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This Monday, the crucial liquid for all life on Earth, water, began trading on the Wall Street commodities futures market. Its price will fluctuate like oil, gold, wheat or electric power.
The price of water will be reflected in the Nasdaq Veles California Water Index, with the ticker NQH2O, based on an indicator of the future prices of reserves in California, trading today at $486.53 for 1,233 cubic meters.
Despite the fact that water covers 71% of the earth’s surface, only 3.5% is fresh, and of this 69% is concentrated in glaciers, and another 30% in underground, with only 1% of water available to satisfy practically all human consumption.
The United States, after China, is the country with the second-highest water consumption in the world and the first in average per capita consumption. It is estimated that the country currently consumes around 322 billion gallons per day.
California is the state with the highest water consumption, with 9% of the total in the United States. With severe droughts in recent years, a growing population and increasing agricultural production, California is looking to encourage more efficient water use through the pricing system.
According to experts, the arrival of NQH2O to the raw materials market allows having a more accurate indicator about water scarcity. Although the price refers to California’s water reserves, it could also serve as an indicator for international markets.
How is water priced?
This index was created by Nasdaq in conjunction with water-market firms Veles Water and WestWater Research. The NQH20 is the first of its kind in which you can determine the spot price (price agreed upon for immediate buy and sell transactions) of water in the state of California.
The NQH2O tracks the price of water rights (which is to say, the type of water use that will happen) around the five major water markets in California, which are the Surface Water Market and the Central, Chino, San Gabriel and Mojave river basins. Between 2012 and 2019, transactions in this market were valued at $2.6 billion.
The index uses West Water’s Waterlitix database as a source for transaction information. NQH2O trades on an acre-foot of water (i.e., 325,851 gallons or 1,233 cubic meters).
On October 1, 2018, the NQH20 was first published, at a value of $371.11 per acre-foot, which means that the price of water in California has risen by 131% in the two years of this index’s existence.
The index value reflects the volume-weighted price of water and excludes transportation costs and water losses. The index is calculated once a week and weighs the price based on all transactions that occurred in the past week, and will be released every Wednesday at 9:30 a.m. (East Coast Time). The NQH20 records the price, volume, day of sale and water right rate of transactions.
The advantages of this index is that it allows the determination of a spot price of water in the state of California determined by water transactions, as well as allocations of the use of the basins, which makes it respond to the conditions of supply and demand of this resource.
This index will allow a more realistic approach to water markets and will give greater awareness of water scarcity to international markets through the information provided by prices. This index will most likely incorporate other valuations of other basins and water areas to create a complete water market in the future.