CME and Nasdaq Create Water Futures Contract

Betting on the Price of H20

Water is arguably the most important commodity in the world, and a new market will soon allow farmers, manufacturers, speculators, and others to bet on its price. Investors have long wagered on the price of materials like crude oil, soybeans, and copper, and soon they will be able to do the same with water.

CME (CME) and Nasdaq (NDAQ) are launching a water futures contract later this year, which will be the first of its kind. Water futures will be able to help industries that use large amounts of water to hedge against price changes.

How Water Futures Will Be Structured

The water futures will be tied to the price of water in California. The state has a large population and a robust agriculture industry, both of which use large amounts of water.

Water futures contracts will be priced in terms of dollars per acre-foot. This is equivalent to about 325,851 gallons, or the amount of water needed to cover an acre with water one foot deep. Last week, the price of an acre-foot of water was $526.40.

Looking Ahead

Water scarcity is a growing risk for agriculture and other industries. By some estimates, almost two-thirds of the world’s population will experience water shortages by 2025.

CME and Nasdaq’s water futures will be launched toward the end of the year’s fourth quarter after a regulatory review. Hopefully, the new initiative will help align supply and demand of a critically important resource.

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