The CME Group launched the first of its kind Water Futures contract on Monday joining the likes of other commodities available for trade with one small difference. Water won’t require any physical delivery or storage – unlike oil or corn, purchasers of a water future contract won’t be greeted by a delivery of millions of gallons of water (also meaning that we likely won’t have a storage shortage causing water going negative like other commodities we know of). Water has never been traded this way before.
Before the futures came along, the buying and selling of water rights, which allow the holder to pump water from the ground or reservoirs, only happened in the spot market. In dry years, when more water is required to grow crops and supply municipalities, it meant that buyers were facing high prices and a lot of uncertainty. (CNN)
And in 2020 where seemingly every event/announcement is in some way connected to a disaster, it makes sense that this contract would be launched. Announced in the midst of wildfires ravaging California forests and heat waves across the country, this contract is a sign of changing times. Listen to our pod with wunder-Meteorologist Dr. Jeff Masters for more on that dynamic and how it could affect different asset classes. The realization that water isn’t always going to be here is slowly making its way to the forefront of both domestic and foreign policy over in Washington – and this contract is further proof of that.
“Climate change, droughts, population growth, and pollution are likely to make water scarcity issues and pricing a hot topic for years to come,” said RBC Capital Markets managing director and analyst Deane Dray. “We are definitely going to watch how this new water futures contract develops.” (Bloomberg)
Of course, traders and speculators can add water futures to their arsenal, but seemingly this contract will be more appealing to farmers looking to hedge their crops.
Farmers, hedge funds and municipalities alike will be able to hedge against — or bet on — potential water scarcity starting this week, when CME Group Inc. launches contracts linked to the $1.1 billion California spot water market. According to Chicago-based CME, the futures will help water users manage risk and better align supply and demand. (Bloomberg)
The agriculture sector is the biggest buyer in California’s spot market, meaning they buy the most water during dry years. This trend has been intensified in recent years by the move to popular high-value permanent crops like almonds and pistachios, which require a lot of water for upkeep. (CNN)
One of our RCM Ag Services brokers – and California resident – Ron Lawson was on the CME Zoom the Water Contract presentation.
At the very least, this indexed, cash-settled contract, will enable California Farmers to fix irrigation costs, and take profits on surplus water, without having to lose ownership of the rights. This could be an active contract if this summer’s predicted drought materializes. Nothing makes a new contract succeed like a bull market. And if there is a drought this summer, this could become a very “liquid” market.
Nasdaq Veles California Water Index futures will be listed by and subject to the rules of CME. For more information and contract specifications, please visit http://www.cmegroup.com/waterfutures. For more information on the NQH20 Index, visit www.Nasdaq.com/waterindexes.
Now, let your sci-fi brains run crazy on just how a water scarce world will look. If only they had hedged that dangerous water delivery in Mad Max Fury Road, they wouldn’t have had to build such a mean looking truck.
Of course, for us Chicagoans, the question is when do we start building the fortifications around Lake Michigan and protect “our” fresh water, BladeRunner 2049 style??