Water Futures Trading. The Good, Bad and Ugly!
Alex "Solar Girl" Steele
It might sound like a story out of a dystopian novel, but over the past few months, we witnessed a sobering occurrence related to one of the most critical resources for supporting life on our planet. Water futures in California went on the market in December 2020, established by global market company CME Group Inc. CME, which trades in asset classes such as agricultural products, currencies, energy, metals, and more added the Golden State’s water supply to their collection of agricultural futures where it was first traded at a value of $496 per acre-foot. This can be viewed as both a negative and positive thing. While farmers, utility providers, and other large-scale consumers of water can invest in the future value of the key resource they use to produce their goods, this event also signifies the increasing scarcity of water around the world. Environmental issues such as climate change, forest fires, and long-term droughts have hit California hard, so it made sense to focus on the water market there because there is a real need for risk management. We’ll talk about the future of the water market, the opportunities and threats this situation is creating, and what water scarcity means for our world today.
You may be familiar with futures trading for goods like fuel, or food staples like corn and wheat. The futures market involves hedging against - or betting on - the future cost of a good. When traders deal with futures, they commit to buy or sell a unit of a commodity for a pre-agreed upon price at a future date. When that date comes, the transaction must be completed at that price, no matter what the market price for the commodity is at that time. People who hedged against the cost of water at a higher price than it is when the time comes to sell will come out on top, making a big profit on their investment. But people who bet too low will lose out and have to sell for less than the market value. Water’s initial price on the futures market was quite high, and people anticipate that it will continue to rise in value as the resource becomes more scarce. Anyone can invest in these futures, but the contracts will be especially valuable for agricultural businesses and municipalities, who rely on large quantities of water and need to secure themselves against the risk of increased scarcity down the line.
So, how did the market for water futures come along, anyway? California has been deeply impacted by water crises in recent years. It’s hot, sunny climate is great for agriculture, so farmers are drawn to do business there. Almond growers, alfalfa and rice farmers all flock to California for it’s optimum growing conditions, but these crops are water-intensive. Over 5 million acres of farmland need to be irrigated throughout the state, and a whopping 1.6 trillion gallons of water must be transported from northern to southern California yearly. California’s water economy has been volatile for a long time; there has been conflict about rights to water and resource management for generations. Despite regulations on use, the Golden State continues to put pressure on their already stressed water availability, so a real need to hedge against future water shortages arose. This can offer security to cities, farmers, and hedge funds which people rely on for their own investment portfolios, but it also paints a grim picture about how our most critical resource for sustaining existence is at risk of dwindling.
As climate change continues to progress, scientists anticipate that rising global temperatures and less predictable weather patterns will disrupt the current distribution of surface and groundwater, eventually leading to adversely affected water quality and widespread hardship. Even though right now, the most serious water shortages in the United States are occurring in California, hedge funds anticipate that other states will enter the market in the future. This is reflective of a worldwide issue: climate change is threatening the global water supply because shifts in the climate system will be primarily felt through changes in precipitation, waterways, changing seal levels, and contamination of groundwater. Increased intensity of droughts, superstorms, and spread of waterborne diseases are projected to occur as global warming increases as well. Despite the profitability of trading water futures, the fact that water is already projected to become so scarce is indicative of a serious problem.
If the concept of water being traded along with oil, gold and other valuable resources makes you uneasy, you’re not alone. The best thing individuals can do to protect water resources is to do their part to conserve and contribute to the fight against climate change. Do some research on steps you can take to save water on your own property, or consult our New Year’s blog for some tips. You can also consider options for switching to more energy efficient appliances, vehicles, or energy sources to join the clean energy revolution confronting global warming!