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Water: The Next Tradable Commodity?

 3 min read / 

Water will one day be soon traded as a commodity. Setup in 2003 as an unmanaged benchmark, the Palisades Water Index is tracked by many water indexes and ETFs.

As the popular rhyme goes:

 “Water, water everywhere, but not a drop to drink”

Public perception has begun to change regarding water no longer being an infinite resource as we previously thought. Despite it covering 68% of the surface of the planet, the amount that actually serves a purpose for humans is only a mere 0.3%. With what some perceive as an “epidemic” expanding globally, experts predict that the only sustainable way in managing water is to trade it on a futures exchange, similar to other natural commodities such as oil and gold.

Stereotypically, issues regarding water supply in arid desert like climates are reserved to developing regions such as Africa, Asia and the Middle East. However, now not even the UK or US are immune to the similar stresses related to water resources. The general increase in pollution shows demand for clean water. Fertiliser runoffs and additives such as MTBE in unleaded gasoline can be found in underground water sources from California to Maryland. This is a cycle where contaminated supplies further limit the availability of clean water for human use.

The global problem of water scarcity is growing at an exponential rate, mostly from rapid industrialisation and increasing agricultural use. The IPCC predicts that by 2050 there will be a minimum need of a 55% increase in water supply to meet the needs of a rising population, also accommodating both food and sector industries. Furthermore, like any other scarcity, the shortages create investment opportunities and it applies to water all the same.

Although water is essential to life and belongs to all, the underlying moral is that it should not be traded like other commodities. However, by giving the market a role to play will definitely provide better water security in the future as it acts as an efficient basing price mechanism to set water tariffs.

Given the interlinked nature of the current global economy, water scarcity could have immediate and lasting ramifications. An example is the recent crop failure of corn, with the consequential knock on effect for poultry prices.

Currently, California is experiencing its fourth year of water scarcity. In response, the State went as far as to implement a mandatory reduction in water use, with the aim of decreasing 25% of the water use level since 2013. A key issue with the stipulation is that the driving factor of water scarcity is the farming industry, which accounts for over 50% of the total water used in California. To make matters worse, farmers are allowed to tap into the groundwater to boost crop yield, which offsets the idea of constructing desalination plants via increased water taxes.

Further concerns by economists include the fear that water rich countries may potentially bound together to form a trade bloc to dictate and monopolies water prices, similar to that of OPEC. This enables them to have market power over those that do not have such abundance.

Recent trends by all indications show a surge in demand for investments that profit from clean water. If this continues, we can expect to see an increase exposure to this unique commodity. Water’s journey to the future market will not be a smooth path, but there is hope that the outcome may be a more efficient use of the resource.

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