Water Futures Traded On Wall Street Signals A Scarcity That May Only Worsen

For the first time in the history of the United States, water is valued like gold. Not only because it’s a necessary component of all life on Earth, but because it’s now being traded on the commodities market.

American financial markets have been trading in commodities since the Civil War. In 1864 futures of wheat, corn, cattle, and pigs motivated exchanges with the  Chicago Board of Trade (CBOT). The Commodity Exchange Act of 1936 added orange juice, bacon, pig iron, and other cornerstones of the commodities broker’s breakfast to the market.

Water futures officially began trading on the Chicago Mercantile Exchange in early December 2020. The trading floor opened up with $1.1 billion in contracts tied to water prices in California, Bloomberg News reports.

Water is now a commodity, purchased and sold on Wall Street.
Source: Pexels
Water is now a commodity, purchased and sold on Wall Street.

What does it mean that water is traded as a commodity?

Commodities markets derive their value from scarcity. The less gold there is in the world, the more valuable it becomes out of rarity. Now the same valuations is being applied to water.

If water is will be hard to come by in California next year, and for some people it will be, it will see a higher price on the commodities market in the current year.

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

Water scarcity will drive its price up in coming years.
Source: Pexels
Water scarcity will drive its price up in coming years.

Who is affected by water being traded as a commodity?

According to Yale Environment 360, one motivation for putting water on the commodities market is to give farmers and municipalities a clearer idea of how to factor in water costs to their yearly operations.

“Those who need to buy extra water in a dry year, when prices are naturally higher, can now bet on futures contracts to offset the higher prices they might have to pay in the water market down the line,” CNN reports.

As water becomes more expensive, so will other basic necessities, like food.
Source: Pexels
As water becomes more expensive, so will other basic necessities, like food.

In contrast, allowing investors and stock markets to profit off this scarcity while others suffer has been criticized as playing chance with a basic human right.

“What this represents is a cynical attempt at setting up what’s almost like a betting casino so some people can make money from others suffering,” Basav Sen, climate justice project director at the Institute for Policy Studies, told Earther. “My first reaction when I saw this was horror, but we’ve also seen this coming for quite some time.”

The western U.S. is expected to suffer water shortages in 2021.
Source: Pexels
The western U.S. is expected to suffer water shortages in 2021.

What could happen next?

We may not have to ask that question, as the eventuality of commodities trading has played out in American literature and film for nearly as long as markets themselves.

During a year when water is expected to be plentiful and prices are down, would unscrupulous investors hide or destroy reservoirs of fresh water like oranges in John Steinbeck’s “The Grapes of Wrath.” Would they hide and redirect its course, like the shadowy figures in Roman Polanski’s 1974 film, “Chinatown?” Will the traders find themselves at the whims of mother nature, one day standing on the stability of wealth like Mortimer and Randolph Duke in 1983’s “Trading Places,” the next struggling to afford basic necessities and living on the streets?

Likely not.

Water is only expected to become more rare in the future, with two-thirds of the world’s population facing shortages by 2025. Meanwhile, it’s becoming more important to industrial expansion. Hydroelectric power and fracking, beer brewing and semiconductor manufacturing all require water.

Water is now valued the same way investors treat gold, wheat, or oil.
Source: Pexels
Water is now valued the same way investors treat gold, wheat, or oil.

“Water scarcity is one of the biggest challenges of the 21st century,” Tim McCourt, global head of equity products and alternative investments at CME Group, told CNN.

As water becomes more expensive, we can expect everything that depends on water to pay the price.

“The implications are dire: the destruction of aquatic ecosystems, the extinction of innumerable species and the risk of regional and international conflicts — the much-dreaded ‘water wars’ of the twenty-first century,” writes Frederick Kaufman in ?Nature. “What will Egypt do when Ethiopia dams the Blue Nile? What will happen when Yemen becomes the first country to run out of water? The short answer: nothing good.”

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