California has recently established a water futures market that has brought with it some criticism as well as confusion. As the first of its kind in the country, it will function similarly to futures markets for other commodities. The market will allow water users to lock in a particular price they are willing to pay for water. This new futures market is entirely different from water markets that allow the purchasing of water allocations.
“In this case, although it’s called a water futures market, there is no physical water being traded,” said Cora Kammeyer, Senior Researcher at the Pacific Institute. “The reason that it’s called a water futures market is because it’s based on the Nasdaq Veles California Water Index which is a composite of water transactions throughout the state of California that gives you a weekly price of water.”
There has been some concern that opening a water futures market could artificially inflate the price of water. Individuals and companies that invest is water futures in the interest of purely financial gain are called speculators. Those who have a stake in the cost of water and want to participate in the market are called hedgers. In a farming scenario, a producer would “hedge” their financial risk by locking in an agreed-upon cost for water, in the event the price increases.
Supporters of the futures market have described it as being a tool for farmers and ranchers to use as a financial buffer for water risk. Kammeyer wrote an in-depth article detailing how the agricultural community can participate in the water futures market. “The idea is that by trading in water futures, water users in California – particularly agricultural water users – can help hedge against the financial risks associated with water scarcity or water surplus,” Kammeyer explained.
Listen to the interview below.