Water has rights for producers and users at an industrial level. In the case of California, they have a much-needed agricultural industry and is the main one for the United States. This region suffers from droughts that make water excessively expensive.
The players of this market exchange water rights. What has changed now is that future water use rights can be quoted. For example, an almond farmer, who is going to need a lot of water for the next six months, can buy future rights so he will have a defined price of water from today. This price is based on the new Nasdaq Veles California Water Index Futures index (NQH2O), which will make it possible to stop setting the price only by making estimations without any guidelines.
The fact that water starts trading on the stock market can have several positive and negative consequences on the economy and the environment, depending on how we act:
That is because there is a contract between the two parties where they agree on exchanging water rights in the future. In other words, they are buying and selling not the water, but the right to use it in the future, on a certain date and at an accorded price.
This market is located in a specific region of California (the Chino Basin, the Main San Gabriel Basin, and the Mojave Basin Alto Subarea). It can be dangerous that such a local market is susceptible to be traded at a global level. Being traded in the futures’ market, makes any investor able to enter even if he does not work in water companies on the stock market. That means that the market will be able to count on more liquidity coming from those individual investors who are not working in that industry. What does it imply? The price won’t be ruled by the natural needs of the water market anymore, but by the stock market, and this could generate deferred prices.
A water does not have a physical delivery. The reason? It is more expensive to deliver the water than to get it in the country where you are. The found solution to face this situation is that, at the expiration of the contract, instead of having the water, you can have an amount of money. This amount will be settled by the difference between the price that was agreed and the current quoting price.
A speculative use of water trading can trigger two main reactions: if the price gets higher could leave many people without water, an asset who anyone can do without. A lower price could encourage water waste, having terrible consequences in sustainability and the environment.
There is only one water price index, the NQH2O. This index allows monitoring the spot price of water in the State of California. It could be used as a reference to influence water prices in the rest of the world, causing greater inequalities.
It can encourage other nations where the water market is private to start trading as well, intensifying the above consequences and increasing the behaviour of trading water as a commodity.
Wall Street trading water futures: what can we do? We have a key role as investors in the effects that our speculations can cause on sustainability. How could we generate a positive effect with our future investments in water?
The key is to look for investment funds related to water companies (infrastructure construction, sanitation, artificial intelligence companies to manage leaks…) in order to have an impact that can improve the world and thus avoid a speculative bubble. This would help local water market players to palliate uncertainties by providing more stability, and having a positive impact on the environment.
In some countries they don’t reflect the real price of water. The price is composed of 2 parts: the first one regards to distribution, and the second one is attributed to the cost of treating the water.
The price of water in Belgium has been getting higher and higher in the last few years. We know that water is a costly and needed resource. In 2005 in Belgium, the price of the water was almost 2€ per cubic meter, and in 2020 the price already passed the 5€ per cubic meter. It almost tripled in 15 years! At Shayp we aim to help to reduce this cost by 22% and save thousands of liters of water. Book a meeting with us if you are interested to know more about how we do it!
SOURCES:
Finect Talks, 23rd Dec 2020
Animal político (Siboney Flores), 16th Dec 2020
The Nasdaq Veles California Water Index
El tiempo, 10th Dec 2020
El tiempo (David Fickling), 9th Dec 2020
Noticias ONU, 11st Dec 2020
Libre Mercado (Jesús Esteban), 21st Dec 2020
Environment magazine, 2019
Smart water magazine, Paula Sánchez Almendros, 9th Dec 2020