Wall Street’s thirst for water
"Moves towards a global water commodities market must be stopped. It will push the price of food far beyond the peaks of the past five years", warns Frederick Kaufman.
Article originally published by Nature October, 25, 2012. Reproduced without commercial aims.
Early last year, I published an article in Foreign Policy that explained how
Wall Street profits from hunger. I traced the history of financial markets in
food and noted how the prices of maize (corn), soya, rice and wheat had broken
records three times in the past five years(1). I examined the impacts of climate
change and biofuel mandates on the grain futures markets, and argued that a
global food-pricing system that once benefited farmers, bakers and consumers had
been undermined by financial derivatives created by investment banks.
These commodity index funds effectively destroyed the traditional ‘price
discovery’ function of the grain futures exchanges in Chicago, Kansas City and
Minneapolis, and turned these markets into profit engines for banks and hedge
funds while driving up the price of our daily bread (2).
Although regulation of global food derivatives has been promised, years have
passed and nothing has materialized. In Washington DC, abuses of commodity
markets and other fiddles resulted in 30,000 pages of new regulations: the
Dodd—Frank Wall Street Reform and Consumer Protection Act of 2010. Predictably,
implementation of these laws has been challenged in court and stalled. Even if
the regulations make it beyond the Beltway, there will be plenty of room for
exceptions for the biggest banks.
Therefore, it is wise to consider what global resource will be the next
financial derivative. What could be more catastrophic than betting on the
world’s food supply? What about our water?
Speculators can already bet on snow, wind and ram through weather-related
futures contracts bought and sold on the Chicago Mercantile Exchange. The
market value of weather grew by 20% from 2010 to 2011.
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But the sector remains small — a paltry US$11.8 billion. Still, weather
futures indicate how restless Wall Street has become to transform Mother Nature
into the mother of all casinos.
Some environmentalists argue that putting a price on fresh water may be our
best bet to save the planet's supply. The more it costs, the less we will
waste. In fact, the financialization of precious resources underlies The
Economics of Ecosystems and Biodiversity (TEEB), an international initiative
hosted by the United Nations Environment Programme and supported by the
European Commission, Germany, the United Kingdom, the Netherlands, Norway,
Sweden and Japan. TEEB aims to calculate the worth of ecosystems down to the
last trillion dollars, riyals or renminbi. And then there is the PES movement —
payment for ecosystem (or environmental) services, which refers to such things
as the air we breathe and the water we drink. Among the many supporters of this
concept are the World Bank and the UN Food and Agriculture Organization. As
TEEB’s 2010 report for business puts it: “Modem society’s predominant focus on
market-delivered components of well-being, and our almost total dependence on
market prices to indicate value, means that we generally do not measure or
manage economic values exchanged other than through markets’
Wall Street’s success in cashing in on the food bubble, Washington’s inability
to regulate global derivatives and the push to commodify nature through TEEB
and PES converged into a single focus this summer, when drought descended on
the United States. With it came a slew of doom-laden social, environmental and
economic predictions: there will be 3 billion “water-stressed” people on Earth
by 2035; water shortages will become chronic, wildfires will be pervasive,
monsoons will be even more unpredictable; and snow run-offs will radically
decrease owing to increasingly sultry winters.
At the same time, water is becoming essential to a widening variety of
industries, from hydroelectric power and fracking to beer brewing and
semiconductor manufacturing. Hydrologists warn that water tables are dropping
across Asia. Political scientists predict squabbles over the ownership and use
of Himalayan rivers, and every water-well driller in Nebraska knows that the
Ogallala aquifer under parts of the midwestern United States is declining at an
The implications are dire: the destruction of aquatic ecosystems, the
extinction of innumerable species and the risk of regional and international
conflicts — the much dreaded ‘water wars’ of the twenty-first century. What
will Egypt do when Ethiopia dams the Blue Nile? What will happen when Yemen
becomes the first country to run out of water? The short answer: nothing good.
