You are kindly ignoring speculation. What you presented is an efficient market hypothesis, however markets are not efficient. They invite speculation bubbles and they do crash.
Regarding this contract, it is financially settled. So there is no actual delivery of water, and it merely offers you an exposure to already existing prices of water in California.
Meanwhile the reality of the average person on this planet doesn't have anything to do with the reasons for the largest trades on "the markets". So are those trades irrelevant for your general opinion or those people?
"The market" has become a sick abomination of capitalism. Trades are being made by people or machines which have nothing to do with the actual products. Absurdly complex products made even the trading process some sick meta-thing.
And you say this is reality? This is the reality the market CREATES not the reality it is supposed to reflect.
If people hold houses to speculate with the price of real state, that makes the price I pay for the necessity of a place to live way more expensive than it would be otherwise (this is something I empirically know to be true).
Why doesn't the same logic apply to water once it's possible to speculate with it?
Consider water. Say a speculator drives the price way up in the sky to the extent that ordinary people are affected. What will said speculator do with these contracts? Either she will sell them (and the price rebounds), or she will be stuck with tons of water which is burdensome and incurs costs to store. So clearly she will want to sell this water and at that point be subject to the market demand for it.
In other words, undue speculation drives you out of business.
Now, regarding this future contract it is financially settled based on the actual index value of what water costs. So it's not capable of being driven by silly speculation at all.
...isn't that one of the problems with housing? It already allows for speculation, and in addition to that, it's heavily biased towards people speculating in one direction: up. People can be leveraged up to 20x (aka. 5% down payment), whereas for stocks it's limited to 2x[1]. There's also no meaningful way to short housing prices. You can't short-sell a house, and there aren't derivatives for housing (futures/options). The latter would also help increase supply because speculators can speculate on housing without tying up the underlying asset (ie. stories of speculators buying houses and leaving them vacant because they don't want to deal with the hassle/risk of tenants).
[1] https://www.sec.gov/reportspubs/investor-publications/invest...
(Spoiler: there are no bubbles as they are commonly understood.)