Economic Tidbits

Futures Market for Water

Nebraska is the nation’s largest irrigated state with roughly 8.5 million acres of irrigated crop ground. As such, Nebraska is often at the forefront on the use of new technologies, management techniques, and conservation measures in utilizing this natural resource. The innovation includes unique marketing arrangements created by Natural Resources Districts (responsible for managing groundwater) and irrigation districts (responsible for distributing surface water) to move and allocate water amongst irrigators. However, when it comes to water markets, Nebraska doesn’t hold a candle to the second-largest irrigated state, California. And now California has taken another step forward with the creation of a futures market for water.

The CME Group and Nasdaq have announced plans for a new futures contract based on the Nasdaq Veles California Water Index. The contract will be launched late this year pending regulatory review. The two entities say the contract “will be an innovative, first-of-its-kind tool to provide agricultural, commercial, and municipal water users with transparency, price discovery, and risk transfer–all of which can help to more efficiently align supply and demand of this vital resource.” With a futures market an irrigator or manufacturer could lock in or hedge the cost of water to avoid price increases or fluctuations. Each contract will represent 10 acre-feet of water and will be settled based on the Nasdaq Veles California Water Index. The index sets a weekly benchmark price for water rights in California based on transaction prices in California’s five largest and most actively traded water markets The value of the index reflects a weighted average price of water for sales and leases in these markets.

The foray into futures markets for water should be watched closely by Nebraska irrigators, water managers, and users. Nebraska irrigators have been cautious of water markets fearing they could result in the use of water moving from agriculture. California’s evolving water markets should help illuminate the pros and cons of these kinds of markets. More information can be found at: https://www.cmegroup.com/trading/equity-index/us-index/nasdaq-veles-california-water-futures.html?redirect=/waterfutures.

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