CME, Nasdaq to Launch Water Futures Contract
September 23 2020 - 4:59AM
Dow Jones News
By Ryan Dezember
Farmers are known to pray for rain. Now they can hedge against
unanswered invocations.
Exchange operators CME Group Inc. and Nasdaq Inc. are planning
to launch a futures contract later this year that will allow
farmers, speculators and others to wager on the price of water.
The market will be the first of its kind, its creators say,
putting water on the board for investors alongside other raw
materials like crude oil, soybeans and copper.
"You have the most important commodity in the world and
everything else is listed except the water price," said Lance
Coogan, chief executive of Veles Water Ltd., which created a
water-price index to which the futures will be tied.
Besides allowing farmers, manufacturers and other big water
users to protect against price swings, water futures can serve as a
risk-management tool for other investors, Mr. Coogan said. They
could be used to hedge against inflation or climate change or
simply serve as an asset that is uncorrelated to others, he
said.
The futures will reflect transactions in the market for water in
California, which a huge population and vast agricultural lands
make America's thirstiest state. Water futures contracts will be
priced in dollars an acre-foot, which is the volume required to
cover an acre a foot deep, about 325,851 gallons.
Last week, an acre-foot of water cost $526.40, according to the
Nasdaq Veles California Water Index. That is a 25% decline since
the start of summer. Prices tripled in spring due to a historically
dry February in California.
The prices are derived from prior-week purchases in markets for
California surface water and in four groundwater basins in the
state. Nasdaq and London-based Veles launched the index in October
2018.
Nasdaq, best known for listing tech stocks, had been pitched
water pricing before, but Veles was the first to produce a data set
of actual transactions with volume and history sufficient for a
pricing index, said Patrick Wolf, senior manager for Nasdaq Global
Indexes. The aim was to present a reference point for buyers and
sellers in an otherwise opaque market.
"They might know a few other deals in their local part of the
market," Mr. Wolf said. "They don't have access to the full market
of buyers."
Layering futures trading on top of the index was the next step.
Trading will be hosted by CME, which makes options and derivatives
markets in assets ranging from stocks to livestock, lumber and
cheese.
Water futures will be available for trading up to two years out
over 10 monthly contracts: one every three months along with the
two most immediate nonquarterly months. Each contract will stand
for 10 acre-feet of water.
Unlike in markets for many commodities, buyers won't have to
find somewhere to put 3.3 million gallons of water if they hold an
expiring water futures contract. Whereas a buyer of a West Texas
Intermediate crude future in the same situation must take delivery
of 1,000 barrels of crude at a pipeline junction in Cushing, Okla.,
water wagers are purely financial and squared up with cash.
"There's no big water fountain like there would be for oil in
Cushing," Mr. Wolf said.
Had there been water futures, a farmer who bought summer-dated
futures at the prevailing price months earlier could have pocketed
big profits when drought hit and prices soared. Those gains could
then be used to offset the higher cost of buying actual water.
"You're just moving dollars so it will be relatively
straightforward to trade and to settle," said Tim McCourt, CME's
head of equity index and alternative investment products.
Write to Ryan Dezember at ryan.dezember@wsj.com
(END) Dow Jones Newswires
September 23, 2020 05:44 ET (09:44 GMT)
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