Are water futures the future of water?

Geneva/New York, 18 Jan (Alexander Kozul-Wright and Bhumika Muchhala) – The principle of water as a public good goes back to antiquity. The Romans, who regarded access to water as a civic right, built aqueducts and public baths. It was only in the 1980s that countries started to privatize formerly state-owned water utility companies.
As the decades-long debate between public vs. private water management rumbles on, a new element has surfaced – the possibility of turning fresh water into a derivatives contract.
For the first time, water was traded on the Chicago Mercantile Exchange in December 2020. Farmers and municipal authorities can now bet on the future price of California water.
Specifically, the futures price will be tied to the Nasdaq Veles California Water Index, which tracks the spot (or immediate delivery) price of California’s five largest water markets.
Presently, underground reservoir rights can only be exchanged on California’s cap-and-trade spot market. The market has expanded in recent years to accommodate a growing taste for water-intensive crops like almonds and pistachios. Demand also rises during dry seasons.
For farmers, having an indication about the future price of water could be helpful. In drought-struck California, subterranean water allocation is granted through land ownership.
However, farmers frequently dip into the spot market for additional water.
In theory, the advent of futures contracts will allow wholesale consumers to look at financial markets for an indication of how current prices relate to historical trends, and hedge against elevated prices when they need more water.
The instruments are being promoted as supply-management tools, designed to address water shortages.
Indeed, the CME Group (which operates the Chicago futures exchange) claims that the new contracts will help farmers and city planners “better align supply and demand”, a key consideration as climate change continues to worsen droughts and wildfires.
To be clear, these contracts will not involve the physical delivery of water. They simply predict the price of Californian water at various points in the future. The shape of these series is known as a futures curve.
Some observers have noted that futures contracts will be difficult to trade, given the localised nature of water regulation and pricing.
Critics also fear that financial market trading, which would not be restricted to industrial users, could spark “herd” investing and amplify price swings.
“The one asset class that I don’t want to see open to potential manipulation via financial markets is [water]”, said Puleston Jones, former European head at the Futures Industry Association, a US trade body.
Clearly, speculative trading could drive up both price volatility and costs.
IMPLICATIONS FOR DEVELOPING COUNTRIES
Due to climate change and rising world populations, water scarcity is becoming a growing policy challenge for governments, particularly in the Global South.
Neoliberal logic purports that privatisation offers the best solution for fresh water allocation.
Economists, however, continue to wrangle over this claim. Many suggest that public water provision is an equal, or better, match in terms of cost and quality.
The debate ultimately boils down to ideological differences concerning the management of the “commons”. Still, the creation of futures contracts adds a layered dimension. Namely, the financialization of water.
The California contract offers a projection of financial markets’ vision for water – to become a financially traded asset.
The standard justification for futures is that they allow economic actors to hedge against risk. However, this protective function no longer serves as the primary driver for futures trading.
Since the global financial crisis, commodities futures have become a popular asset class in their own right.
Today, financial speculators with no inherent interest in the price of oil can (and do) profit from bets on near- term price fluctuations.
This partly explains the commodities boom-bust cycle over the past decade, with price volatility rising in tow.
The advent of futures contracts could see water prices follow suit. Water calamities in London may one day reverberate as price spikes in Lahore.
For now, a global trade in water futures will have to wait for financiers to establish a universally adopted measure for water stress, i.e. withdrawals from available resources.
Looking ahead, the growth of futures markets will probably continue to spring up at a local level.
Even if developing countries retain some degree of public oversight, they will face increasing pressure to extend the invisible hand of market forces into the domain of water management, beginning with privatisation and ending with the speculative trading of water-linked instruments.
Unfortunately, there is strong evidence to suggest that futures trading amplifies commodity price volatility.
Violent swings in water prices could threaten populations already vulnerable to water stress, especially in the Middle East and Africa.
While the proliferation of futures contracts has vastly increased the interconnectedness of commodities markets with other parts of the global financial system, this has triggered very little physical investment into commodities-linked infrastructure.
It should also be recalled that in July 2010, the UN General Assembly recognized access to water as a human right.
The 6th Sustainable Development Goal went further in calling for universal access to safe and affordable drinking water.
Water futures have so far failed to address concerns regarding access to water in developing countries. There is no easy panacea for humanity’s water needs.
However, the global derivatives market, with its chequered history in mortgage-backed securities during the global financial crisis, offers little more than wishful thinking for developing countries, who would do well to heed the words of the Ancient Mariner, “water, water everywhere, but not a drop to drink.” – Third World Network