Okanagan Basin Water Board seeks answers on commodification of resource

Commodification of water

The commodification of water is raising some concern with the Okanagan Basin Water Board.

Executive director Anna Warwick Sears says in a report to the board that she has discussed developments around trading water futures on the stock market with Dr. John Janmaat at UBC Okanagan, who specializes in water resource economics.

Janmaat explained that recent news stories about futures contracts on the price of water in a number of California water markets don’t really have much to do with water as a resource, but rather with the variation in price of water in markets where it is already traded.

Conditional contracts for water delivered at a future date may fluctuate depending on dry years and have been around for a long time. "The innovation," he explains, "is that somebody came up with a water price index upon which a futures contract could be based."

There is no water market in B.C.

"Technically, if you purchase a long position in a futures contract, somebody has sold you a promise that they will deliver you water at a particular place on a particular date."

The price of the contracts is determined on the Chicago Mercantile Exchange.

"If you took a long position in the fall and the price of water went up before you closed the position in the spring, your profit is the amount by which the price went up. The price of the futures contract and the price of the actual underlying item the contract is based on converge as the delivery date approaches. That means if you actually want to have the water in the spring, you can use the profit you made on the futures contract to cover the increase in the price of water in the underlying water spot market."

Janmaat says this opens the door for a larger group of people to gamble on the price of water.

Positives may include options for water users to protect against price changes, but it's unlikely typical farmers would do so.

"This derivative market simply confirms that it already is being treated like a commodity in some places. So in that sense, it is neutral. However, depending on your perspective, can be a good thing or a bad thing."

More Vernon News