The CME Group is set to launch futures contracts tied to the spot price of water for the first time ever.
The contracts will allow investors and farmers alike to bet on the future price of water. The contracts are tied to the $1.1 billion California spot water market.
While water will officially join the likes of gold, oil, and other commodities in being traded on Wall Street, the contracts will be financially settled. This means buyers of the contracts who hold on through expiration won't be greeted by a delivery of millions of gallons of water like they would for other commodity based futures like oil and grain.
The water contracts are tied to the Nasdaq Veles California Water Index which was launched two years ago. The index is driven by the volume-weighted average of the transaction prices in California's five largest and most actively traded water markets.
Contracts will each represent 10 acre-feet of water, equal to about 3.26 million gallons.
One high-profile investor potentially looking to capitalize on the newly launched water future contracts is Michael Burry of "The Big Short."
Burry highlighted water as one of his top investment ideas following the great financial crisis of 2008, as he sees demand for the life-sustaining natural resource to continue climbing as supply falls due to population growth and climate change.
But farmers will likely utilize the water contracts more than investors, as they look to hedge out their input costs amid an increasingly uncertain climate environment.
The CME Group initially announced the launch of water futures back in September.
"With nearly two-thirds of the world's population expected to face water shortages by 2025, water scarcity presents a growing risk for businesses and communities around the world, and particularly for the $1.1 billion California water market," said Tim McCourt, CME Group Global Head of Equity Index and Alternative Investment Products.
Source: Business Insider