The Water Risks Facing California: New Index Offers Future Price Visibility

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A new futures contract based on the Nasdaq Veles California Water Index provides longer-term visibility into the price of water, according to Roland Fumasi of RaboResearch.

California is facing another dry summer in 2021, and for agricultural producers, that means a difficult growing season. Drought emergencies have been declared for 41 California counties, mostly in Northern and Central California, home to the majority of the state’s farmland. The situation has put a strain on the state’s traditionally fragile water resources, resulting in water price spikes for producers looking to sustain their crops.

“This year is a critically dry year in California. It’s the second consecutive dry year in a row. And we’re seeing really high prices and lots of buy-side competition,” said Matt Payne of WestWater Research of the current water situation in California. That point is supported by the Nasdaq NQH20 index, which reached a record near $900 per acre-foot in May.

Payne joined Roland Fumasi of RaboResearch Food and Agribusiness in a discussion with Tim McCourt, CME Group’s Managing Director of Equity Products, about the water challenges facing California and how a new water futures contract based on the Nasdaq Veles California Water Index (NQH20) is playing a role as a new risk management tool available to producers in the state. Watch the full discussion in the video above. Intro Text can be Placed Here

'A Lot of Price Variability'

California is the top producing agricultural state by cash receipts. Its top five products by total value in 2019 were dairy, almonds, grapes, cattle and strawberries, according to the California Department of Food and Agriculture.

Traditionally, ag producers in the state have dealt with challenges of accessing scarce water supplies in one of a few ways, says Fumasi: Using reliable wells (up to 15,000 are drilled each year in the state), long-term contracting to buy water where there is an abundance, fallowing farm ground or buying additional surface water on the open market. “In the short run, that’s where you can see users have to deal with a lot of price variability,” says Fumasi.

NQH2O_Price_1200x800

The financially settled futures contract is another tool that producers can turn to when managing the risk of rising water prices. “The futures add a non-structural financial tool to assist with that risk management. The futures are not the end-all, be-all, they’re not the single solution. They’re part of a portfolio of risk management tools that is now available to water users in the state,” says Payne. No physical water changes hands when two parties trade the futures contract, he adds. “It’s really a financially settled risk management tool. Trading of the futures does not influence how water is delivered, where it’s delivered to, how it’s used or who has access to it.”

Fumasi told McCourt that the NQH20 index and futures contract will help add transparency to the market for producers and ag lenders.

The contract helps” give you longer-term visibility as to what the price of water might do,” he says. “It allows lenders and producers to make more informed decisions.”

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