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CME, Nasdaq to Launch Water Futures Contract

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Re: CME, Nasdaq to Launch Water Futures Contract

#21

Post by H8crilA »

Anybody has read the CME contract specs in detail? One thing I don't understand is how can you trade a commodity that's all about transportation costs.

In some parts of the world water is literally free, you only have to pay for the connection. Whereas in others there's a shortage and people have to resort to clever engineering, like Israel with desalination or Libya with the Great Man-Made River project. In both of those cases the problem would be trivial if global transportation costs were zero.

Even with oil it is a thing - there's a different spot price and different forward curve at each tradeable terminal. For example the recently famous negative prices (and the monster contango) were observed only in Cushing, OK; other ports were always > 0. With water the difference would be much larger.

Re: CME, Nasdaq to Launch Water Futures Contract

#22

Post by bluedevil2k »

gumby wrote: post #15
bluedevil2k wrote: post #11

This is a unique commodity in that it literally falls from the sky. I don’t believe we have any tradable commodities that can be obtained, rather easily, for free. Yes, I know we’re talking about massive amounts of water and aquifers, but I can picture Wall Street banks setting up huge rain catchers and desalination plants to try and profit from this market.

That isn’t how commodity markets (which aren’t on wall st btw) work. The traders don’t now frames or, except by mistake, barges fill of coal; they sit in the middle and rarely touch it. A farmer can sell their crop before it has grown to improve cash flow, chocolate companies can buy cocoa that they will need next year so they have a predictable price and these guys sit in the middle.

I didn’t say commodities traded on Wall Street, and I know usually they’re middlemen.

I’m saying Wall Street banks are the kinds of investors to sell delivery contracts and then find a way to gather water cheaply and actually deliver it (for a nice profit). Banks aren’t always just middlemen.

Re: CME, Nasdaq to Launch Water Futures Contract

#24

Post by dcolkitt »

supernova87a wrote: post #10

I'm afraid that the dispersal of responsibility among many different parties who benefit under archaic "riparian rights" laws that are totally outdated and unable to be changed because no one cares enough to build the political momentum means that this issue will fester like climate change. And even more than climate, the emotions driving the issue (such as in California) are tangible and exploitable to favor incumbe…

Nat gas is subject to pretty wild discrepancies between regional markets. It's not unusual for the price to go negative in the Rocky Mountain region during many summers.

The market mostly seems to work fine. Henry Hub is somewhat arbitrarily picked as the most canonical price point. And then a lot of price discovery occurs in robust "basis" markets (i.e. region-specific contracts).

Re: CME, Nasdaq to Launch Water Futures Contract

#25

Post by malloryerik »

H8crilA wrote: post #21

Anybody has read the CME contract specs in detail? One thing I don't understand is how can you trade a commodity that's all about transportation costs. In some parts of the world water is literally free, you only have to pay for the connection. Whereas in others there's a shortage and people have to resort to clever engineering, like Israel with desalination or Libya with the Great Man-Made River project. In both of…

The contract is intended to track the Nasdaq Veles California Water Index. From the FAQ:

"4. What is the Nasdaq Veles California Water Index?

Nasdaq and Veles Water have partnered with WestWater Research, LLC, the leading economic and financial consulting firm in water trading, to develop the Nasdaq Veles California Water Index.

This index was launched by Nasdaq in October 2018 and tracks the price of water rights transactions (leases and sales) across the five largest and most actively traded regions in the state of California, including surface water and four adjudicated groundwater basins. NQH2O utilizes WestWater’s WaterlitixTM database as the source for the underlying data."

https://www.cmegroup.com/education/articles-and-reports/nasd...

It's based on an acre of California water one foot deep and cash-settled so that, you see, nobody must deliver or receive actual H2O.

Crude oil (like almost all other commodity futures) is also traded based on local physical benchmarks, WTI at the Cushing, Oklahoma storage facility for the price you see quoted for U.S. oil.

Re: CME, Nasdaq to Launch Water Futures Contract

#26

Post by H8crilA »

malloryerik wrote: post #25
H8crilA wrote: post #21

Anybody has read the CME contract specs in detail? One thing I don't understand is how can you trade a commodity that's all about transportation costs. In some parts of the world water is literally free, you only have to pay for the connection. Whereas in others there's a shortage and people have to resort to clever engineering, like Israel with desalination or Libya with the Great Man-Made River project. In both of…

The contract is intended to track the Nasdaq Veles California Water Index. From the FAQ: "4. What is the Nasdaq Veles California Water Index? Nasdaq and Veles Water have partnered with WestWater Research, LLC, the leading economic and financial consulting firm in water trading, to develop the Nasdaq Veles California Water Index. This index was launched by Nasdaq in October 2018 and tracks the price of water rights tr…

So it's really "Californian water", and even that may not be very accurate (it's a big state), one would have to study what exactly goes into the index with what weight.

