CME, Nasdaq to Launch Water Futures Contract | Hacker News Reader

CME, Nasdaq to Launch Water Futures Contract

wsj.com

69 pointstumblerz48 comments

This has been somewhat of a long time coming. Water's been on the financial brain for a long time now. From 2012-2018 Harvard's $39bn endowment spent $305m on California vineyards that had reliable access to groundwater[0]. It wasn't for the wine.

[0]: https://www.businessinsider.com/harvard-california-vineyards...

edit: correct dates.

I find it interesting that the cost of water is pretty close to the cost of Desalination. 1 acre foot = 1233 m^3. Hyflux has contracts [1] in Singapore (on a multi-year committed contract at volume) back in 2011 for Desalinated water at $0.45/m^3 or $554/acre foot, which is roughly where the spot market right now is for water.

I wouldn't gave guessed they would be that close, but it bodes very well for inexpensive energy / improvements in desalination technology being a source of water.

[1] https://www.eco-business.com/news/hyflux-to-produce-worlds-c...

As you point out (“inexpensive energy”), if fusion ever gets to be less than “10-20 years away” :D then the crazy concept of water shortages will thankfully be a thing of the past. I hope to see it in my lifetime.

I don't think this is a coincidence. Salt water, after all, is present in effectively unlimited quantities in many of the world's major cities. If the price of desalination drops, competition (in an imaginary world) will drive down the price of desalinated water in lockstep with it.

Interestingly, there is a theoretical floor to the amount of energy invested per unit of water desalinated, and we're apparently quite close to it. From here, our best hopes for improvement are to use waste heat or solar thermal energy to desalinate water.

I'm afraid that the dispersal of responsibility among many different parties who benefit under archaic "riparian rights" laws that are totally outdated and unable to be changed because no one cares enough to build the political momentum means that this issue will fester like climate change. And even more than climate, the emotions driving the issue (such as in California) are tangible and exploitable to favor incumbent users.

In the meantime as long as it continues, the situation be taken advantage of by those who know how to find holes in the system for concentrated private gain.

Nat gas is subject to pretty wild discrepancies between regional markets. It's not unusual for the price to go negative in the Rocky Mountain region during many summers.

The market mostly seems to work fine. Henry Hub is somewhat arbitrarily picked as the most canonical price point. And then a lot of price discovery occurs in robust "basis" markets (i.e. region-specific contracts).

It's no picnic out west under the Colorado doctrine either. The Colorado River Compact was drafted during an unusually wet period, in absolute rather than relative terms. Now from tree ring studies we know that, not only does the amount of water allocated not generally flow through the river, but the river system can experience "megadroughts" that can last for decades or even centuries.

And we're about twenty years into a drought.

Oh goody! Nothing like the financialization of life-necessities to warm the cockles of the heart of big capital.

Hunting and gathering is overrated.

Yes, hunting and gathering, the obvious result of not privatizing our water.

Public or private, we still ascribe financial value to it.

This might make it easier to quantify the effects of groundwater depletion and climate change. If we see that futures priced further out are more expensive, that says something.

In general, by the time something gets to being turned into financial instruments like this, the actual step from whatever state it was in prior to a regulated, standardized, liquid, public contract is generally good. Light is an excellent disinfectant.

Except the market will lack perfect information, likely not price in long-term environmental damage, and encourage wealth hoarding via the literal pooling of wealth. Then you'll get crazy speculation, with the markets experiencing adverse liquidity events resulting in spectacular splash crashes afterward.

Markets quite often do not help usher in eras of rationale and logic. A lot of that goes out the window when "there's money to be made".

I do not understand your point as these contracts are settled in cash. Do you care to elaborate?

I share the same concerns. Market economics did not prevent e.g. Enron from scalping millions of dollars out of CA energy markets while rolling blackouts resulted in powerless hospitals.

Speculation - not actual supply or demand - in oil markets drove the price of gasoline from $1 to $4 a gallon (and now back to $2). Everyone else paid for the inefficient market finding a false equilibrium pumped up by perception of security.

(Financial deregulation of Wall St in 1999 preceded the popping of the dotcom asset bubble by very little lag. And then CDS in 2005 and the Great Recession and now this whole mess: and the only solution is to pay cronies who didn't hoard enough cash?)

Sugar water companies can afford to push the price of water higher while the external health and commodity costs are passed onto everyone else.

