Can Wall Street help us find the true price of water?

You could be forgiven if, amid the recent chaos of COVID-19 and U.S. politics, you missed some news related to what is arguably Canada’s most valuable mineral resource.

Just before Christmas, the CME Group, the New York-based market operator that takes its name from the Chicago Mercantile Exchange — once described as the biggest financial exchange you’ve never heard of — began trading water futures.

For the first time, Wall Street traders are now able to take a stake in the future value of water, the way they have with other agricultural and mineral commodities.

As with gold or pork bellies or natural gas, commodities speculators may see it as a kind of sophisticated gambling on derivatives, but the intent of the new water futures market is to share the risk of unexpected price swings for farmers and other water users.

While traded in North America’s financial capital, so far the water contracts being bought and sold are limited to five water districts in drought-prone California, representing a tiny fraction of the water actually used in the state, never mind the whole country.

But as the commodities market launched, the implication by many of those involved, including CME Group executive Tim McCourt, was that pricing water risk could be a business that expands well beyond California.

‘Liquid and transparent’ markets’

“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,” said McCourt in a release announcing the new market, which it referred to as “liquid and transparent.”

One long-time advocate of investing in water is Michael Burry, made famous in the book and film The Big Short after he made a killing with a contrarian bet against subprime mortgages just before the market collapsed in 2007.

“Climate change, droughts, population growth and pollution are likely to make water scarcity issues and pricing a hot topic for years to come,” RBC Capital Markets managing director Deane Dray told Bloomberg Green after the CME water market began trading. “We are definitely going to watch how this new water futures contract develops.”

Folsom Lake in California was at 17 per cent of its full capacity in 2017. High water demand, a growing population and a dry climate has helped lead to the trading of private water rights in the state. (Robert Galbraith/File Photo/Reuters)

Water remains big business. The URL for the upcoming Global Water Summit scheduled this spring in Madrid — with an agenda that includes some of the world’s biggest water producers and consumers — is watermeetsmoney.com.

But the idea of water as something to be bought and sold by Wall Street speculators does not necessarily sit well with those who study the economics of this resource in Canada.

“I find it quite disturbing,” said Jim Warren, Regina-based scholar and author of Defying Palliser: Stories of Resilience from the Driest Region of the Canadian Prairies. “I mean it’s upsetting, especially since, you know, the world will be watching and others will be thinking it’s the way to go.”

Water has always been seen by economists as a special case. Like the air we breathe, it is more valuable to human life than gold or oil or even, in the short term, food. But because of its relative abundance, water’s traditional price in Canada has been close to zero.

Private deals at the curling rink

In the driest parts of Alberta and Saskatchewan, Warren said there are signs that may be changing. He points to events around the year 2000, when Alberta and Saskatchewan were suffering a serious drought and communities and their industrial users were running out of water in the Lethbridge area.

Warren said that under an implied threat from the provincial government, and for a financial consideration, irrigation associations of farmers who had allocations of water cut back on their use by about a third. Many of them made up the difference with more efficient irrigation techniques.

Elsewhere, individual farmers who had allocations of their own made private deals with neighbours to share some of their water.

“It wasn’t as if there were public auctions,” said Warren. “At the curling rinks and coffee shops, you sort of figured out what it might be worth to sell some of what [you] had to others.”

But the situation demonstrated how water was already being commodified.

Because of the limited supply of water, only a small fraction of land in Alberta and Saskatchewan is irrigated. But normally when land is sold, the water allocation necessary to farm the higher-value crops on that land goes with it, which in many ways appears to be an evolution toward private water rights of the kind that have emerged in California.

As a provincial resource under the constitution, there is no single set of rules for water use in Canada. However, the general rule is that water cannot be bought or owned. Instead, it is allocated by provincial regulation.

We’re ‘not paying the value’ of water

But as Diane Dupont, a long-time water economist at Brock University in St. Catharines, Ont., points out, in most cases, the water itself costs nothing for municipal and large industrial users, and that creates problems of its own.

During the G8 summit in 2010, demonstrators in Huntsville, Ont., declared water a human right. But water economists say it must also have a price to avoid wasteful consumption. (REUTERS)

“Typically, they’re paying a very low fee,” said Dupont, author of Running Through Our Fingers: How Canada Fails to Capture the Value of its Top Asset. “They’re not paying the value of the water.”

Despite the apparent abundance of water in Canada, she said, low prices mean the best-quality water in many regions — such as Southern Ontario groundwater — is in increasingly short supply and is being overused.

Roy Brouwer, executive director of the Water Institute at the University of Waterloo, said that when he came to Canada from the Netherlands five years ago, he was surprised by the low price and wasteful misuse of water in this country.

Water users simply don’t pay the full cost, he told me, and introducing various sorts of market price systems might fix that.

Of course, in the past, leaving speculators in charge of the price of essential goods — such as when Enron helped bid up the price of gas and electricity in the early 2000s — has sometimes worked out badly for end users.

“If you leave it completely to the market, you might end up with some of these extreme situations,” said Brouwer. “Somewhere in between considering water a human right and the commodification of water through these water markets is probably where you want to be.”

Follow Don on Twitter @don_pittis

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