Investors of all stripes adore the apocalyptic vibe. Within the interstices of
violence and chaos there will be money to be made. These days, the biggest
profits do not come from buying or selling actual things (such as houses or wheat
or cars), but from the manipulation of ethereal concepts like risk and collateralized
debt. Wealth flows from financial instruments that are one step away from
Investing in a water index is now more popular than ever. There are more than
100 indices(3) that track and measure the value of stocks of companies in
water-related businesses, such as utilities, sewage treatment and desalination.
Several offer healthy returns (see go.nature.com/zrl4qo).
As a result, the World Bank and the International Monetary Fund — both always
on the lookout for market-based security for the billions of dollars of credit
they extend — have been pushing countries to privatize their resources. These include the
lakes, streams and reservoirs of Argentina, Bolivia, Ghana, Mexico, Malaysia,
Nigeria and the Philippines (see, for example, go.nature.com/iuwp8m). What
better guarantee of prosperity than a rush of multinationals determined to
generate revenues from something no one can manage without?
So this summer, as cornfields from Ukraine to Kansas withered, as bacon
shortages made headlines and dairymen fed candy to their cows, a new message
congealed: the world’s next great commodity will not be gold or grain or oil. It will be water. Useable water.
“Within the interstices of violence and chaos there will be money to be made“.
Although collecting stakes in indices of publicly traded companies is nice,
and water certainly generates predictable profits wouldn’t it be more efficient
if it could be translated into a cash equivalent? Perhaps, plotted the hedgers
and speculators, there should be a commodity market in water, as there is for
gold and grain a futures exchange in which assurances to deliver or accept
water on some specified future date can be traded like cash.
In certain respects, water is a likely candidate for a futures contract on a
commodity exchange. First, it meets the requirement of fungibility — the
commodity pumped from one lake or river or stream is pretty much the same as
that collected from an iceberg, extracted from an aquifer, or collected in a
ram barrel. And water will soon meet the second requirement of commoditization:
it is becoming increasingly liquid, as in convertible to cash. Most obviously,
water is global. River-basin management is as hot a topic for the Volta as it
is for the Senegal(4). From a money perspective, there is no difference if the
river is Spain’s Guadalquivir, the French Rhone, the Niger or the Sacramento in
Financial forecasters perceive that much like traditionally traded commodities —
precious metals, for example — the useable water of the future will be so
scarce as to need to be mined, processed, packaged and, most importantly, moved
around the world. And they know that the demand will not go away. That is the
thrust of the thinking behind a global water futures market.
The year 1996 marked a Rubicon in the history of water and money. The water
from California’s Westlands irrigates an estimated $1 -billion-worth of food a
year; at 2,000 square kilometres, it is the largest agricultural water district
in the United States. In 1996, the district introduced an electronic bulletin
board for farmers to buy and sell their rights to Westlands’ water from their
home computers. Trading water rights from a laptop is now a given, just as
commodities that once could be bought and sold only on the trading floors of
Chicago or Kansas City are now routinely trafficked by mathematics PhDs at
hedge funds in Connecticut. If and when water becomes an exchange-traded
derivative, it will join Brent crude, jet fuel, and soya bean oil — and be
traded any time, anywhere, by anyone.
Making money come out of the tap means that fresh water must be given a price
anywhere it is traded — a global price that can be arbitraged across the
continents. Those in Mumbai or midtown Manhattan who understand the increasing
value of water in the world economy will speculate on this undervalued ‘asset
and their investments will drive up the cost everywhere(5). A water calamity in
China or India — and the food inflation, political instability and humanitarian
crisis that will surely follow — will reverberate in price spikes from London
to Sydney. This is how bankers will profit.
