Publications

- January 1, 2021: Vol. 8, Number 1

Opening the tap: California, plagued by drought, has begun trading water futures

by Mike Consol

Underscoring fears that H2O, one of earth’s most vital resources, is facing potentially dire shortages, water has joined gold, oil and other commodities traded on Wall Street.

A report from Bloomberg says farmers, hedge funds and municipalities alike are now able to hedge against, or bet on, future availability of water in California, the biggest U.S. agriculture market and world’s fifth-largest economy. The state’s $1.1 billion spot water market, traded on opening day, Dec. 7, at 496 index points, equal to $496 per acre-foot.

Deane Dray, a managing director and analyst with RBC Capital Markets, is quoted by Bloomberg as saying: “Climate change, droughts, population growth and pollution are likely to make water scarcity issues and pricing a hot topic for years to come. We are definitely going to watch how this new water futures contract develops.”

Climate change is leading to severe droughts and more flooding, making water availability increasingly less predictable, according to the United Nations, and California’s most recent drought spanned December 2011 through March 2019. The dry spell became most acute during July 2014, according to U.S. Drought Monitor, with 58 percent of the state experiencing “exceptional drought,” resulting in water emergencies and crop and pasture losses.

The state’s water futures, according to Bloomberg, are tied to the Nasdaq Veles California Water Index, which was started two years ago and measures the volume-weighted average price of water.

One could surmise that water is likely to play a far bigger role with commodity investors when considering that 2 billion people currently live in countries plagued by water problems, and almost two-thirds of the world could face water shortages in just four years.

“The idea of managing risks associated to water is certainly increased in importance,” Tim McCourt, global head of equity index and alternative investment products at CME Group, commented to Bloomberg.

 

Mike Consol (m.consol@irei.com) is editor of Real Assets Adviser. Follow him on Twitter @mikeconsol to read his latest postings.

 

 

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