When former Nestle CEO Peter Brabeck-Letmathe said “water is not a right and should have a market value” in 2005, there was an immense backlash. Due to the fact that Nestlé itself is a major producer of bottled water, it was a sign there was something very wrong with how this essential life source was perceived. Following the reaction, he later corrected himself, writing “the water you need for survival is a human right, and must be made available to everyone”.

Fifteen years on, water futures came onto the financial markets. In December 2020, American derivatives exchange company Chicago Mercantile Exchange Group launched the Nasdaq Veles California Water Index futures, claiming it would allow traders to manage water price risk. 

Shortly after, in October 2021 UN-Water Members and Partners met to advance progress on Sustainable Development Goal (SDG) 6: to ensure availability and sustainable management of water and sanitation for all by 2030.

Scarce resource

“Critics claim that water futures should not be permitted, as the financial product will result in the commoditization of water – which should be a free resource,” says Gary DeWaal, Special Counsel at Katten Muchin Roseman LLP. “Unfortunately, water is an increasingly scarce resource and must be allocated in an equitable fashion with farmers and other entities able to protect themselves against price spikes – in order to maintain more stable prices for consumers.”

The Future of Water Act 2022, drafted by US senator Elizabeth Warren, says of trading in water futures that “the most immediate impact would be on California’s agricultural industry, potentially driving out small producers and incentivizing further farmland consolidation.” The proposed Act is still in the discussion phase. It aims to prohibit the trading of water and water rights from commodity futures contracts and protect American families, farmers, and ranchers from water price spikes.

The Act further elaborates: “Wall Street’s interest in financial derivatives based on water and water rights could lead to severe real-world water price spikes due to market manipulation and/or excessive speculation. Prohibition of water and water rights futures trading stops this dangerous speculation and protects Americans.”

“With the current global droughts it’s more evident that we are exposed to risks we have neither foreseen nor factored in. Water, energy, and food security are now under threat,” says Anna Poberezhna, founder of sustainability company Smart4Tech.

“Adding opportunistic speculative water trading will amplify it all. In the past in Australia and California, water trading pushed farmers into poverty or difficulty since they could no longer afford their farming businesses due to unaffordable water prices and simply had to kill their cattle.”

Mitigate concerns

But Gary DeWaal sees it differently. “With increasing episodes of droughts, the need for farmers and municipalities to help offset large unplanned price increases in the cost of water is imperative. Use of cash-settled water futures – such as currently offered on the Chicago Mercantile Exchange – provide such an alternative,” he argues. “Requiring water futures to be solely cash-settled and not physically settled should help mitigate concerns that such futures could be manipulated and result in unfair prices.”

As a major actor, Nestlé says it is making efforts to manage water sustainably and increase its collaboration with partners to identify and support local solutions designed to help regenerate the ecosystems in the areas around each of Nestlé Waters’ 48 sites. It says it will help nature retain more water than the business uses in its operations.

“The challenge will be to develop geographically relevant water futures contracts that are meaningful to a sufficiently large area to promote sufficient volume and open interest in the contract and correlated hedging opportunities. The current NASDAQ Veles California Water Index futures traded on CME may be helpful to farmers in California, but likely not in Texas and Oklahoma. To date, use of this futures contract has been limited.”