In December, the Chicago Mercantile Exchange started trading a new ticker for futures tied to the Nasdaq Veles California Water Index – NQH20. This is a big step forward in how water is traded, allowing agents with high water needs to bet on futures contracts and avoid the uncertainty of paying extra for when the availability drops in dry years and seasons. The US is the second biggest water consumer in the world, with California accounting for 9% of the total country consumption, making it a huge player in the water market, particularly as the state gets hit by an increasing number of droughts.
Introducing water-futures speaks to the changing climate, growing water scarcity, and the increased need for agricultural industry to be able to hedge for droughts. The introduction of hedging against higher water prices in the spot market at a specific time in the future in California, can prove to be game-changing for farmers by giving them price certainty and substantially reduce their risks.
Will the new product stabilise water price in California and introduce the much needed transparency? Or will it invite speculation from financial players such as hedge funds?