California Water futures have been added to the list of tradable commodities.
Historically, commodity futures contracts were first created as a way for farmers to hedge against fluctuating crop prices. If someone thought a drought might devastate their corn season, buying a corn futures contract would mitigate the loss. Conversely, if someone foresaw an oversupply of corn, they could sell a contract in order to lock in the higher price. Although 98% of futures speculators do not take delivery of the raw material they bought, 2% of actual farmers might. Hence, if you are long futures in a spot month, you either roll into a future month or get out, lest you want a delivery of 42,000 barrels of oil.
The need for California to add water to the exchange can be related to extreme droughts, fires and the unknown future of climate change. Not only will this benefit farmers, but utility companies can now hedge their current supply helping navigate dry seasons.
Throughout this year, we have been holding and watching many commodity related ETFs, as the pandemic has shown supply chain disruptions leading to increased demands in agriculture (DBA). Recently, our Global Macro Model bought the Invesco Water Resources ETF (PHO). Similarly to the market, PHO has rallied into a new multi-month high.
With the advent of water futures based on the California spot water contract representing 3.26 million gallons of water, you will not have to take delivery. Whether you choose the ETF or are waiting for the new water futures contract, one thing is for certain: in the commodities play for 2021, water should be on your list.
Water, water, every where,
And all the boards did shrink;
Water, water, every where,
Nor any drop to drink.
- "The Rime of the Ancient Mariner", Samuel Taylor Coleridge, 1834
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Mish Schneider
MarketGauge.com
Director of Trading Research and Education
Forrest Crist-Ruiz
MarketGauge.com
Assistant Director of Trading Research and Education
