What Are Water Futures?

Last year, the Chicago Mercantile Exchange launched the world’s first water futures market, allowing farmers, investors, governments, and hedge funds to purchase a legal agreement known as a “futures contract” that locks in a predetermined price for water to be used in the future. If a natural disaster, such as a drought, raises the price, the contract seller must make up the difference (and vice versa if the price falls).

What is the purpose of water futures?

As commodities market and water resource economists, we believe there are numerous advantages to a well-functioning water futures market, particularly as climate change makes the amount available for use increasingly unpredictable. After all, the market’s primary goal is to safeguard California’s water consumers – such as farmers and towns from price volatility.

While there are genuine dangers, we believe they are misunderstood and exaggerated. In any case, just a few people trade water futures.

What are some future examples?

Crude oil, natural gas, corn, and wheat futures are examples of commodity futures. Futures on stock indexes, such as the S&P 500 Index. Currency futures, such as those for the euro and the pound sterling. Gold and silver futures are precious metal futures. Futures on US Treasury bonds and other items.

Is it possible to buy water futures?

Water prices are mostly determined by supply and demand. Agricultural and electrical demands, for example, can have a direct impact on water costs, as can a reduction in availability due to a lengthy drought.

Freshwater is used extensively in a variety of industries, including agriculture, industry, utilities, mining, and public supply for consumers and companies. Users pay extra for water when demand exceeds supply, and their water access may be rationed in some situations. Water is considered a crucial commodity on the earth because none of these consumers can live without it.

Water price swings can be profited from in a variety of ways, including buying water futures on the exchange or indirectly through “water” stocks or exchange-traded funds (ETFs).

Water is a valuable commodity with financial potential for investors seeking to diversify their portfolios by purchasing water-related assets and investments.

Is there a market for water on Wall Street?

Water has joined the ranks of gold, oil, and other commodities traded on Wall Street, as concerns about its future availability grow. The first of its type in the United States, the Chicago Mercantile Exchange opened a water trade market with $1.1 billion in contracts related to California water prices. Farmers, hedge funds, and municipalities have been able to hedge against future water shortages in California because to this market. The new program was launched in October 2020 in response to the region’s extreme heat, wildfires, and droughts. While treating water as a marketable commodity may reduce price uncertainty, it also places essential human rights in the hands of financial organizations and investors.

Is water going to be a commodity?

Water, like gold and oil, is a commodity that is becoming increasingly scarce. Water scarcity, like any other scarcity, presents investment opportunities.

Is it possible to trade water futures?

Water futures began trading on the United States (US) futures market in December 2020. Water has joined the ranks of other commodities like oil and gold. The announcement comes as 2020 is predicted to be one of the warmest years on record, with water scarcity one of the consequences of rising temperatures. But what does this indicate in terms of water’s future?

WATER IN THE FUTURES MARKET

To begin with, water itself is not available for sale in California; rather, water futures are. California, sometimes known as “the Golden State,” is the largest agricultural market in the United States, and catastrophic droughts and wildfires have put its land at risk and exacerbated the problem of water shortages in the previous decade. Farmers, institutions, and hedge funds will be able to buy or sell water at a set price at a certain time in the future through water futures contracts.

These water futures can be traded on the CME Group (Chicago Mercantile Exchange), one of the world’s largest derivatives marketplaces, with reference to the spot price established by the Nasdaq Veles California Water Index (NQH2O Index). The NQH2O Index, which was launched in October 2018, tracks water prices across California and indicates the value of water per acre-foot, which is roughly comparable to more than 1,2 million litres.

The goal is to increase transparency and monitor the market price of water, as well as to assist water users in managing the financial risks associated with droughts. As a result, water futures would allow farmers to hedge against price increases while also improving water management.

However, there are many questions about whether contracts will truly aid in bettering control and reducing financial risk. Water futures contracts are the first of their sort, unlike earlier futures contracts for fundamental commodities like rice or corn. Physical distribution of water for contract settlement is not permitted under Californian law. Furthermore, compared to other commodities, water has a more unique and localized nature. Its cost varies according to location and water rights. It can only be found in a few locations, cannot be harvested, and is more tightly regulated than other commodities.

These qualities, as well as present legislation and the asset’s localized nature, make it difficult to trade.

