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Water As A Commodity? Nasdaq Has The Futures

Late last year, the Nasdaq Veles California Water Index started trading futures on the Chicago Mercantile Exchange. This phenomenon has yet to come to Nevada or Utah. But there are efforts to create the type of marketplace that could eventually allow for this to occur outside of California.

Right now, the index tracks the price of water in California’s massive surface water market and in four groundwater basins, valuing the average price of water in those areas in order to create a future.

What is a future? Well it is a way to hedge, or speculate, on the price of water. If a farmer is worried that the price of water will sky-rocket over the coming year, he/she can hedge the bet and lock in at a price – with the risk of the price dropping or the satisfaction of watching it skyrocket while remaining locked into the lower price. This opens the door for speculative plays like “shorts,” which are bets on the decline of the price of a security like a future. The index calculates one “futures” contract as 10 acre feet multiplied by the price of water on the market.

The futures market is not that different from the exist-ing marketplace – where an entity can lease water. But this is clearly just the beginning.
Lance Coogan, the CEO of Veles Water Limited, said in a recent interview that he hopes the index will ex-pand into other investment vehicles: options, bonds, mu-tual funds, swaps and others.
Right now, these markets are “cash settled,” meaning that physical water isn’t trading hands. However, Coogan said he hopes that the markets one day include “physical deliveries.”
A commoditized marketplace for a resource like water does not re-spect the resource’s physical limita-tions and uses. It doesn’t respect cultural, spiritual or recreational values. It is merely a vector for transactions.
This is really scary stuff for many reasons. But let me list two: One: As the Pacific Institute described the situation, this index is a way to gamble on the weather.

Two: Thinking about this from a Nevada perspective, two companies come to mind: Water Asset Management and Blockchains LLC.
The former is a hedge fund that owns Winnemucca Farms. The latter is a crypto-currency company looking to build its own county in the Tahoe-Reno Industrial Center, but it has one problem: It needs water. For years, Water Asset Management has advocated for creating a pipeline network that would allow water from all across the state to be transported and sold in other regions of Nevada. The company is not shy about its intent to fallow fields and send water to places like Reno or to the Tahoe Reno Industrial Center – where Blockchains owns 70,000 acres of land and not a lot of water.

We can speculate all day about what’s going to happen. But there’s no doubt at GBWN that forces are working to get water out of rural places and into urban environs, for profit. Utah recently passed a “Water Banking” bill that allows for more market-based transactions of water.

Water officials in Nevada, in opposition to GBWN, were recently pushing for legislative proposals to do the same thing.
The efforts to more easily facilitate rural-to-urban water transfers will undermine Nevada water law by taking away Priority Dates and Beneficial Use requirements that are the cornerstones of the Prior Appropriation Doctrine.
By taking away those requirements, an entity with water rights can sit on water and wait for the highest bidder to come along. That’s commoditization.
Turning water into a commodity that can be traded, sold and speculated upon will most certainly aid in the effort to turn water that’s beneficially used into a currency or security.

This leaves a final question: Whom do we want in control of our water? Wall Street or Main Street. If the Nasdaq Veles California Water Index remains a mere marketplace for futures, I don’t see a problem. But if Coogan’s prognostications become true, we will be in over our heads. Water won’t be in local control. It will be in Wall Street’s control.

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