In a first, water futures to start trading on Wall Street amid fears of scarcity

A scenic view of Gilmore Lake in California, USA. (PC- Facebook)

With Chicago-based CME Group Inc all set to launch contracts linked to the $1.1 billion California spot water market, consumable water is joining gold, oil and other commodities that are traded on Wall Street.

Following this, farmers, hedge funds and municipalities will be able to bet on potential water scarcity starting this week. CME expects that this will enable water users to better align with supply and demand.

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Earlier in September, the contracts were first announced amid the heat and wildfires ravaged the US West Coast, with an aim to serve as a hedge for California’s biggest water consumers against skyrocketing prices.

"Climate change, droughts, population growth, and pollution are likely to make water scarcity issues and pricing a hot topic for years to come. We are definitely going to watch how this new water futures contract develops," Bloomberg quoted RBC Capital Markets managing director and analyst Deane Dray as saying.

While expressing his concern, global head of equity index and alternative investment products at CME -- Tim McCourt -- pointed that the idea of managing risks associated with water is certainly increased in importance. He cited that almost two-thirds of the world could face water shortages in just four years.

Nasdaq Veles California Water Index, which started two years ago, already has set a benchmark spot price of water rights in California. It underpinned the volume-weighted average of the transaction prices in most actively traded water markets.

In the contracts that are to be traded will include quarterly ones through 2022, with each representing roughly 3.26 million gallons in 10 acre-feet of water area.

Nasdaq's head of product development Patrick Wolf opined that this is kind of 'best guess' for a farmer who wants to know what water will cost in California six months from now.

Meanwhile, CME declined to identify potential market participants. However, it expects that the exchange has heard from California agriculture producers, public water agencies, utilities as well as institutional investors like asset managers and hedge funds, reports the business site.

"Without this tool people have no way of managing water supply risk. This may not solve that problem entirely, but it will help soften the financial blow that people will take if their water supply is cut off," Bloomberg quoted Idaho-based Landry Boise as saying.