Climate change is real. As if the fires out west, hurricanes in the Gulf, and the moderate winters didn’t underline this sentiment; Wall street is reminding us that climate change is VERY real by starting to trade futures contracts on California’s water supply. This is the first of its kind in the U.S., making this a momentous event for the CME Group Inc., the world’s largest futures exchange.  

Almost two-thirds of the world’s population is expected to face water shortages by 2025 CME reports. Water supplies have seen new lows these past few years in California; not to mention its extreme scarcity in parts of Asia (namely India) and Africa. “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, reported in an interview.  

The stress of water shortages isn’t only tied to individuals’ consumption, it is directly tied to our food supply. Currently in California, 40% of the state’s water consumption goes to crop production. As time goes on, crop production is going to be more challenging due to climate change. In recent years, climate advocates have warned of a “water war” due to the increasing needs from agriculture, energy and growing cities. These futures contracts will allow buyers to hedge the risk of water price volatility; a game changing tool for agricultural producers, property owners, municipalities and public water agencies.  

Carter Malloy, founder and CEO of AcreTrader commented in a recent interview, “The crucial thing is right now we have very little visibility on what water prices will look like in the future.” By employing and executing a futures contract, one will be able to assess the market, determine the risk and hedge against it – ultimately buying safety, or the inverse. CME’s contract will be based on the Nasdaq Veles California Water Index. “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. 

CME’s contract is tied to California’s $1.1 billion water market and will launch later this year pending regulatory review.  

 

 

 

 

 

Written by: Kristin DeBias 

 

Sources: Bloomberg, The Free Press Journal