Trading water futures like oil or gold is expected to leave the market vulnerable to a speculative bubble, according to Pedro Arrojo-Agudo, the UN’s Special Rapporteur on the human rights to safe drinking water and sanitation.
“The news that water is to be traded on Wall Street futures market shows that the value of water, as a basic human right, is now under threat. It is closely tied to all of our lives and livelihoods, and is an essential component to public health,” the top official said in a statement.
Earlier this week, Chicago Mercantile Exchange, run by CME Group, has launched the futures tied to the spot price of water. The contracts, linked to the Nasdaq Veles California Water Index, has begun trading this week.
The water contracts are expected to allow investors and farmers, funds and municipalities hedge against water scarcity or bet on future water availability in California, the US major agriculture market.
The futures, traded under the ticker NQH2O, are not financially settled. In other words, the buyers are not going to get millions of gallons of water once they held on through expiration of the contract the way they would while dealing with such commodity futures as oil and grain.
California Water Index, launched two years ago, is based on volume-weighted average of the transaction prices in the five biggest and most actively traded water markets of the Southern state. Each contract represents 10 acre-feet of water that equal to nearly 3.26 million gallons.
CME Group announced plans to launch water futures back in September amidst the devastating wildfires that outraged in California, highlighting major risks of climate-related impacts on the water supply. The corporation refers to the new futures contract as to “an innovative, first-of-its-kind tool that may provideagricultural, commercial, and municipal water users with greater transparency, price discovery, and risk transfer.”
Analysts say the California index, as well as the new futures, could be the first of its kind, with more local indexes to come as water scarcity is forcing innovation in the field.
“Climate change, droughts, population growth, and pollution are likely to make water scarcity issues and pricing a hot topic for years to come. We are definitely going to watch how this new water futures contract develop,” said RBC Capital Markets managing director and analyst Deane Dray, as quoted by Bloomberg.
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