In Face of Extreme Weather, CME and NASDAQ Launch Water Future’s Index for California

In February 2020, at the height of winter and the wet season, parts of California hadn’t seen a drop of rain and snowpack was near all-time lows. The state, coming off an already dry January, was barreling toward a summer season of drought and possible fires. With March, some relief came, especially to the southern portions of the state, but northern and central California remained alarmingly dry throughout the summer.

By the end of June 2020, nearly 60 percent of California was experiencing drought-like conditions, ranging from abnormally dry to extreme drought in the northern central regions of the state. Then the fires came. Engulfing much of the west coast in flames, the summer droughts gave way to unprecedented wildfires across the West Coast, from Oregon to California. According to NASA, they are the worst fires the coast has seen in at least 18 years, and came during a perfect storm of fierce dry air blasts, drought conditions, and extreme temperature.

It’s within this context that the CME Group, the world’s largest derivatives exchange, and NASDAQ announced their plans to launch a water futures index for California, set to start trading near the end of Q4. The Nasdaq Veles California Water Index (NQH2O) will allow traders to make bets on water futures for the California region, one of the most dynamic water markets in the United States.

According to CME, the exchange “will be an innovative, first-of-its-kind tool to provide agricultural, commercial, and municipal water users with greater transparency, price discovery, and risk transfer – all of which can help to more efficiently align supply and demand of this vital resource.” 

As with all futures markets, betting on price changes of water in the near future will allow investors to better mitigate risk from price shocks, and could in theory help stabilize the water market in California. With 40 percent of all water going toward agriculture, California’s farmers and agricultural investors will be able to guarantee water prices, even in the face of extreme events, allowing for a more stable agricultural market.

The contracts will sell in 10-acre feet of water units, where one acre foot of water equals the amount of water needed to cover an acre of land in about one foot of water (or about 326,000 gallons/1.2 million liters of water). The index is waiting for final regulatory approval, before trading can begin.

Lead photo: A Marine walks through a burned and smoky forest during wildland firefighting operations with National Interagency Fire Center personnel near the Sierra National Forest, Calif., Sept. 26, 2020. By Marine Corps Warrant Officer Eric Laclair.

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Overallocation, outdated policies, increasing demand, and climate change have resulted in increasingly severe water crises that affect food supplies, energy production, and ultimately human wellbeing. Without access to and an understanding of the latest information, decisions are often made that perpetuate or exacerbate water issues, impacting geopolitical and economic stability, and causing harm to people and the environment.