What does it mean for water to start being traded on Wall Street stock market?
Since the end of 2020, water has joined gold, oil, wheat and coffee, among other commodities , on the Wall Street stock market. But how can you buy or sell a resource like water? Is it going to be commercialized? Does this imply a monopolization of an indispensable natural resource? How does it affect the common citizen, you who are reading this?
All these and more questions are what come to mind when we find out that water is going to start trading on the Wall Street futures market . Keep reading, we explain in a very simple and quick way everything you need to know about this news that is on everyone's lips, environmentalists, investors and governments.
More than 70% of the Earth is covered in water, but less than 1% can be consumed as drinking water, and fears about droughts and water scarcity are increasing.[/caption]
In order to answer all these questions we need to understand what is happening and what it means that this water resource is in the bag.
What is the futures market?
It is the market that the rights to use and exploit California's water entered. They are markets in which futures contracts are traded. The price of an asset is agreed, in this case water, for a future date. The buyer today signs a futures contract for irrigation rights to a summer 2021 crop, for example. When the time comes, you must buy it at that price, although if there is an abundance of water, the cost for the buyer may be less. The seller, for his part, has the opposite risk, he can lose money, because if there is no shortage, the price of water could be less than agreed.
It should be noted that for now the water that is going to be taken as a reference is the water that comes from California, USA, a very arid area. This means that not all the world's water entered the market.
And the need for water that may exist in other countries, for example Colombia, which is a country rich in water resources, is not the same as in Spain or Africa. They all have different problems. Therefore, it would be very difficult to generalize this measure to the whole world, although it can be a kind of meter to determine costs to establish different contracts for rights of use and exploitation.
What is going to happen?
In a few words , what is going to be quoted are the rights of its use, not the water itself. The right to use water will be closed in the future. Therefore, no physical delivery of the resource is made. "What is intended with these contracts is, on the part of the buyer, to protect themselves from a rise in the price of water, and on the part of the seller, to ensure a minimum sale price ." how they clarify it in the newspaper La Razón.
Currently, the price that its use may have is determined privately (for activities such as irrigation of crops or livestock, among others). What is wanted through the stock market is to determine in a more efficient and transparent way what the price of said good can be. Those who invest in this asset will not receive physical water, they will receive the difference between the established contract price and the market price of the water at the time.
Institutional investors, governments, organizations that require large amounts of water for their industrial activities, farmers, energy sector industries, among others, will participate in this market.[/caption]
What are water markets and how do they work?
A water market or water bank is an institutional mechanism that facilitates the legal transfer of water rights .
If you have a property that is fed by a basin or you have an important water resource on your property, you can extract water. The right to water is tied to their land, so you can sell different amounts of water to other people. This can be problematic if one analyzes who has the right to the land, and therefore the right to use water, since on many occasions the territories are in the hands of large landowners, thus monopolizing this resource. The issue of trenching water is not new. In the world there are at least 34 countries that have water markets, where they have had scarcity problems, and have used this mechanism.
If you want to read more, we invite you to read this WWF article: Water markets and environmental conservation.
Will the entry of water in the bag affect the common citizen?
At first, in this first stage, the world will not perceive anything that is happening, or at least ordinary citizens will not. Once the market has matured, it is possible that these prices of these contracts will begin to influence the prices to the public, not only for water, but also for other markets that need this water resource.
Think of it like this, if the price of an element that is crucial to the production of your product goes up or down, the total price of your product will go up or down as well. It's very simple, if you sell bread and the price of flour triples, you will most likely have to reevaluate your selling prices, because your production costs will have increased.
Two postures.Faced with this situation, we should not take a moralistic stance and think that entering the stock market is good or bad. Although it has benefits and complications for the water resource itself and some complex problems, it is a subject that must be analyzed in depth and see how it evolves over time.[/caption]
Pros: It facilitates the management of farmers and ranchers, really anyone who is part of the water market, since they can ensure a fixed price for water in the future and in this way their businesses are not facing uncertainty all the time .
The use of water already had a value, but it was defined in a completely private way. Publicly establishing a price for a good, which has already been charged by private entities according to their considerations, can establish prices that benefit the different parties.
Some experts argue that these financial mechanisms can contribute to a more efficient management of the resource.
Cons: This type of activity can encourage the accumulation of a basic resource in a few hands that could keep the water rights and then resell them.
There may be speculation about this good, as well as inflating prices or appealing to a supposed scarcity to make the water resource more expensive.
Although this is a subject that by its name may sound alarming, THE WATER IN THE STOCK EXCHANGE! It is important to understand that beyond being a mercantilist issue, which as we realized it is not, it is a financial relationship in order to avoid speculation and increases in the prices of the water market. Now we can only hope that it is really so.
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