Wall Street is going to start trading futures contracts on the state’s water supply.
These contracts are the first of their kind in the U.S. and are being created by CME Group Inc., the world’s largest futures exchange, reported Mint.
According to CME, the contracts are being created to allow California’s big water consumers to hedge against surging prices. The contracts can also act as a benchmark that signals how acute water scarcity is becoming.
Almost two-thirds of the world’s population is expected to face water shortages by 2025, according to the CME.
“Water scarcity is certainly one of the biggest challenges facing communities and individuals today across the globe, where currently about 2 billion people are already living in countries experiencing high water stress," said Tim McCourt, the global head of equity index and alternative investment products at CME, in an interview.
Wall Street took significant note of the potential for water after investor Michael Burry drew attention to the commodity 10 years ago. Burry spoke about investing in farmland with “water on site."
“It’s really a unique mechanism for investors themselves and California to be able to at the very least understand and price the risk and potentially hedge the risk of water price volatility," said Carter Malloy, founder and chief executive officer of AcreTrader, a farmland investing platform.
Water preservation and distribution could become increasingly attractive, according to CME.
Climate advocates have warned for the potential of water wars as competition increases between needs from agriculture, energy and growing cities, reported Mint. Food production in particular could be vulnerable since drought makes it difficult to grow crops in many parts of the world.
CME’s contract is tied to the $1.1 billion California water market and will launch late this year, pending regulatory review. The contract will be based on the Nasdaq Veles California Water Index, reported Mint.
“What we really wanted to be able to do was firstly to provide clear and transparent rules-based information to the marketplace," said Patrick Wolf, a senior manager for Nasdaq Global Indexes.