An Overview

The world is currently facing a pandemic which has left everybody believe it to be the next world war. But, have we ever wondered about the water crisis and how it can even turn to be the World War all across the world? It is high time that we realise the disequilibrium faced between the supply and demand in water sector and start to take steps to dodge this to-be-war which is easily avoidable with some structural rules and regulations

With 71% of our planet under water, only 1% of fresh water (constituting 3.5% of total water) is easily accessible. In quantitative terms, it is about 14 million billion gallons that can be used by human race. Though this number seems to be very large but the recent news of CME, “Almost two-thirds of the world’s population is expected to face water shortages by 2025” shows the real picture of how large portion has been exploited and we are on the verge of facing scarcity of one of the commodities of necessity.

In the present century, with the increase in the rate of population, water use has grown at a double rate. Some of the areas of China, Egypt, India, Israel, Mexico, Africa and the United States are facing severe paucity of water. The recent news of one million people in California facing water stress due to climatic change, underground depletion and pollution should act as a warning bell for regulatory authorities everywhere.

Reasons for The Water Crisis

Some of the reasons to water crisis are Rapid industrialization, increasing agricultural use and climate change. The water cycle being transformed significantly by climate change, higher temperatures are increasing evapotranspiration from vegetation, land, surface water, and oceans. A warmer atmosphere is holding more water and thus, more precipitation is leading to increased flooding. A warmer climate also translates to having more precipitation in the form of rain and less as snow. Snow represents natural water storage, valuable for later irrigation seasons. At the same time, areas like the Southwest of the United States will experience less precipitation because of climate change, leading to longer and more severe drought periods.

In addition, rain seasons will become shorter, creating more days when irrigation is needed and therefore increasing water demands. Warmer water in streams and rivers also affects metabolism, life cycle, and behavior of aquatic species. The prediction and management of water availability are skeptical because of these cumulative impacts on water resources. This is furthering the problems for areas that are experiencing such impacts for sometime now and extending water stress into new places that will need to learn the art of adaptation.

A Possible Solution

Though these were some of the reasons uncontrollable in the hands of mankind race. But, the recent announcement of CME Group, the world’s leading derivative marketplace and Nasdaq, a global technology company serving the capital markets of launching its new Nasdaq Veles California Water Index futures contract lately this year can be considered as one of the positive tools to manage water crisis and reduce the risks for investors and farmers.

The future contact would be based on Nasdaq Veles California water index (NQH20). This index helps to calculate the water prices (priced in U.S. Dollar per Acre Foot ($/AF). The value represents the volume weighted average price of water at the source which are verified to ensure the accuracy of the price. The upcoming futures will be an innovative tool to provide agricultural, commercial, and municipal water users with greater transparency, price discovery, and risk transfer – all of which can help to more efficiently to bring in equilibrium.

Benefits gained on investing in these Futures

Futures would help the farmers to hedge against the losses that would arise due to unpredictable reasons. Farmers who purchased future contracts at a predetermined price can earn a larger portion of profit when there is drought or less rainfall and prices of the contracts are higher. These profits can help in offsetting the higher cost of buying actual water for their use in agricultural produce. This would also ensure a guaranteed price for water even if shortage arises for farmers and other agricultural businesses. 

Besides benefits to farmers, manufacturers and other big water users to protect against price variation and for investors, water futures can serve as a risk-management tool. They could be used to hedge against inflation or climate change or simply serve as an asset that is not related to others. Since, the future contracts would help the businesses who need water to function to manage the risks of climate change, higher cost price risk, etc. This would in turn help the end consumers to get water at a lower price and be beneficial in terms of cost.

The futures would be a safer bet because of emerging market growth. The growth of the global economy is one of the major factors that could increase both the shares prices of water equipment manufacturers as well as physical water prices. And, since water being a necessity, will always invite a good demand, hence it is considered to be a safer bet.

Conclusion

Diversifying one’s portfolio into natural resources can be a good long-term strategy. In many cases, factors that move water investments are different than the factors that affect stock and bond prices. Since water demand is generally unaffected by geographic area, economic conditions, political developments or changing consumer preferences, and water quantity being finite against our unlimited development, investing in water has a long-term prospect, growth potential, whether in developed or emerging markets.

However, one should keep in mind that investing in water projects is not directly synonymous to positive social impact.  A tense geopolitical context can also result in conflicts related to water, compromising the smooth progress of local projects and thus, compromising the positive impact on populations.

Therefore, apart from the Sustainable Development Goal 6 ‘Clean Water and Sanitation’, investing in water can have a much further-reaching impact, helping feeding the humanity, avoiding serious conflict, and making sure that no one stays left behind.