[HN Gopher] CME, Nasdaq to Launch Water Futures Contract
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CME, Nasdaq to Launch Water Futures Contract
Author : tumblerz
Score : 51 points
Date : 2020-09-23 12:12 UTC (1 days ago)
(HTM) web link (www.wsj.com)
(TXT) w3m dump (www.wsj.com)
| H8crilA wrote:
| Anybody has read the CME contract specs in detail? One thing I
| don't understand is how can you trade a commodity that's all
| about transportation costs.
|
| In some parts of the world water is literally free, you only have
| to pay for the connection. Whereas in others there's a shortage
| and people have to resort to clever engineering, like Israel with
| desalination or Libya with the Great Man-Made River project. In
| both of those cases the problem would be trivial if global
| transportation costs were zero.
|
| Even with oil it is a thing - there's a different spot price and
| different forward curve at each tradeable terminal. For example
| the recently famous negative prices (and the monster contango)
| were observed only in Cushing, OK; other ports were always > 0.
| With water the difference would be much larger.
| malloryerik wrote:
| The contract is intended to track the Nasdaq Veles California
| Water Index. From the FAQ:
|
| "4. What is the Nasdaq Veles California Water Index?
|
| Nasdaq and Veles Water have partnered with WestWater Research,
| LLC, the leading economic and financial consulting firm in
| water trading, to develop the Nasdaq Veles California Water
| Index.
|
| This index was launched by Nasdaq in October 2018 and tracks
| the price of water rights transactions (leases and sales)
| across the five largest and most actively traded regions in the
| state of California, including surface water and four
| adjudicated groundwater basins. NQH2O utilizes WestWater's
| WaterlitixTM database as the source for the underlying data."
|
| https://www.cmegroup.com/education/articles-and-reports/nasd...
|
| It's based on an acre of California water one foot deep and
| cash-settled so that, you see, nobody must deliver or receive
| actual H2O.
|
| Crude oil (like almost all other commodity futures) is also
| traded based on local physical benchmarks, WTI at the Cushing,
| Oklahoma storage facility for the price you see quoted for U.S.
| oil.
| H8crilA wrote:
| So it's really "Californian water", and even that may not be
| very accurate (it's a big state), one would have to study
| what exactly goes into the index with what weight.
|
| I wonder if it will help the farmers in the region hedge
| their production and also would it improve price discovery.
| The open interest will tell us.
|
| PS. Cushing (the terminal for west texas intermediate) is in
| Oklahoma.
| malloryerik wrote:
| >> PS. Cushing (the terminal for west texas intermediate)
| is in Oklahoma.
|
| Oops of course you're right, thanks. Changing in the
| comment. Like you I also wonder if these contracts will
| take off.
| tumblerz wrote:
| Typically, one transports the water within another product.
| Alfalfa, for example:
|
| https://www.theguardian.com/us-news/2019/mar/25/california-w...
| marcinjachymiak wrote:
| Michael Burry was way ahead on this too.
|
| Also, fun to see the expected seething at anything related to
| finance here :)
| jonahbenton wrote:
| Oh goody! Nothing like the financialization of life-necessities
| to warm the cockles of the heart of big capital.
| kube-system wrote:
| Hunting and gathering is overrated.
| WealthVsSurvive wrote:
| Yes, hunting and gathering, the obvious result of not
| privatizing our water.
| kube-system wrote:
| Public or private, we still ascribe financial value to it.
| cashewchoo wrote:
| This might make it easier to quantify the effects of
| groundwater depletion and climate change. If we see that
| futures priced further out are more expensive, that says
| something.
|
| In general, by the time something gets to being turned into
| financial instruments like this, the actual step from whatever
| state it was in prior to a regulated, standardized, liquid,
| public contract is generally good. Light is an excellent
| disinfectant.
| Klinky wrote:
| Except the market will lack perfect information, likely not
| price in long-term environmental damage, and encourage wealth
| hoarding via the literal pooling of wealth. Then you'll get
| crazy speculation, with the markets experiencing adverse
| liquidity events resulting in spectacular splash crashes
| afterward.
|
| Markets quite often do not help usher in eras of rationale
| and logic. A lot of that goes out the window when "there's
| money to be made".
| dereg wrote:
| I do not understand your point as these contracts are
| settled in cash. Do you care to elaborate?
| [deleted]
| h2o_enron wrote:
| I share the same concerns. Market economics did not
| prevent e.g. Enron from scalping millions of dollars out
| of CA energy markets while rolling blackouts resulted in
| powerless hospitals.
|
| Speculation - not actual supply or demand - in oil
| markets drove the price of gasoline from $1 to $4 a
| gallon (and now back to $2). Everyone else paid for the
| inefficient market finding a false equilibrium pumped up
| by perception of security.
|
| (Financial deregulation of Wall St in 1999 preceded the
| popping of the dotcom asset bubble by very little lag.
| And then CDS in 2005 and the Great Recession and now this
| whole mess: and the only solution is to pay cronies who
| didn't hoard enough cash?)