Markets have thus far failed to solve for long-term environmental damage: their incentive is to externalize costs in order to maximize short-term profit.

> Markets have thus far failed to solve for long-term environmental damage:

That's really not true in general. Market theory has been crucial in creating more sustainable resource usage in the US northeast fisheries, and the highly successful SOX and NOX emissions markets (acid rain really isn't an existential threat any longer). The US seems to be incapable of forming a sane CO2 market because of the rights intransigence and capture by fossil fuels, and the lefts reluctance to embrace a market solution/desire to overregulate (combining a methane/hfc greenhouse market with a CO2 greenhouse market is going to cause major arbitrage problems that could lead to greenhouse worsening)

Climate change is real. Markets are not solving for that.

(Subsidies and market theory.)

Hopefully we can utilize market economics to incentivize sustainable development and head off currently accelerating environmental destruction with costs unrecoverable in a human lifetime. Markets absolutely have not solved for global warming. Take a look around: the arctic is burning; CA is burning; the severity, frequency, and costs of weather disasters are significantly increasing.

https://news.ycombinator.com/item?id=20925127

It is denial or delusion to claim that markets have solved or will solve for long-term environmental and thus economic sustainability.

Some firms - despite the current EPA's denialism, suppression, and appeasements of special interests - have chosen to forego short-term profits in order to achieve (voluntary) Paris Agreement targets. Unfortunately, markets are hardly reinforcing that good decision. Long-term ROI is beyond the attention spans of retail and institutional investors.

Unregulated free markets have resulted in smog-filled cities and polluted drinking water in very many economies.

Europe has had carbon credits for quite awhile. That's a good first step, but it's clearly not sufficient.

There could be yearly tokens for carbon, greenhouse gases, and toxic waste (e.g. the wastewater from washing out coal plants that the current administration has decided to allow to be dumped in our rivers). Speculators and do-gooders could drive up the prices of said tokens.

Is the market choosing the most energy-efficient cryptoasset when there's virtually zero switching cost and plenty of substitute assets? No. That market, at least, is choosing the least energy-efficient alternative; and it appears that nothing but a pan-industry "you can only waste renewable energy on that speculative margin" could be expected to result in capital allocation with long-term environmental security as a rational primary objective.

Firm A: wildly profitable, stock price through the roof, dumping waste at zero cost

Firm B: profitable, blue chip, 100% green, files (e.g. GRI) Corporate Sustainability Reports

Which investors are factoring in the most important long-term factors in portfolio development? Markets are not optimizing for sustainability: policy is necessary to counterbalance profit motive.

Are we just using markets wrong?

Nobody likes penalties more than incentives.

Water has been financialized for years in the western US. Developers buy and sell water rights from farmers, farmers own farms where they don't grow crops because the water is going to condos. Water rights are bought and sold and traded all the time.

Water rights have been finacialized for thousands of years. Qanats, which are underground sort of canals (https://en.wikipedia.org/wiki/Qanat) were built in Persia to distribute water to agriculture and incentivized by government

"It was an Achaemenid ruling that in case someone succeeded in constructing a qanat and bringing groundwater to the surface in order to cultivate land, or in renovating an abandoned qanat, the tax he was supposed to pay the government would be waived not only for him but also for his successors for up to 5 generations"

Thanks. I love hearing bits of interesting history like that. I'd never heard of Qanats.

It's a good scrabble word

Or the farmers grow alfalfa once every five years simply to avoid losing their water rights.

Because (heating) Oil and Pork Belly weren't life necessities?

The previous situation where almond farmers got unlimited water for free and some cities couldn't get enough water at any price was worse.

It’s still like that, except now they’ll be able to sell futures contracts for it.

Important to note that CA almonds are mostly grown for global export. This ties in with GDP.

Hydraulic despotism remains the best despotism.

Immortan knew his Wittfogel.

Next up: Trade in water is trade in grain, corn, dairy, meat.

120 gallons of water for an egg 4000 gallons of water for a bushel of corn 11000 gallons of water for a bushel of wheat

That is..2 lbs or baked bread is 1000 gallons of water.

You are wearing 650 gallons of water if you were wearing a cotton shirt.

And wait for this: 135000 gallons of water for a ton of alfafa(which btw we exported cheap to China during California drought because it was cheaper to send that in empty shipping containers going back than truck it to a California dairy farms)

Anybody has read the CME contract specs in detail? One thing I don't understand is how can you trade a commodity that's all about transportation costs.

