Water is becoming a new commodity traded on the United States (US) Futures Exchange. This is the first time in history.
The futures contract associated with the California Air Nasdaq Veles Index, which measures the volume-weighted average price of water. It began trading under the ticker NQH2O on the Chicago Mercantile Exchange on Monday.
Previously, in the dry season, the demand for water increased to grow crops and supply the city. At such times the price of water becomes very expensive and unstable.
Now those who need to buy extra water in the dry season can pay less with futures contracts.
Unlike other futures contracts, water contracts only lock in price in order to hedge against higher prices on the spot market at a certain time in the future.
“Price certainty is what you buy,” said Clay Landry, managing director and principal at WestWater Research, a consulting firm that provides the data behind the water index.
US is the second largest water consumer in the world
United States alone is the second largest water consumer in the world, with California accounting for 9% of the country’s daily consumption.
The size of the California water market is four times larger than in any other state. Water transactions in the state totaled US $ 2.6 billion between 2012 and 2019. However, drought often hit the country.
“California has a long period of dry conditions followed by a brief period of very wet conditions. And that has a big impact on prices,” said Patrick Wolf, a major product developer with the Nasdaq Global Index.
In his opinion, having contracts that are publicly traded will bring more transparency to the market and that will be good for all parties who have to buy water.