New York (CNN Business)There’s a new commodity in town for investors to trade: water.Futures tied to the Nasdaq Veles California Water Index, which measures the volume-weighted average price of water, began trading under the ticker NQH2O on the Chicago Mercantile Exchange on Monday.Water has never been traded this way before.Before the futures came along, the buying and selling of water rights, which allow the holder to pump water from the ground or reservoirs, only happened in the spot market. In dry years, when more water is required to grow crops and supply municipalities, it meant that buyers were facing high prices and a lot of uncertainty.The new futures are meant to bring an end to that and add price transparency to a previously opaque market.Those who need to buy extra water in a dry year, when prices are naturally higher, can now bet on futures contracts to offset the higher prices they might have to pay in the water market down the line.close dialog
BEFORE MARKETS OPENSTART YOUR DAY SMARTGet essential news and analysis on global markets with CNN Business’ daily newsletter.Sign Me UpNo ThanksBy subscribing you agree to ourprivacy policy.At the same time, the new futures market could also invite speculation from financial players, including hedge funds.
Hedging for droughts
The United States is the second biggest consumer of water in the world, with California accounting for 9% of the nation’s daily consumption.The size of California’s water market is four times larger than in any other state. Water transactions in the state totaled $2.6 billion between 2012 and 2019.But the state is often hit by droughts.”California has long periods of dry conditions followed by short periods of very wet conditions. And that affects the price a lot,” said Patrick Wolf, lead product developer with Nasdaq Global Indexes.Having a publicly traded contract will bring more transparency to the market and that will be good for all the parties that have to buy water, Wolf told CNN Business.The agriculture sectors is the biggest buyer in California’s spot market, meaning they buy the most water during dry years. This trend has been intensified in recent years by the move to popular high-value permanent crops like almonds and pistachios, which require a lot of water for upkeep.Sellers are water districts with surplus supply, for example farmers and municipalities in other parts of the state.For farmers, having some knowledge about the price of water could be a game changer. Some allocation of water comes with land ownership, but in drought-struck California, farmers often need additional water to get their crops ready for the harvest. That’s when these farmers have to go into the public market to buy more.
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