The value of water on the stock market is skyrocketing

The value of California water, traded on U.S. stock exchanges since December 2020, is hitting new highs due to the fires and droughts gripping the Golden State, among other things pointing to higher prices for fruits and vegetables that Quebec imports from this region.

In two months, the price of water futures traded on the Chicago Stock Exchange and Nasdaq jumped 30% from $792 to $1,144 per acre-foot, a metric equivalent to $1.2 million liters.

In California, when large consumers—municipalities, farmers, and industrialists—have used their rights of first appropriation (the amount of water allocated to them initially), they can then turn to the stock markets. Since December 2020, water futures intended for these major consumers are thus traded on the Chicago Stock Exchange and the Nasdaq. Futures contracts are financial instruments which aim to fix the price of deliveries of a resource in advance; they are notably used for oil, metals and grains.

“This increase in the price of water contracts is part of a summer situation and in a context of the end of the drought, or even its continuation, with damaged aquifers”, explains Frédéric Lasserre, expert in water geopolitics and Director of the Quebec Council for Geopolitical Studies at Laval University.

Historical droughts, historical prices

California’s 17 major reservoirs are indeed at historic lows. Eleven of them do not reach 40% of their maximum capacity, according to data published daily by the State. Some (like those at Pine Flat and Trinity, located in central and northern California, respectively) are only at a quarter of their maximum capacity.

Droughts have increased in the state in recent years. Precipitation was extremely rare in 2014 and 2015, as in 2020 and 2021.

This reality stimulates the demand for water from the agricultural sector which, through its use of irrigation, “supposes a very mechanical rise in prices in the short term”, points out the specialist in geopolitics of water.

Last year alone, the amount of surface water used by California agriculture fell 5.5 million acre-feet (6.8 billion cubic meters) compared to a drought-free year. To fill this gap, the farms then pumped an additional 4.2 million acre-feet of groundwater.

A study released this week by the Public Policy Institute of California looked at the impact of water stress and water scarcity on the San Joaquin Valley. This region of central California alone produces nearly half of the fruits and vegetables in the United States.

So far, farmers in the region have had to fallow regarding 100,000 acres of farmland. Experts believe the drought might push that number to 500,000 by 2040.

The current trend suggests that an increasing number of farmers may have to turn to the stock markets due to water scarcity, says Lasserre: “A farm, with medium priority rights, might in the medium term to see part of its water needs henceforth not assured through its rights, which would force it to turn to the free market. This would therefore suppose an increase in its costs, which it would most likely pass on in its prices. »

In the United States, the fact of letting the free market determine the price of water caused a reaction. Two elected Democrats, Representative Ro Khanna and Senator Elizabeth Warren, also tabled a bill last March, the Future of Water Act, which would prohibit trading in water futures contracts on the various stock markets.

When introducing the bill, Senator Warren explained her approach as follows: “Water is a human right, and Wall Street should not be allowed to use this vital resource to make profits at the expense of American workers. One of our most essential resources must not be auctioned off to the highest bidder. »

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