Two billion people now live in nations plagued by water problems, and almost two-thirds of the world could face water shortages in just four years. The United Nations has long warned that human-driven climate change is leading to severe droughts and more flooding, making water availability increasingly less predictable. In California, the most recent acute dry spell stretched from December 2011 until March of last year. The direst effects took hold in July 2014, with 58% of the state’s land suffering “exceptional drought,” leading to crop and pasture losses and other water emergencies. Water also recently joined gold, oil, and other commodities traded on wall street.
Beginning
I never thought I’d have to say this but there is a fear that there is a lack of freshwater resources to meet the standard water demand. A recent article from Bloomberg that caught my attention almost immediately, stated that “Water joined gold, oil, and other commodities traded on Wall Street, highlighting worries that the life-sustaining natural resource may become scarce across more of the world. What this means is that Farmers and hedge funds are now able to hedge against — or in other words, bet on –future water availability in California, the biggest U.S. agriculture market and the world’s fifth-largest economy. Then a few days later my friend Beatriz on Instagram tagged me in an article from the Fresnobee in California with the headline reading “Toxic tap water in Latino towns is a legacy of racist policies..” and so I thought well I have to talk about this because if you connect these two articles that came out within the same week it’s evident that there’s a real growing concern of a water shortage and the ones that are already being affected by it are immigrant, low-income families.
In California’s San Joaquin Valley, the nation’s leading agricultural region, Latinos make up the great majority of farmworkers. They are also disproportionately likely to live in communities where drinking water supplies are contaminated with elevated levels of nitrate, a toxic chemical that primarily comes from polluted farm runoff. Agricultural runoff from fertilizer and manure leaches into groundwater, contributing to some of the highest levels of nitrate pollution in community water systems in the country. Nitrate contamination of drinking water is widespread in California: Tests by utilities have detected some level of nitrate in the finished water supplies for more than two-thirds of all Californians.
But it’s worse in the eight counties of the San Joaquin Valley, and worse still in majority-Latino communities in those counties. Between 2003 and 2017, tests detected elevated levels of nitrate in the finished water of hundreds of the state’s towns and cities located in census block groups where the population was 50 percent Latino or higher. EWG analyzed California State Water Resources Control Board data on the Valley communities with nitrate levels in drinking water meeting or exceeding the federal legal limit. They found that almost six in 10 are majority-Latino. Latinos are also a majority in Valley communities with nitrate at or above half the legal limit, which is linked to an increased risk of cancer and other diseases.
HOW IT HAPPENS
In Joaquin Valley is this happens when nitrogen fertilizer and animal manure are applied to farm fields, rain washes nitrogen off fields and into sources of drinking water. Irrigation is the main culprit for nitrate contamination of groundwater: The water from extensive irrigation of cropland forces nitrogen from fertilizer and manure into and through the soil to pollute groundwater.
ECONOMIC IMPACT & HOW WATER FUTURES WORK
The economic impact can already be seen. The price of water in California has doubled in the last year, according to the Nasdaq Velez California Water Index. Experts assure that trading water in the futures market will allow better management of the future risk associated with this asset.
The US company CME Group will launch contracts related to California spot water, a market of 1.1 billion dollars. With the NQH2O ticker symbol, the price of water futures in California on December 7th was trading at about $ 486.53 per acre-foot, which is equivalent to 1,233 cubic meters. These futures contracts do not require physical delivery of water and are purely financial. They are based on the weekly price averaged across California’s top five watersheds through 2022. They are the first of their kind in the United States and were announced in September when the west coast of the country was devastated by heat and wildfires. They are supposedly intended to “serve as protection for California’s largest water consumers against rising prices and as an indicator of scarcity for investors around the world.”
The way these future contracts work is through an agreement between buyer and seller to swap water in exchange for a set price at a predetermined date in the future. But in this case, it will be a completely cash-based transaction. Nobody involved will have ten acre-feet of water delivered to them. And each contract will have a quarterly duration – so they will be settled in three months’ time.
So let’s say there is a contract for NQH2O (which again is the ticket symbol it’s trading under) for $500 that expires in three months. If heavy rainfall takes place, this can drive down the spot price. And if this proves to be the case when the contract expires, the buyer of the contract will be required to pay the difference between the current price and the agreed-upon price.
On the other hand, if the spot price of NQH2O has risen above the agreed-upon price when the contract expires, the seller pays the buyer the difference. For the average investor, this is pretty much a crapshoot. In the early months of this, the odds of a winning trade will probably be as likely as blackjack. gambling investors aside, this will also allow farmers and municipalities to hedge their bets on the future price of water… Or even the availability of water in Western states. In this new marketplace, those who need to buy extra water when prices are high, can now bet on futures contracts to offset higher prices in the future.
WHO REALLY BENEFITS FROM THIS?
The agriculture sector is the largest buyer of water in California during dry years. And water shortages have only been exacerbated as thirsty almond and pistachio growing has increased. Farmers know their land better than anybody else. Plus, they’ve already been forced to prepare for shortages and learn the complexities of the public market when they need more. These factors put farmers in a unique position to understand water futures contracts better than anyone else… And protect themselves from outsized increases in water prices.
Let’s be real though who really benefits from the new futures market? Imagine a well-connected investor betting on drought and a raised NQH2O spot price. If he had the means to temporarily limit access to water and its distribution, it could artificially increase the spot price… and make the immoral investor a good chunk of change. In the process, it could have damaging effects on crops, the price of food, and of course minorities like those in Joaquin Valley. Similar schemes have already been done in Australia.
THE SOLUTION
Water shortage and polluted water is a complex problem. Solving it will require tougher farm regulations and a lot of money to clean up polluted water systems. In 2019, California established the Safe and Affordable Drinking Water Fund, which was intended to provide $130 million a year for the next decade to communities to help rebuild or improve drinking water infrastructure. However, because of the pandemic that money was put on hold. It’s also uncertain how much will go into it because of how it’s funded.
State and local agencies also have plans to address pollution from farms. But these plans rely on monitoring fertilizer and manure use, and it will be decades before any regulation of agricultural activities gets put in place. Real regulations on farm pollution and dedicated funding for water systems that won’t disappear in an economic downturn are needed to fix this statewide problem.
CONCLUSION
China and the United States are the world’s main consumers of water. According to the United Nations, 2 billion people live in countries with serious problems of access to water. The agency estimates that in the next few years two-thirds of the planet could experience water shortages and millions of people will be displaced by it. With prices of water going up and no real solutions for polluted water, the rich will prevail and the minorities and low-income families, as usual, will be the ones to feel the effects of this which are already being seen. It’s important we stay informed in order to better educate, and demand change so that we are better prepared for not only what’s already happening today but also what’s to come in the future.