|
| Sugar water companies can afford to push the price of
| water higher while the external health and commodity
| costs are passed onto everyone else.
|
| Markets have thus far failed to solve for long-term
| environmental damage: their incentive is to externalize
| costs in order to maximize _short-term_ profit.
| smileysteve wrote:
| Because (heating) Oil and Pork Belly weren't life necessities?
| fred_is_fred wrote:
| Water has been financialized for years in the western US.
| Developers buy and sell water rights from farmers, farmers own
| farms where they don't grow crops because the water is going to
| condos. Water rights are bought and sold and traded all the
| time.
| calvinmorrison wrote:
| Water rights have been finacialized for thousands of years.
| Qanats, which are underground sort of canals
| (https://en.wikipedia.org/wiki/Qanat) were built in Persia to
| distribute water to agriculture and incentivized by
| government
|
| "It was an Achaemenid ruling that in case someone succeeded
| in constructing a qanat and bringing groundwater to the
| surface in order to cultivate land, or in renovating an
| abandoned qanat, the tax he was supposed to pay the
| government would be waived not only for him but also for his
| successors for up to 5 generations"
| wmf wrote:
| The previous situation where almond farmers got unlimited water
| for free and some cities couldn't get enough water at any price
| was worse.
| koolba wrote:
| It's still like that, except now they'll be able to sell
| futures contracts for it.
| User23 wrote:
| Hydraulic despotism remains the best despotism.
| bluedevil2k wrote:
| This is a unique commodity in that it literally falls from the
| sky. I don't believe we have any tradable commodities that can be
| obtained, rather easily, for free. Yes, I know we're talking
| about massive amounts of water and aquifers, but I can picture
| Wall Street banks setting up huge rain catchers and desalination
| plants to try and profit from this market.
| gumby wrote:
| That isn't how commodity markets (which aren't on wall st btw)
| work. The traders don't now frames or, except by mistake,
| barges fill of coal; they sit in the middle and rarely touch
| it.
|
| A farmer can sell their crop before it has grown to improve
| cash flow, chocolate companies can buy cocoa that they will
| need next year so they have a predictable price and these guys
| sit in the middle.
| bluedevil2k wrote:
| I didn't say commodities traded on Wall Street, and I know
| usually they're middlemen.
|
| I'm saying Wall Street banks are the kinds of investors to
| sell delivery contracts and then find a way to gather water
| cheaply and actually deliver it (for a nice profit). Banks
| aren't always just middlemen.
| malloryerik wrote:
| The contract is cash-settled so there's no opportunity to
| pipe in water like that.
| andrewmcwatters wrote:
| Potable water and desalination is a very expensive problem.
| tony_cannistra wrote:
| This has been somewhat of a long time coming. Water's been on the
| financial brain for a long time now. From 2012-2018 Harvard's
| $39bn endowment spent $305m on California vineyards that had
| reliable access to groundwater[0]. It wasn't for the wine.
|
| [0]: https://www.businessinsider.com/harvard-california-
| vineyards...
|
| edit: correct dates.
| bromquinn wrote:
| this is interesting. theoretically, more liquidity should lead to
| more efficiency in the distribution of a commodity . in practice,
| there are obvious exceptions to this (the hunt brothers & silver,
| the oil markets from 2006-2010 etc).
|
| I also wonder how a futures contract with instant liquidity
| interplays with standard water bills, which as far as I know are
| billed at rates that get adjusted yearly at most (at least here
| in LA).
| ghshephard wrote:
| I find it interesting that the cost of water is pretty close to
| the cost of Desalination. 1 acre foot = 1233 m^3. Hyflux has
| contracts in Singapore (on a multi-year committed contract at
| volume) Desalinated water at $0.45/m^3 or $554/acre foot, which
| is roughly where the spot market right now is for water.
|
| I wouldn't gave guessed they would be that close, but it bodes
| very well for inexpensive energy / improvements in desalination
| technology being a source of water.
| bawolff wrote:
| Feels like someone has been reading the water knife
| supernova87a wrote:
| I'm afraid that the dispersal of responsibility among many
| different parties who benefit under archaic "riparian rights"
| laws that are totally outdated and unable to be changed because
| no one cares enough to build the political momentum means that
| this issue will fester like climate change. And even more than
| climate, the emotions driving the issue (such as in California)
| are tangible and exploitable to favor incumbent users.
|
| In the meantime as long as it continues, the situation be taken
| advantage of by those who know how to find holes in the system
| for concentrated private gain.
| dcolkitt wrote:
| Nat gas is subject to pretty wild discrepancies between
| regional markets. It's not unusual for the price to go negative
| in the Rocky Mountain region during many summers.
|
| The market mostly seems to work fine. Henry Hub is somewhat
| arbitrarily picked as the most canonical price point. And then
| a lot of price discovery occurs in robust "basis" markets (i.e.
| region-specific contracts).
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(page generated 2020-09-24 23:01 UTC)