the advantage that firms will take over water scarcity, but also sees the benefit from such a market. He said in a statement, that in addition to the anticipated “great deal of interest” from Wall Street, he expects the early water futures adopters to be large and small agriculture businesses. “Without this tool people have no way of managing water supply risk” (Chipman 2020).

So what is the intended purpose of the contracts? Tim McCourt, the Global Head of Equity Index and Alternative Investment Products at CME, confirms Landry’s prediction about the market, “At a time when businesses and communities around the world face increasing water risks, we believe market-based solutions like our new Nasdaq Veles California Water Index futures can be an important part of the solution,” The statement from McCourt at the release of the contracts indicates a hope for the new market to help agricultural, commercial and municipal water users hedge their exposure to uncertain water prices in California with greater price discovery and risk management (CME 2020). 

With drastically increasing water scarcity and volatility, these contracts may have just come in the nick of time. Nearly two-thirds of the planet’s population is predicted to face water shortages as soon as 2025, as climate change is actively leaving droughts and water supply issues around the world. California’s annual wildfires, which have been becoming more extreme with each coming year due to warming, exist as one of the most serious threats to water security in the area. Last year’s wildfire season set a record in California’s modern history, with 4.2 million acres burnt by almost 10,000 fires. Since soils burned at high from wildfires can lose the ability to absorb water for a few years, the fast-moving runoff can erode soils and ash into rivers and fill water supply and hydropower reservoirs with sediment (Shulka 2020). 

No, these contracts don’t do anything to increase the water supply, but they can indicate the public’s best guess for future water prices. As a result, these contract prices can aid these agricultural, commercial and municipal water users by giving them a resource to hedge against water price increases. As climate change continues to drive water scarcity, this market possesses promise for the future.

Sources

Chipman, Kim. 2020. “California Water Futures Begin Trading Amid Fear of Scarcity.” Bloomberg, December 6, 2020. https://www.bloomberg.com/news/articles/2020-12-06/water-futures-to-start-trading-amid-growing-fears-of-scarcity.

CME Group. 2020. “CME Group Announces Dec. 7 Launch of Nasdaq Veles California Water Index Futures.” CME Group, October 27, 2020. https://www.cmegroup.com/media-room/press-releases/2020/10/27/cme_group_announcesdec7launchofnasdaqvelescaliforniawaterindexfu.html.

Noor, Dharna. 2020. “Wall Street’s New Water Market Is the Latest Sign We’re Headed Toward a Mad Max Future.” Gizmodo. December 7, 2020. https://earther.gizmodo.com/wall-street-s-new-water-market-is-the-latest-sign-we-re-1845824408.

Shulka, Nikita. 2020. “Water is Now Being Traded as a Commodity Amid Fear of Scarcity.” Earth.org. January 26, 2021. https://earth.org/water-trade/#:~:text=The%20new%20scheme%20was%20announced,of%20financial%20institutions%20and%20investors.

UN Human Rights Council. 2020. “Water: Futures market invites speculators, challenges basic human rights” - UN expert. December 11, 2020. https://reliefweb.int/report/world/water-futures-market-invites-speculators-challenges-basic-human-rights-un-expert