Do you know you can now trade Water Futures on the Chicago Mercantile Exchange (CME)? The exchange has recently included water futures in its list of negotiable contracts. This is good news given that it is the first time water is getting listed for trading in this manner. Before this listing, the only place you could buy or sell water is in the spot market.
The listing makes water – at least in the Wall Street eyes – as good as gold, oil, and lean hogs that are traded in the futures market. The Water Futures began trading at 496 USD for one acre. However, the public sentiment hasn’t been unanimous about turning water into a commodity.
Sudden fluctuations in the demand and supply of water can presently be counter-balanced by “insurance” provided by the latest futures contract. This ground-breaking insurance will benefit farmers and consumers by reducing the cost of agricultural production.
No matter what the public opinion is about the commoditization of water, the fact now is that water is presently tradable in the futures market. Any period that comes with a lack of water will cost some money and pay others as it always has. Farmers pay more during dry years when they require more water because there isn’t a sufficient amount of rainfall. This makes the prices of water to go higher for consumers and creates uncertainty for farmers.
If everything goes as planned, commoditizing water could have a stabilizing effect on the controversial crop-water market. However, since it is a fresh development, it will take many years before we figure out if the new development will shake things negatively or positively.
How Water Futures function
CME primarily propelled the water futures market in the country with a 1.1 billion USD contract. The contract is linked to the California Nasdaq Veda Water Index which is a representation of the spot price per one-acre foot of this nature-given necessity. The CME ticker for water futures contract on CME is NQH2O.
The water futures contract will be a contract between the buyer and the seller of water. They will be exchanging water at a fixed price on a predetermined future date. However, unlike other futures market, in this instance, it will entirely become a cash transaction. None of the participants will get 10 acres of water. And since all contracts are completed quarterly, they are completed within 3 months.
Let’s say you have a 500 USD water contract or NQH2O which expires after 3 months. If it rains heavily, you can lower the price. In this case, at the end of the contract, the buyer must pay the variation in price between the present price and the agreed price.
Conversely, if the NQH2O spot price rises higher than the agreed price at the end of the contract, the seller pays the variance to the buyer. For regular investors, the development is mostly bullshit. For the first few months, the possibility of making a profitable trade is potentially equivalent to Blackjack, Baccarat, or yeah, some craps.
However, the new water commoditization will equally enable farmers and metropolises to hedge water against futures price rise. It can equally work for hedging water accessibility in western states. People who want to purchase more water at a higher price in this innovative market can now invest in futures contracts to compensate for the rise in future prices.
How can the Water Futures market move sideways?
This innovative market can attract speculators with large and powerful pockets. And having a lot of money can lead to unwanted activities.
Imagine an investor with a good connection investing in NQH2O during drought and increasing the spot price. If an individual has a sufficient amount of money to minimize the accessibility and distribution of water, it can artificially raise prices and help unscrupulous investors. When this happens, it can have devastating consequences on crop and food prices.
Although it’s unlikely, the idea has a precedent. A similar system has been implemented in Australia. However, so far, this is just an exaggerated conspiracy in America.
The agricultural sector is California’s biggest consumer of water during the dry season. The water shortage was exacerbated by the growing thirst for the growth of almonds and pistachios. The vendors who sell water are other municipal areas with excessive water supply. With the newly introduced futures market, agriculturalists can back-test price movements and it can be a very valuable way to protect their crops from price increase that may occur in the months they’ll have the greatest need for water.
Besides, croppers are already familiar with their lands and know when they’ll require the highest amount of water. They will also set up their farms for times of scarcity and study the complex nature of the open market when they require extra water. These factors give farmers a unique opportunity to appreciate water contracts and the futures market. The understanding will help them to hedge against an excessive rise in water prices. Therefore, when looking to get additional insight into the Water Futures Market, look for farmers. They will be part and parcel of the Water Futures market.