Is Water a Commodity?
Water is now officially a commodity. One can now buy and sell water, just like they buy and sell oil.
“Water, water, everywhere,
And all the boards did shrink;
Water, water, everywhere,
Nor any drop to drink.”
- The Rime of the Ancient Mariner
Water is now officially a commodity. One can now buy and sell water, just like they buy and sell oil.
CME Group Inc., the world’s largest futures exchange, will allow futures contracts of water.
Why introduce this?
Water is scarce. Anything that’s scarce and has utility becomes a resource (Economics 101). And any resource comes with a price tag.
Water is not only something humans need for survival but also a necessary raw material for a lot of industries (California, USA has a $1.1 billion water market).
Certain States in the US are witnessing a massive shortage of water, which is pushing its prices up for industrial use.
Here’s where the futures contract comes into play: as a hedging instrument for firms including food or agricultural producers, land lease owners, municipalities, and public water agencies.
Corporates can now hedge themselves against future price fluctuations by entering into these water-tight contracts.
71% of earth's surface is water, i.e. 326 Million Trillion Gallons. 96.5% is salty ocean water, which is unfit for human use. Saltwater cannot be used for drinking, crop irrigation, or most industrial uses.
Of the remaining 3.5%, 69% is in the form of glaciers, 30% is underground and therefore only 1% is readily available (114 Million Billion Gallons) for agricultural, industrial and residential needs.
Wondering what industrial uses are we talking about?
1) A single 5-pound bag of refined white sugar uses about 88 gallons of water.
2) A single pair of jeans requires about 2,866 gallons of water.
3) A 2-litre bottle of soda takes between 180 and 328 gallons of water.
4) A pint of beer takes 20 gallons of water
5) The ingredients to make a single cup of coffee takes nearly 37 gallons of water to produce.
6) It takes about 39,000 gallons of water to produce the average domestic vehicle, including the tires.
These are just some examples. Other industries like chemicals and leatherwear also use massive amounts of water.
Currently about ~26.67% of the population lives in countries having high water crises.
"Almost two-thirds of the world’s population is expected to face water shortages by 2025, according to the CME." - Live Mint
Who’s to blame?
Maybe consumerism. In our pursuit of materialistic pleasures, we have steered the economic wheel away from meeting basic necessities, and towards feeding our own desires.
Treating water as a commodity may have far-reaching consequences. The wars in the last five decades were fought over another, denser liquid.
Is it time for water to take over?
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This piece was extensively researched by Yash Gandhi, a capital markets enthusiast with a zeal to make complex financial concepts simpler.