The California water futures market may not be the economic tool that supporters are suggesting. No actual water changes hands through the futures market, but it offers an economic opportunity similar to the stock market. Market participants enter into a contract for a certain price based on the Nasdaq Veles California Water Index hoping the price will rise. Advocates of the water futures market present it as an economic tool available to farmers to help offset the real costs of physical water transfers. However, the risks involved may outweigh the potential benefits for the agricultural community.
“[Proponents’] points are made based on the change in price and the potential gain if the prices rise,” said Mike Wade, Executive Director of the California Farm Water Coalition (CFWC). “But they don’t get into the real quantities of water that would be required to have enough of a gain, enough of a net income from buying and selling a water futures contract to make a big enough difference for a water budget for an individual farm for a year.”
A blog post from CFWC details an example of how a farmer might participate in the water futures market. The example given shows that even when a farmer makes a profit on the futures contract, it likely would not equate to the purchasing power needed to acquire an adequate amount of water. “The number of contracts needed to have a significant impact on providing income to irrigate even a modest size farm; it would be an incredible amount of money that would need to go out upfront,” Wade explained.
One of the questions raised by the development of the water futures market is how it may impact the process of buying and transferring water. Prices for water futures contracts are dictated by the actual sale of water. If a connection between the futures market, the actual water market, and the purchase of water supplies occurs, it could be years before it is identified. The number of unknowns that remain, compounded by the upfront cost of enough futures contracts to be valuable may limit the practicality of the futures market for farmers.
“We don’t know where it’s going to go but, the way it’s structured now, I don’t see it as a viable tool for water management, especially in agriculture,” Wade noted. “It’s interesting and it will be interesting to follow, but I don’t see that it’s a real tool right now because it doesn’t involve actual water. It’s simply speculating on price and I don’t see how that fits with the water budgeting process to grow crops in California.”
Listen to the interview below.