How much will water be worth in the future? We may soon find out.
For years, investors have traded “futures” contracts in corn, soybeans, crude oil, silver, and gold. A futures contract is simply an enforceable agreement to buy (or sell) a certain quantity of a commodity at some point in the future at a price agreed upon today. Although the concept is simple, the futures market is high risk. Depending on what happens to the market in the meantime—including weather events, political developments, global conflicts—either the buyer or the seller can win or lose a lot.
Now we can add water and stir up the commodity futures market even more. A few weeks ago, Nasdaq and the CME Group both announced that they are going to start offering futures contracts in water. Each contract will be for 10 acre feet of water. (An acre foot is the amount of water required to cover one acre of land to a depth of one foot—which amounts to almost 326,000 gallons of water.) The price at any given point in time will be set based on the Veles California Water Index —the intricacies and limitations of which will have to wait for another blog post.
Regardless, this is big news. If there weren’t so many other urgent matters competing for your attention, you might hear a deep thunderous rumble across the western states—the sound of several generations of “water buffaloes” (aka “the good ol’ boys” of western water) turning over in their graves.
Why? One reason is because trading in futures is inherently speculative and speculation has always been a bad word in the western water world. Since the resource is relatively scarce, the law rewards use in the present, and discourages speculation and profiteering in the future. Another reason is that water is tied to place more than other traded commodities, both physically and legally. There really cannot be a free-flowing market in water the way there is in corn or soybeans.
But climate change is altering the calculus. The importance of water and the impacts of the changing climate are highlighting the need to hedge against future risks to water supplies and resources, and the financial markets are beginning to recognize that need. By doing so, the financial exchanges may be the catalyst for legal changes that decades of reformers have not been able to achieve. Listen to those water buffaloes roll and rumble.