In some parts of the world water is literally free, you only have to pay for the connection. Whereas in others there's a shortage and people have to resort to clever engineering, like Israel with desalination or Libya with the Great Man-Made River project. In both of those cases the problem would be trivial if global transportation costs were zero.

Even with oil it is a thing - there's a different spot price and different forward curve at each tradeable terminal. For example the recently famous negative prices (and the monster contango) were observed only in Cushing, OK; other ports were always > 0. With water the difference would be much larger.

The contract is intended to track the Nasdaq Veles California Water Index. From the FAQ:

"4. What is the Nasdaq Veles California Water Index?

Nasdaq and Veles Water have partnered with WestWater Research, LLC, the leading economic and financial consulting firm in water trading, to develop the Nasdaq Veles California Water Index.

This index was launched by Nasdaq in October 2018 and tracks the price of water rights transactions (leases and sales) across the five largest and most actively traded regions in the state of California, including surface water and four adjudicated groundwater basins. NQH2O utilizes WestWater’s WaterlitixTM database as the source for the underlying data."

https://www.cmegroup.com/education/articles-and-reports/nasd...

It's based on an acre of California water one foot deep and cash-settled so that, you see, nobody must deliver or receive actual H2O.

Crude oil (like almost all other commodity futures) is also traded based on local physical benchmarks, WTI at the Cushing, Oklahoma storage facility for the price you see quoted for U.S. oil.

So it's really "Californian water", and even that may not be very accurate (it's a big state), one would have to study what exactly goes into the index with what weight.

I wonder if it will help the farmers in the region hedge their production and also would it improve price discovery. The open interest will tell us.

PS. Cushing (the terminal for west texas intermediate) is in Oklahoma.

>> PS. Cushing (the terminal for west texas intermediate) is in Oklahoma.

Oops of course you're right, thanks. Changing in the comment. Like you I also wonder if these contracts will take off.

Typically, one transports the water within another product. Alfalfa, for example:

https://www.theguardian.com/us-news/2019/mar/25/california-w...

That only works if you have unlimited amounts of unused fertile soil at the transport origin.

Western Washington has a massive excess of water but can't use this technique to "send it" anywhere... the clay-heavy soil isn't much good for industrial-scale crop production (aside from trees of course).

> One thing I don't understand is how can you trade a commodity that's all about transportation costs.

It's a big hoax, like all cash-settled futures.

Wall Street doesn't mind that.

Michael Burry was way ahead on this too.

Also, fun to see the expected seething at anything related to finance here :)

this is interesting. theoretically, more liquidity should lead to more efficiency in the distribution of a commodity . in practice, there are obvious exceptions to this (the hunt brothers & silver, the oil markets from 2006-2010 etc).

I also wonder how a futures contract with instant liquidity interplays with standard water bills, which as far as I know are billed at rates that get adjusted yearly at most (at least here in LA).

This is a unique commodity in that it literally falls from the sky. I don’t believe we have any tradable commodities that can be obtained, rather easily, for free. Yes, I know we’re talking about massive amounts of water and aquifers, but I can picture Wall Street banks setting up huge rain catchers and desalination plants to try and profit from this market.

Potable water and desalination is a very expensive problem.

Desalination @$0.45/m^3 from Hyflux (Singapore Contracts) would be $554/acre foot - roughly the price we see on the spot markets.

That isn’t how commodity markets (which aren’t on wall st btw) work. The traders don’t now frames or, except by mistake, barges fill of coal; they sit in the middle and rarely touch it.

A farmer can sell their crop before it has grown to improve cash flow, chocolate companies can buy cocoa that they will need next year so they have a predictable price and these guys sit in the middle.

I didn’t say commodities traded on Wall Street, and I know usually they’re middlemen.

I’m saying Wall Street banks are the kinds of investors to sell delivery contracts and then find a way to gather water cheaply and actually deliver it (for a nice profit). Banks aren’t always just middlemen.

The contract is cash-settled so there's no opportunity to pipe in water like that.

Actually in many Western states (Oregon for one) it is illegal to capture and store rainwater. There is one narrow and very recent exception for capture using the roof of a permitted dwelling, but if you build a pond or a lake or any kind of structure for rainwater collection purposes you are in fact breaking the law.

Water rights are bonkers-crazy.

Feels like someone has been reading the water knife

thanks for the suggestion. ordered on amazon :)

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