Water as an asset class is hereThe technology and infrastructure for creating an integrated global market in water and water rights is advancing...Water as an asset class is here
The technology and infrastructure for creating an integrated global market in water and water rights is advancing quickly, with promising new ventures entering the market. Give it another decade, and exchange-traded funds for water and water rights will be part of the new normal for investors
20 Dec 2021 | Willem H. Butler
Just over a decade ago, I predicted the arrival of water as an asset class. I foresaw “a massive expansion of investment in the water sector, including the production of fresh, clean water from other sources (desalination, purification), storage, shipping and transportation of water.” This would result in “a globally integrated market for fresh water within 25 to 30 years. Once the spot markets for water are integrated, futures markets and other derivative water-based financial instruments – puts, calls, swaps – both exchange-traded and OTC [over-the-counter] will follow. There will be different grades and types of fresh water, just the way we have light sweet and heavy sour crude oil today.”
In fact, I believed that water would eventually be “the single most important physical-commodity-based asset class, dwarfing oil, copper, agricultural commodities and precious metals.”
Ten years later, the future is now – though not quite what I expected.
In December 2020, the Chicago Mercantile Exchange Group created the first futures market in water. Cash-settled water futures with a maximum contract period of two years are now traded on the CME Globex electronic trading system. I view this development as somewhat premature. For futures markets (and markets for other derivatives like put and call options) to function properly, the underlying spot market – in this case the spot market for physical water or water rights – should be liquid and transparent.
CME Group’s futures market is based on the Nasdaq Veles California Water Index, which tracks the cash price of physical water rights in California, based on transactions in surface water and in four groundwater markets. Because the local and regional water supplies often are not connected, let alone fully integrated, the spot market underlying the futures market is too segmented; it does not represent a single, homogeneous commodity or asset. Today’s spot markets for water and water rights thus are too illiquid and non-transparent to support an economically and socially useful futures market.
But there is hope. The regional and global integration of physical water supplies – and the associated spot markets for water and water rights – is making spectacular progress. Two ongoing developments stand out. One is Project Greenland, created and sponsored by Thomas Schumann Capital, in partnership with North Atlantic Research and Survey. Under its Iceberg Management and Water Extraction Programme, suitable free-floating North Atlantic icebergs weighing 1.2 to 1.4 million tons are towed to an operational location in Scotland, where the ice and water are prepared for international transportation.