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Why US investors are now betting on water

Sabrina Kessler New York
January 21, 2021

At the Chicago Mercantile Exchange, investors are now able to speculate on water prices. This practice, meant to help secure supplies for cities and farmers, has drawn criticism, as Sabrina Kessler reports from New York.

California irrigation system
Farmers in California have to make sure that scarce water resources are used efficientlyImage: DW/S. Czimmek

When Edgar Terry walks his fields in the morning, there's one thing on his mind: water. The 61-year-old farmer owns 700 hectares (1,730 acres) of land — a total of 12 fields with bell pepper, strawberries, spinach, celery and cilantro that have to be watered all year round.

His family has run the Terry Farms for 126 years. This long-established farming company in Ventura County is located about an hour's drive north of Los Angeles, California, where water is often scarce. "I think about water every day of the week, especially now because we're in a drought," Terry told DW.

Some 2,000 miles (2,320 kilometers) east of Ventura County, Chicago has set out to fight water scarcity. At the Chicago Mercantile Exchange (CME), the world's biggest futures exchange, investors usually speculate on assets such as oil, wood or aluminum.

Water futures added

But since early December, investors have been able to trade the Nasdaq Veles California Index, where the prices of water usage rights are reflected in so-called water futures. Futures are derivative financial contracts that obligate the parties to transact an asset at a predetermined future date and price.

What's important is that the buyer must purchase or the seller must sell the underlying asset at the set price, regardless of the current market price at the expiration date. Such contracts are meant to help farmers simplify their calculations.

A CME Group trader calls in an order
California Mercantile Exchange traders can now experiment with a new financial product — water futuresImage: picture alliance/landov/B. Kersey

Municipal companies and utilities could also stand to profit from water futures, the CME argues. In California where water is scarce, water prices often soar overnight because of wildfires or droughts.

Costs for the next six months can be estimated only roughly, as Nasdaq Senior Manager Patrick Wolf told Bloomberg. He's in charge of the futures in California, the United States' largest water market.

Farmers like Edgar Terry believe the Wall Street initiative might come in handy. When a drought is on the horizon, they could secure enough water in time at reasonable prices. Terry, who in a side job is a professor of finance at California Lutheran University, says the futures could enable him to secure today's prices for tomorrow's supplies.

In neighboring Kern County, farmers have for decades aimed to use wastewater from oil and gas mining for their fields during protracted periods of drought. There, recycled water already accounts for up to 30% of the annual irrigation budget. According to the LA Times, oil giant Chevron alone delivered over 20 million gallons (76 million liters) of wastewater to farmers in Kern County in 2015.

Consumer risks

However, scientists and environmentalists have been warning of health hazards for consumers, because even after the purification process, traces of harmful chemicals such as arsenic as well as some poisonous substances and radioactive elements remain in the water.

But experts are likewise skeptical about water futures, saying it raises ethical questions about whether such an essential element for human life like water should be tradable at all.

"We need to think now about the potential direct and indirect negative consequences of treating water as an asset rather than a resource," the former chief executive of FIA Europe, Simon Puleston Jones, told the Financial Times. (FIA is the US Futures Industry Association). The expert fears prices may go up considerably, and speculation might occur, impacting the poor.

According to the United Nations, more than 2.2 billion people across the world lack access to clean drinking water. It fears that the situation will be exacerbated in the wake of water-price speculation instruments.

"I'm very concerned that water is now being treated as gold, oil and other commodities that are traded on the Wall Street futures market," said UN Special Rapporteur Pedro Arrojo-Aguda, adding that water futures trading jeopardizes the access to water as a human right.

Drought in California
Many farmers in Califronia are now selling their government-subsidized water for profit instead of using it to plant cropsImage: Getty Images/D. McNew

Provoking a crisis?

 Speculators have triggered food crises before. Between 2008 and 2010, hedge funds bet on rising cocoa prices and thus eventually drove up the price for cocoa beans by a staggering 150%. Financial speculators also contributed to the price of wheat and soybeans soaring in 2007 and 2008, which triggered famine and social unrest in developing countries.

But the Chicago exchange is trying to calm people down, saying the water futures would only be traded regionally and in small quantities and that the majority of all Californian water rights are in the hands of utilities anyway. In addition, it says, it's all about "financially settled contracts," meaning that no water is flowing anywhere, as the only thing that really happens is cash settlements.

This is to prevent investors with large storage capacities from causing an artificial water scarcity in pursuit of profits from rising prices.

For farmers like Edgar Terry, water futures thus appear to be useless. "We need wet water, not paper water," he said. This is why he chooses to rely on his own initiative that he launched a couple of years ago to combat water scarcity — the Fox Canyon Groundwater Market, a local trading system for farmers.

That marketplace for selling and buying water is possible because the strict water usage rights and regulations in California are confined to water from rivers, creeks and lakes. But thanks to Terry, farmers can sell or pass on excess water they pump up from the ground of their own land. That is to say that the concept of trading water has long materialized there, albeit on a strictly regional level.

California robot-farms to feed the world

This article has been adapted from German.