Commodities

Now, trade water on Wall Street

Bloomberg September 18 | Updated on September 18, 2020 Published on September 18, 2020

CME launches first water futures

If the record heat and wildfires ravaging California weren’t a clear enough sign that the climate is changing, then consider this: Wall Street is about to start trading futures contracts on the state’s water supply.

The contracts are the first of their kind in the US and are being created by CME Group Inc, the world’s largest futures exchange. They are intended, CME says, to both allow 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.

Water supplies have been tight for years in California, and large parts of Asia and Africa also face the potential of scarcity as temperatures rise. 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.

“It’s really a unique mechanism for investors themselves and California to be able to at the very least understand and price the risk and potentially hedge the risk of water price volatility,” said Carter Malloy, founder and chief executive officer of AcreTrader, a farmland investing platform.

Climate advocates have warned in recent years for the potential of water wars as competition increases between needs from agriculture, energy and growing cities.

CME’s contract, tied to the $1.1-billion California water market, will launch late this year, pending regulatory review, and will be based on the Nasdaq Veles California Water Index, the bourse said on Thursday.

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.

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Published on September 18, 2020
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