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CME Group Launching "First-of-its-Kind" Water Futures Product

By Eric Volkman – Sep 17, 2020 at 5:36PM

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The exchange operator's new contracts will be based on a California water index managed by Nasdaq.

Investors can buy and sell futures contracts for items like pork bellies and oil, so why not for water too? Securities exchange operator CME Group (CME 0.79%), which specializes in financial derivatives like futures, announced Thursday it has launched a water futures contract in conjunction with Nasdaq (NDAQ 0.34%). The contract will be based on the Nasdaq Veles California Water Index, which was introduced in 2018.

CME Group said in the press release trumpeting the Nasdaq Veles California Water Index futures contract that it "will be an innovative, first-of-its-kind tool to provide agricultural, commercial, and municipal water users with greater transparency, price discovery, and risk transfer – all of which can help to more efficiently align supply and demand of this vital resource."

San Francisco viewed from San Francisco Bay.

Image source: Getty Images.

Each contract will represent 10 acre-feet of water and will be settled on the basis of the index. On a weekly basis, the index sets a spot price for water rights based on the volume-weighted average of prices in the five most significant water markets covering the massive Western state. 

The use of water is a particularly pressing concern in California, as large swathes of the state are arid since it receives comparatively little rain or snowfall. Meanwhile, its Central Valley region is home to some of the most significant and active American farms growing food to be sold throughout the national market and even abroad. CME Group said that 40% of the state's water consumption is used for agricultural purposes.

Investors seem to be amenable to this new product. On Thursday, CME Group's shares bucked the overall bearish trend of the wider market by closing the day marginally higher.

Eric Volkman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends CME Group. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.

Stocks Mentioned

CME Group Stock Quote
CME Group
$177.90 (0.79%) $1.40
Nasdaq Stock Quote
$68.49 (0.34%) $0.23

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