Markets are known to be future looking and that is exactly, it is doing by introducing water as the new trading commodity. According to a Bloomberg report, Wall Street is about to start trading futures contracts on the state’s water supply.
This is the first of its kind in the U.S. and is being created by CME Group, the world’s largest futures exchange.
This trade is intended at allowing California’s big water consumers — like almond farms and municipalities — to hedge against surging prices and can act as a benchmark that signals how acute water scarcity is becoming in the state and, more broadly, across the globe. The recent fire in California has brought to light that the climate change issue will not stop anytime soon. Apart from California in the US, large parts of Asia and Africa are displaying early signs of scarcity as temperature soars.
Almost two-thirds of the world’s population is expected to face water shortages by 2025, according to the CME.
“Water scarcity is certainly one of the biggest challenges facing communities and individuals today across the globe, where currently about 2 billion people are already living in countries experiencing high water stress," Tim McCourt, the global head of equity index and alternative investment products at CME, said in an interview.
Wall Street first took significant note of the potential for water after investor Michael Burry drew attention to the commodity 10 years ago when he spoke about investing in farmland with “water on site."
In California, about 40 per cent of water currently consumed in the state goes to crop production. The CME contract will help to create a forward curve so users can hedge future price risk, the bourse said.
“What we really wanted to be able to do was firstly to provide clear and transparent rules-based information to the marketplace," said Patrick Wolf, a senior manager for Nasdaq Global Indexes.