Because of the peculiarity of water, many specialists have already warned against the perils of contracts. Former head of Europe at the FIA (Futures Industry Association), Simon Puleston Jones, has raised his concerns about potential financial market manipulation that might drive the price higher. “We need to consider the direct and indirect negative repercussions of seeing water as an asset rather than a resource right now,” he said.

THE THREATS OF TRADING IN WATER

The notion of clean drinking water has been recognized as a human right by the United Nations (UN) General Assembly – the international organization’s main organ – and the Human Rights Council (OHCHR) – the UN’s body to defend human rights – since 2010. The organization has already raised concerns about the risks of bringing water futures to the futures market, citing the fact that it jeopardizes humanity’s most valuable resource and human right. “Water cannot be valued in the same way that other commodities can.” Water is a public good that belongs to everyone. It is inextricably linked to all of our lives and livelihoods, and it is a critical component of public health,” said Pedro Arrojo-Agudo, Special Rapporteur on the human right to safe drinking water and sanitation.

The skepticism is reasonable, given the possibility of financial manipulation by introducing speculators who may inflate the price. “It’s crucial to remember that hedgers and speculators are inextricably linked. “If you took one away, there would be no market,” Tim McCourt, CME’s global head of stock index, stated. Water is becoming increasingly scarce, with scarcity currently a severe issue and the price of water likely to rise in the future years. It will only be available to a restricted group of people, such as large-scale agricultural and industrial producers, who will be able to purchase it in the near future. The economy’s most marginalized and vulnerable sectors will be put at danger. “Water has a set of vital values for our society that market logic does not understand and, as a result, cannot manage adequately, let alone in a financial arena so prone to speculation,” Arrojo-Agudo continues. The entire issue has the potential to spark water wars. Such battles are expected to occur in the next 50 to 100 years, according to researchers.

As the effects of climate change become increasingly apparent, the following years will determine the destiny of water and our world. As a result, governments must ensure and implement safeguards to protect our natural resources, particularly water, which is the most important natural resource on our planet for humanity. We can’t treat water like any other commodity; we can’t leave it exposed to financial speculation by those who want to profit from it. We cannot survive without water; it must be conserved and made available to everybody.

How are futures traded?

A futures contract is a contract to purchase or sell an item at a predetermined price at a future date. Soybeans, coffee, oil, individual stocks, ETFs, cryptocurrencies, and a variety of other assets could be used. Futures contracts are often traded on an exchange, with one side agreeing to buy a specific quantity of securities or commodities and take delivery on a specific date. The contract’s selling party agrees to provide it.

What are the market’s futures?

Futures are a sort of derivative contract in which the buyer and seller agree to buy or sell a specified commodity asset or security at a predetermined price at a future date. Futures contracts, or simply “futures,” are traded on futures exchanges such as the CME Group and require a futures-approved brokerage account.

A futures contract, like an options contract, involves both a buyer and a seller. When a futures contract expires, the buyer is bound to acquire and receive the underlying asset, and the seller of the futures contract is obligated to provide and deliver the underlying item, unlike options, which can become worthless upon expiration.

Invest in individual water stocks

You would acquire shares of a specific firm, such as American Waterworks, Inc., The Danaher Corp., or PepsiCo, if you wanted to invest in individual water stocks.

Individual stock investments can help you earn higher profits, but they also come with a higher level of risk.

Because the stock market is so volatile, investing in individual equities can result in substantial gains and losses.

This strategy is suitable for those who have a high risk tolerance and can afford to ride out market swings.

Invest in ETFs

A professionally managed exchange-traded fund (ETF) is a portfolio of stocks, bonds, and other securities.

An ETF can contain dozens, if not hundreds, of different investment kinds, allowing you to diversify your portfolio.

For example, the Invesco S&P Global Water Index ETF (CGW) allows you to invest in a variety of water utility, technology, and bottling companies all at once.

ETFs are generally considered to be a safer investing option. There’s less risk of a single corporation ruining your investment if you diversify your investments.

ETFs typically have lower returns than individual stocks. Investing in ETFs may be a better option if you are risk averse.

Is it wise to invest in water companies?

Whatever happens, there is a growing demand for the resource, but availability is restricted. As a result, now is an excellent time to explore investing in water equities, as water technology is improving and the climate problem is likely to spur more innovation.