Californian Water Futures & Water Scarcity
Water is a non-negotiable requirement for life. Due to our heavy reliance on this resource for survival, it’s often overlooked as a commodity comparable to precious metals or natural gas. This phenomenon has left consumers and market participants such as those in the agricultural and manufacturing industries susceptible to immense water price risk. To help alleviate such issues, the Nasdaq Veles California Water Index (NQH20) was introduced to better manage the risk tied to water scarcity and serve for protection against rising prices.
NQH20 is the first exchange-traded risk management tool of its kind and tracks the price of water rights across the five largest and most actively traded regions in California. Nasdaq partnered with Veles Water and WestWater Research after the west coast was devastated by wildfires in 2018. Beginning in 2020, the team has provided water futures for purchase to the public.
Speculations over water futures market
Adding water to the futures market has raised concerns amongst UN experts. It’s argued to be a public good due to how closely it's tied to our livelihoods and the immense threat water scarcity poses from population growth. The environmentalist and former member of the Spanish Parliament, Arrojo-Agudo, also insists that water futures hold potential for investors to bet on the prices, repeating the speculative bubble of the food market in 2008. Experts alike have condemned NQH20 because of the ethical risks of manipulating a resource all life depends on and the financial risks of Wall Street creating a price-driving effect in this market.
Relation to water scarcity
A futures contract for water allows farmers in California to address the problems they have faced related to price uncertainty, but it fails to target the root causes of water scarcity such as climate change, pollution, and unsustainable usage. Water futures are distinct from other futures like gold, oil, and wheat because holders cannot take delivery of water after the contract expires and sellers cannot provide any water to stakeholders. This is due to water rights that date back to the 19th century. As a result, the water futures market only hedges against changing prices and not water scarcity itself, so farmers and other market participants cannot rely on these investments to guarantee ample supply for their businesses. The only way to fully hedge all water risk is to address the unsustainable habits that are reducing the supply and stand as major contributors to water scarcity.
3 Solutions to California’s drought
Water agencies relying on the Central Valley Project, a water management project based in California, fear talk of only receiving 5% of their contract supply this year due to weather conditions, further exacerbating the ongoing drought issue. Looking forward, long-term solutions outside of the market will be necessary to solve the complex water problems in California and on a global scale. Potential solutions to be explored include:
Recycling: 4 million acre-feet of water are diverted from Californian rivers on an annual basis which is more than the State Water Project can deliver. A beneficial step to lessen this issue would be to develop a water purification plant to replenish what is currently being diverted.
Conservation: Restaurants in California can be fined up to $500 for serving customers a glass of water they have not asked for, yet there are no such restrictions for farmers. Expanding restrictions that promote efficient water usage across industries would help to preserve the state’s depleting groundwater.
Innovation: Some solutions being explored include desalination, fog catchers, atmospheric water generation, and geo-engineered rain. These strategies have seen success on smaller scales and are currently being scaled up to satisfy state-wide demand.
A mix of these 3 solutions would release the pressure California is facing involving water scarcity and rising water prices.
The introduction of water futures to the stock market is a promising tool to help organizations manage the risk of volatile water prices. However, the creation of such a tool cannot address the growing climate change issue of water scarcity which is a large contributor to overall water supply risk. Ultimately, the future of our global water supply is dependent on igniting sustainable change that proactively protects our water resources and rights.
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