Economists have begun to model a global water-based futures market featuring
financial puts, calls, shorts, longs, exchange-traded funds, indices of
indices, options piled on top of options, and all sorts of opportunity for
over- the- counter swap s. Flood-insurance companies will certainly want to buy
stakes that could mitigate their financial risk. In fact, every corporation
that conducts its business in a flood plain, anywhere, would probably
participate. Farmers will want to hedge their bets that it will or will not
main, as will frackers and fishermen. As for the speculators, we know who they
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Currently, no one is trading
water futures, but it won’t take much to spark the market into life. When the
state of Texas tallied up to $10 billion in economic losses due to the recent
drought, academics set about theorizing how the water of the Rio Grande might
be indexed for a futures market(6). After the floods in Thailand last year
caused economic losses totalling $46 billion, Thailand’s Securities and
Exchange Commission studied the possibility of financial derivatives indexed to
rainfall and dams(7). The semiconductor manufacturer Intel might have been
interested — the mud and muck that reportedly halted its chip-making operation
in Thailand cost the company up to $1 billion.
A truly global trade in water futures will have to wait until the financiers
come up with a universally adopted measure of water stress. Until then, water futures
markets will emerge as local phenomena based on local concerns. For example, in
drought-riddled Australia, every element of an indexed futures market is ready
to go on the Sydney Futures Exchange (see go.nature.com/u7hdas). In the
Medinipur and Tumkur districts in West Bengal and Karnataka in India, where the
monsoon has become less and less predictable, a south Asian water futures
exchange bas been conceptualized, to be traded on the Delhi Stock Exchange(8).
Futures trading will extend from the most pristine rivers to the barely legal
effluvia of solid-waste plants. Commodity theorists in Switzerland have taken
the first steps in setting up markets that will trade in water futures derived
from sewage. The team calls its concept an ethical water futures market (see
go.nature.com/dq6fm4). In my view, it is a financial platform to sell treated
water to the highest bidder.
In all of these cases, the futures contracts will emerge from valuations of
relative water scarcity or plenitude based on an index of water levels in dams,
average precipitation or other indicators and predictors. Ultimately, the
financial instrument will have the same basic structure as the index funds
which brought unprecedented levels of speculation to the global grain market,
increasing the volatility in prices — volatility that futures exchanges were
originally meant to blunt. After all, if the natural-gas industry can pay more
for water than soya farmers, then the gas drillers will get the water and the
soya will not.
The reverberations of a global water futures market can hardly be imagined.
This much is clear: a water betting game will leave crops thirsting and push
the global price of food far beyond the peaks of the past five years.
The good news is that, unlike the failed attempts to regulate the derivatives
markets in food, something can still be done in the case of water. There are
plenty of examples of valuing water outside the realm of pure commodification.
One of the best examples bas been developed in the Ruhr basin in Germany(4).
This riverine resource is managed not by the invisible hand of the market, but
by a policy-creating body called the Ruhr Association. Cities, counties,
industries and enterprises in the region are represented by associates and delegates.
A total of 543 stakeholders negotiate water-abstraction fees and pollution
charges. The politics may be messy, but it works. Unfortunately, that is the
way with democracy.
There is no easy panacea for the world’s water needs, least of all the global derivatives
business, which has proved that h is not to be trusted with mortgage-backed
securities, much less our most precious resource. There is no need to initiate
a futures market in water only to create yet more financial madness that seems
to resist all attempts at regulation. This time around, let the business stop
before it starts.
Frederick Kaufman is a
professor at the Graduate School of Journalism, City University of New York,
New York 10018, USA. He is author of Bet the Farm: How Food Stopped Being Food (Wiley,
1. Kaufman, F. Foreign Policy 27 April 2011.
2. Lagi, M., Bar-Yam, Y., Bertrand, K. Z. & Bar-Yam, Y. Preprint at
http://arxiv.org/ abs/1 109.4859(2011).
3. Moya, E. The Guardian 8 August 2010.
4. Global Water Partnership & International
Network of Basin Organizations A Handbook for
Integrated Water Resources Management in Basins (GWP/INBO; 2009); available at
5. Keim, B. Wired Science 6 March 2012.
6. Brookshire. D. S., Gupta, H. V. & Matthews, O. P. (eds)
Water Policy in New Mexico (RFF Press
Water Policy Series, 2011)
7. Nguyen, A. Bloomberg 14 December 2011; available at
8. Ghosh. N. Commodity Vision 4,8.-18 (2010).
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