CME, Nasdaq to Launch Water Futures Contract

Market will be first of its kind for world’s most crucial commodity, organizers say

Farmers are known to pray for rain. Now they can hedge against unanswered invocations. Exchange operators CME Group Inc. and Nasdaq Inc. are planning to launch a futures contract later this year that will allow farmers, speculators and others to wager on the price of water.

The market will be the first of its kind, its creators say, putting water on the board for investors alongside other raw materials like crude oil, soybeans and copper.

“You have the most important commodity in the world and everything else is listed except the water price,” said Lance Coogan, chief executive of Veles Water Ltd., which created a water-price index to which the futures will be tied.

Besides allowing farmers, manufacturers and other big water users to protect against price swings, water futures can serve as a risk-management tool for other investors, Mr. Coogan said.

They could be used to hedge against inflation or climate change or simply serve as an asset that is uncorrelated to others, he said.

The futures will reflect transactions in the market for water in California, which a huge population and vast agricultural lands make America’s thirstiest state. Water futures contracts will be priced in dollars an acre-foot, which is the volume required to cover an acre a foot deep, about 325,851 gallons.

Last week, an acre-foot of water cost $526.40, according to the Nasdaq Veles California Water Index. That is a 25% decline since the start of summer. Prices tripled in spring due to a historically dry February in California.

The prices are derived from prior-week purchases in markets for California surface water and in four groundwater basins in the state. Nasdaq and London-based Veles launched the index in October 2018.

Nasdaq, best known for listing tech stocks, had been pitched water pricing before, but Veles was the first to produce a data set of actual transactions with volume and history sufficient for a pricing index, said Patrick Wolf, senior manager for Nasdaq Global Indexes.

The aim was to present a reference point for buyers and sellers in an otherwise opaque market.

“They might know a few other deals in their local part of the market,” Mr. Wolf said. “They don’t have access to the full market of buyers.”

Layering futures trading on top of the index was the next step. Trading will be hosted by CME, which makes options and derivatives markets in assets ranging from stocks to livestock, lumber and cheese.

Water futures will be available for trading up to two years out over 10 monthly contracts: one every three months along with the two most immediate non-quarterly months. Each contract will stand for 10 acre-feet of water.

Unlike in markets for many commodities, buyers won’t have to find somewhere to put 3.3 million gallons of water if they hold an expiring water futures contract. Whereas a buyer of a West Texas Intermediate crude future in the same situation must take delivery of 1,000 barrels of crude at a pipeline junction in Cushing, Okla., water wagers are purely financial and squared up with cash.

“There’s no big water fountain like there would be for oil in Cushing,” Mr. Wolf said.

Had there been water futures, a farmer who bought summer-dated futures at the prevailing price months earlier could have pocketed big profits when drought hit and prices soared. Those gains could then be used to offset the higher cost of buying actual water.

“You’re just moving dollars so it will be relatively straightforward to trade and to settle,” said Tim McCourt, CME’s head of equity index and alternative investment products.