As of December 2020, water officially started trading on the United States (US) futures market. Water joins other commodities such as oil and gold. The news comes as 2020 is revealed to be one of the hottest years in history, with water scarcity being one of the effects of temperatures raising. But what does it mean precisely for the future of water?
WATER IN THE FUTURES MARKET
Firstly, water itself is not available for trade, but rather, water futures in the US state of California. Known as “the Golden State”, California represents the biggest US agricultural market, and in the last decade, severe droughts and wildfires have endangered its territory and worsened the issue of water scarcity. Through water futures contracts, farmers, institutions, and hedge funds will be able to buy or sell water at a determined time in the future at an agreed-upon price.
The CME Group (Chicago Mercantile Exchange), one of the world’s largest derivatives marketplace, enables the trading of these water futures, in reference to the spot price set by the Nasdaq Veles California Water Index (NQH2O Index). Launched in October 2018, the NQH2O Index tracks water's price across California and reflects the value of water per acre-foot, a unit of volume equivalent to more than 1,2 million litres approximately.
The purpose is to promote transparency and monitor the cost of water on the market and help water users manage droughts' financial risk. Accordingly, water futures would enable farmers to protect themselves from a price increase and improve water management.
However, there are many disagreements on whether contracts will genuinely help with better control and financial risk. Unlike previous futures contracts of basic commodities, such as rice or corn, water futures contracts are the first of their kind. Following the Californian laws, physical delivery of water for the contracts' settlement is not possible. Additionally, water has a more unique and localised nature than other commodities. Its price varies depending on geography and water rights. It is only found in limited places; it cannot be harvested and is more regulated than other commodities.
These characteristics, the current legislation, and localised nature of water make the asset challenging to trade. Many experts have already warned about the dangers of the contracts due to the uniqueness of water. Simon Puleston Jones, former head of Europe at FIA (Futures Industry Association), a trade association, has expressed his concerns about the potential manipulation of financial markets that could drive the price upwards. "We need to think now about the potential direct and indirect negative consequences of treating water as an asset rather than a resource," he said.
THE THREATS OF TRADING IN WATER
Since 2010, the United Nations (UN) General Assembly - the main organ of the international organization- and the Human Rights Council (OHCHR) - the UN's body to protect human rights- recognise the principle of clean drinking water as a human right. The organisation has already called out the problems of introducing water futures to the futures market as it threatens humankind's most precious substance and human right. “You can’t put a value on water as you do with other commodities. Water belongs to everyone and is a public good. It is closely tied to all of our lives and livelihoods, and is an essential component to public health,” said Pedro Arrojo-Agudo, Special Rapporteur on the human rights to safe drinking water and sanitation.
The scepticism is justified, with possible financial manipulation through introducing speculators that could possibly drive up the price. “It’s important to keep in mind that hedgers and speculators go hand in hand. If you took one away, there simply would be no market,” CME’s global head of equity index, Tim McCourt, said. With water scarcity already being a serious problem and water price possibly increasing over the next years, water is becoming more and more exclusive. It will be only accessible only for a selected few, such as large-scale agricultural and industrial farmers, those who will be able to afford it in the foreseeable future. The most marginalised and vulnerable sectors of the economy will be at risk. Arrojo-Agudo adds; “water has a set of vital values for our society that the market logic does not recognize and therefore, cannot manage adequately, let alone in a financial space so prone to speculation”. The whole situation could trigger wars for water. Researchers have already advised that such conflicts are pretty likely in the next 50 to 100 years.
The forthcoming years will determine the future of water, and our planet as climate change effects become more and more evident. Hence, governments must ensure and impose measures to protect our natural resources, most notably water, the essential natural resource on our planet for humankind. We can't treat water like other commodities; we cannot let water open to the financial gambling of participants who expect to profit from it. We cannot live without water; it must remind protected and accessible to everyone.
Raquel holds a Bachelor´s in International Relations and is currently studying a Masters in Political Communication in Spain. She is a trained Climate Reality Leader and has experience working for human rights organizations. She is interested in political advocacy, environmental justice, women´s rights, and the promotion of international cooperation.