Lifeblood: The Commodification of Water and What Lies Beyond

Water futures contracts began trading on the Nasdaq in December, with the first set of contracts to be settled in early 2021. This marked the first time that water joined the long list of commodities traded through futures contracts – an agreement to buy a commodity or security at a fixed price at a future date. Despite the fact that the contracts only service a portion of the California water market, which is about $1.1 billion in size (comparatively small relative to most commodities), the mere suggestion of such a critical resource being traded on Wall Street was understandably met with scrutiny.

The commodities market is immense in size, with products ranging from corn to oil traded through futures contracts everyday. Due to the intense short-term price fluctuations associated with commodities, they are often also the subject of speculation and profiteering. While many futures contracts are used to secure prices and minimize risk, banks and other investment institutions make up a large portion of commodity trading and have no interest in the goods themselves, rather, they hope to profit from price swings. Speculators in the market have even been alleged to cause “food speculation,” a controversial claim that financial speculators can have undue effects on the prices of vital resources by attempting to game the futures market. As water enters the commodity arena, there are fears that it will lose its place as a human right and morph into a financial instrument.

While water is often thought of in the context of personal utilization, public usage does generally account for a small portion of freshwater consumption. Irrigation expectedly accounts for a large allocation in California since the state’s warm climate makes it a hotbed for agricultural production. However, while agriculture is abundant in the state, water shortages have become increasingly prevalent as well. For the most part, the farming industry as well as local municipalities have been at the mercy of fluctuating water prices as these conditions change. The Nasdaq Veles California Water Index has been actively tracking the price of water for just two years, and within that timeframe, the prices have fluctuated by over 200%. CME Group, who facilitates the water futures (which are pinned to the index), characterizes the contracts as a mechanism for water users to hedge their risk and lock in pricing, while providing higher transparency for water pricing across the state. At their best, water futures contracts might serve as a defense mechanism against price swings and even promote greater stability in a market that is moving towards greater scarcity and volatility.

Regardless of whether some companies and municipalities may benefit from the intended usage of the contracts, commodity profit-seekers are likely to enter the market as well. Unlike many other commodity futures contracts, the new water futures are not settled via delivery of goods. By contrast, many in oil futures culminate with a massive delivery of crude oil barrels. These cases can exacerbate price fluctuations if the purchaser no longer wants the product. A famous example is when the price of oil briefly went negative in 2020 as the pandemic ravaged demand and those who had speculated or bought futures contracts raced to liquidate them in order to avoid warehousing costs. The newly established water futures contracts are settled in cash rather than physical delivery, which may alleviate concerns of storage, but certainly opens the floor for speculators who have no intention of ever using the good. Even aside from the practical arguments of price and delivery, the general thought of profiteering from a vital resource is understandably difficult to accept. While it occurs every day with other important commodities, nothing is as irreplaceable as water. 

 A final trend that the introduction of water futures may lead to is putting prices on public goods. Allowing the economic forces of supply and demand to determine the distribution of water may drive greater efficiency and less waste. For instance, while Canada is known for its abundance of water, it certainly is not known for using it efficiently. Companies often pay little to nothing to use plenty of the resource in the country – Nestle and other bottled water companies pay just above $500 CAD per million litres of water extracted. Much water is wasted in various places simply due to the fact that there is no need to consider any trade-offs or costs. By instituting proper pricing, water might be better allocated to efficient projects and initiatives. However, it goes without saying that water usage should not be judged solely on its economic productivity - personal usage and consumption for all should be protected first and foremost.

In reality, the announcement of water futures trading on Wall Street is really just a small piece of what is potentially yet to come. For now, the contracts trade in a relatively small market on a global scale and will likely not have the apocalyptic nor utopian productivity impacts some may claim. That being said, similar contracts are likely to arise in other markets as water becomes scarcer. It is never too early to plan for the commodification of water in order to protect a fundamental human right, and to drive productive usage of an important resource.

Note: All figures in USD unless stated otherwise