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).
How do I go about purchasing water stocks?
Water stocks are equities that are closely associated to the irrigation, utilities, water treatment, or other water-related industries. Individual firms’ stocks can be purchased, or a mutual fund or ETF with a large exposure to water stocks can be purchased.
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 situation 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.
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.
How can I make water investments like Michael Burry?
Another simple approach to invest in Water like Michael Burry is to buy an Index fund or an ETF that tracks Water stocks (Exchange Traded Fund).
Is there a market for water?
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 it a smart idea to invest in water?
Water is a valuable commodity used across the economy since it is a limited resource with a finite quantity. Investing in water-related companies or index funds that invest in them can help investors take advantage of the expanding trends in water renewal, conservation, treatment, and purification.
How can I invest in the futures market?
Open a trading account with a broker who specializes in the markets you want to trade. A futures broker will most likely inquire about your investment experience, income, and net worth. These questions are meant to help you figure out how much risk your broker will let you take on in terms of margin and positions.
Should water become a commodity?
Water is, without a doubt, the most valuable commodity on the planet. Crops, metals, and energy are all crucial to the earth, but without water, none of them matter.
It is required for the growth of every agricultural produce that feeds the world. Without it, farmers could not grow chickens, cows, pigs, or any other livestock.
Without it, miners would be unable to collect and process metals, and energy companies would be unable to generate fuel. Humans, in fact, could not exist without water.
What Does Global Water Distribution Look Like?
Despite the fact that water covers more than 70% of the Earth’s surface, just 0.3 percent of this water is usable by people. The remainder is contained in seas, soils, ice caps, and the atmosphere.
A lesser portion of the useable amount is easily accessible from sources such as rivers and streams. In actuality, rivers and streams contain 300 cubic miles of water, or 1/1000th of 1% of the total water on the planet.
The majority of the water we drink and use in industry comes from deep underground aquifers, which are porous stone layers beneath the ground.
Aquifers hold around a third of the world’s freshwater, while glaciers and icecaps store the remainder. Natural springs or pumps are required to tap into the supply of fresh groundwater.