I wonder if it will help the farmers in the region hedge their production and also would it improve price discovery. The open interest will tell us.

PS. Cushing (the terminal for west texas intermediate) is in Oklahoma.

Re: CME, Nasdaq to Launch Water Futures Contract

#27

Post by malloryerik »

bluedevil2k wrote: post #22
gumby wrote: post #15

Earlier quoted context omitted.

That isn’t how commodity markets (which aren’t on wall st btw) work. The traders don’t now frames or, except by mistake, barges fill of coal; they sit in the middle and rarely touch it. A farmer can sell their crop before it has grown to improve cash flow, chocolate companies can buy cocoa that they will need next year so they have a predictable price and these guys sit in the middle.

I didn’t say commodities traded on Wall Street, and I know usually they’re middlemen. I’m saying Wall Street banks are the kinds of investors to sell delivery contracts and then find a way to gather water cheaply and actually deliver it (for a nice profit). Banks aren’t always just middlemen.

The contract is cash-settled so there's no opportunity to pipe in water like that.

Re: CME, Nasdaq to Launch Water Futures Contract

#28

Post by malloryerik »

H8crilA wrote: post #26
malloryerik wrote: post #25

Earlier quoted context omitted.

The contract is intended to track the Nasdaq Veles California Water Index. From the FAQ: "4. What is the Nasdaq Veles California Water Index? Nasdaq and Veles Water have partnered with WestWater Research, LLC, the leading economic and financial consulting firm in water trading, to develop the Nasdaq Veles California Water Index. This index was launched by Nasdaq in October 2018 and tracks the price of water rights tr…

So it's really "Californian water", and even that may not be very accurate (it's a big state), one would have to study what exactly goes into the index with what weight. I wonder if it will help the farmers in the region hedge their production and also would it improve price discovery. The open interest will tell us. PS. Cushing (the terminal for west texas intermediate) is in Oklahoma.

>> PS. Cushing (the terminal for west texas intermediate) is in Oklahoma.

Oops of course you're right, thanks. Changing in the comment. Like you I also wonder if these contracts will take off.

Re: CME, Nasdaq to Launch Water Futures Contract

#29

Post by h2o_enron »

dereg wrote: post #18
Klinky wrote: post #12

Earlier quoted context omitted.

Except the market will lack perfect information, likely not price in long-term environmental damage, and encourage wealth hoarding via the literal pooling of wealth. Then you'll get crazy speculation, with the markets experiencing adverse liquidity events resulting in spectacular splash crashes afterward. Markets quite often do not help usher in eras of rationale and logic. A lot of that goes out the window when "the…

I do not understand your point as these contracts are settled in cash. Do you care to elaborate?

I share the same concerns. Market economics did not prevent e.g. Enron from scalping millions of dollars out of CA energy markets while rolling blackouts resulted in powerless hospitals.

Speculation - not actual supply or demand - in oil markets drove the price of gasoline from $1 to $4 a gallon (and now back to $2). Everyone else paid for the inefficient market finding a false equilibrium pumped up by perception of security.

(Financial deregulation of Wall St in 1999 preceded the popping of the dotcom asset bubble by very little lag. And then CDS in 2005 and the Great Recession and now this whole mess: and the only solution is to pay cronies who didn't hoard enough cash?)

Sugar water companies can afford to push the price of water higher while the external health and commodity costs are passed onto everyone else.

Markets have thus far failed to solve for long-term environmental damage: their incentive is to externalize costs in order to maximize short-term profit.

Re: CME, Nasdaq to Launch Water Futures Contract

#30

Post by tumblerz »

H8crilA wrote: post #21

Anybody has read the CME contract specs in detail? One thing I don't understand is how can you trade a commodity that's all about transportation costs. In some parts of the world water is literally free, you only have to pay for the connection. Whereas in others there's a shortage and people have to resort to clever engineering, like Israel with desalination or Libya with the Great Man-Made River project. In both of…

Typically, one transports the water within another product. Alfalfa, for example:

https://www.theguardian.com/us-news/2019/mar/25/california-w...

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