Comment: Water may soon be a commodity that can be traded in the markets

NEW YORK CITY: A little over a decade ago, I predicted the arrival of water as an asset class.

I foresaw a massive expansion of investment in the water sector, including the production of fresh, clean water from other sources (desalination, purification), storage, shipping and transport of water.

This would result in a globally integrated market for fresh water within 25 to 30 years. Once the water spot markets are integrated, futures markets and other derivative water-based financial instruments – puts, calls, swaps – both exchange traded and OTC (over-the-counter) will follow.

There will be different qualities and types of fresh water, just as we have slightly sweet and heavy sour crude oil today.

In fact, I thought water would eventually be the most important physical-commodity-based asset class, dwarf oil, copper, agricultural commodities, and precious metals.

Ten years later, the future is now – though not quite as I had expected.

A FUTURES MARKET IN WATER

In December 2020, the Chicago Mercantile Exchange Group created the first futures market for water. Cash-settled water futures with a maximum contract period of two years are now traded on the CME Globex electronic trading system.

I see this development as something too early. In order for futures markets (and markets for other derivatives such as put and call options) to function properly, the underlying spot market – in this case the spot market for physical water or water rights – should be liquid and transparent.

CME Group’s futures market is based on the Nasdaq Veles California Water Index, which tracks the cash price of physical water rights in California, based on transactions in surface water and in four groundwater markets.

Because local and regional water supplies are often not connected, let alone fully integrated, the spot market underlying the futures market is too segmented; it does not represent a single, homogeneous product or asset.

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