Traders take advantage of scarcity: Dirty speculation about clean drinking water

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It’s been possible to speculate with water on the Chicago Stock Exchange for two and a half years. Speculations for wheat, oil, gas, gold, copper and zinc have been going on for a long time. Now, when it comes to such a vital commodity as water, the same can be done especially in California.

What makes water attractive to speculators is the high volatility of prices, affected by droughts, fires and floods. Also, water is an opaque market where price information is almost nonexistent. All the qualities that attract speculators. Typically, a trader does not own the water they are betting on, but merely speculates on the price from afar. About rising or falling prices.

How do retailers do this?

Traders use derivatives to bet on the price of the resource at various future times. These derivatives are primarily known as futures, which is a type of forward contract that obliges two parties to exchange an asset at a specified time and price. This transaction must be paid in advance, regardless of the actual price at the end of the contract.

Traders in these derivatives include hedge funds, proprietary trading firms and retailers, as well as asset managers and family offices. Matthew Diserio, director of New York hedge fund Water Asset Management, makes no secret of his belief that water in the US is “the largest emerging market on earth” with “$1 trillion in market opportunity”.

Future» Of water

But how do these market participants bet on the water? Essentially, traders are targeting California companies’ water rights. For example, you can buy water rights futures from companies like Veles on the Chicago Mercantile Exchange (CME). Because the state of California allocates a limited supply to areas and users who need it most, traders acquire rights to tradable water to exploit this shortage and sell the rights to various claimants. And also make profit.

When it comes to betting on water, the main argument is scarcity: by 2050, one in four people will live in a famine-affected country. Water prices will inevitably rise due to global warming, scarcity of water in the land and scarcity of fresh water. This encourages investors to invest in water in the long run. “Blue gold” is the world’s most coveted resource.

Is property a universal right?

The commercialization of water raises ethical questions: How can one speculate on an essential commodity at the risk of skyrocketing in price and excluding people who can no longer afford access? Derivatives can manipulate prices: if too many bets accumulate on rising prices, futures contracts will signal this to the market and the price of the resource will rise artificially.

According to the United Nations (UN), more than 2.2 billion people worldwide currently do not have access to clean drinking water. The UN fears that these speculative tools will exacerbate the problem. A link has already been established between speculation in staple foods and food crises. Between 2008 and 2010, hedge funds are said to have increased cocoa prices by 150 percent.

Speculation also led to food riots, driving wheat and soybean prices higher in 2007 and 2008.

Source :Blick