Water is a vital resource for the survival of all living things. Luckily, water covers about 71% of the earth’s surface.1 In fact, there are 326 million trillion gallons of it on earth.2

However, 96.5% of the earth’s water is found in the oceans3. Just 3.5% of the earth’s water is fresh water ‒ 69% of that water is trapped in glaciers and ice caps, while 30% is found underground and is costly to extract.4 That leaves only 1% of water that is readily accessible (114 million billion gallons) to meet most of the world’s agricultural, industrial, and residential needs for water.5

Water consumption

The United States ranks second in the world behind China in water consumption and ranks first on a per capita basis.6 It’s estimated that the US uses approximately 322 billion gallons of water per day.7 California, the third largest state in the US by size and the largest by population, ranks first in its use of water ‒ accounting for about 9% of the US’s daily consumption.8

With heightened climate concerns, growing population, and increasing agricultural production; how does the most populous state balance the competing demands for water with its limited supply?

How is water valued to meet these demands?

The Nasdaq Veles California Water Index

Nasdaq and Veles Water have partnered with West Water Research, LLC, the leading economic and financial consulting firm in water trading, to develop the Nasdaq Veles California Water Index (NQH2O Index).

This index tracks the price of water rights across the five largest and most actively traded regions in the state of California including California’s surface water market and the following four adjudicated groundwater basins:

  • Central Basin
  • Chino Basin
  • Main San Gabriel Basin
  • The Mojave Basin

From 2012 to 2019, these markets accounted for nearly $2.6 billion US dollars in transactional activity. The NQH2O Index utilizes WestWater’s Waterlitix database as the source for underlying transaction data. Sales and lease transactions are included in the NQH2O Index. The index is priced in US dollars per acre foot. An acre foot is the volume of water required to cover one acre of land to a depth of one foot, which is equivalent to 325,851 gallons.

The NQH2O Index was launched on October 31, 2018 at a value of $371.11 per acre foot. The value of the index reflects the volume-weighted average price of water, at the source ‒ excluding conveyance costs and losses in the underlying markets after adjusting for idiosyncratic pricing factors specific to each of the eligible markets and transaction types. It is calculated and disseminated once per week and published every Wednesday morning at approximately 9:30 a.m. (Eastern Time) and represents water leases and sales that occurred Monday through Friday of the prior week

All transactions undergo a rigorous research process through which they are identified, verified, and accepted. The minimum requirements for adding a transaction into Waterlitix are verified such as price, volume, sale date, water right type, and participating counterparties

Transaction data is not accepted unconditionally, and confirmation of details is obtained from multiple sources including copies of purchase agreements. The ability for any market participant to influence the index price is small as the barriers to entry are high and market participants must demonstrate ownership of water resources and define a water use case. Furthermore, all purchases and sales agreements are reviewed by a government agency.

The Nasdaq Veles California Water (NQH2O) Index is an established benchmark index for water prices that provides greater transparency, oversight, and price discovery for the water industry and its participants.

Sources

  1. Source: www.usgs.gov
  2. Source: www.caltech.edu
  3. Source: www.usgs.gov
  4. Source: www.usgs.gov
  5. Source: www.usgs.gov 
  6. Source: www.usgs.gov
  7. Source: www.usgs.gov

Test Your Knowledge

ACCREDITED COURSE

In case you didn’t know, the CFA Institute allows its members to self-determine and report continuing education credits earned from external sources. CFA Institute members are encouraged to self-document such credits in their online CE tracker. CME Institute offers a variety of courses, webinars, and white papers to support your professional education.

What did you think of this course?

To help us improve our education materials, please provide your feedback.

Extend your learning

Put your knowledge into practice with the Trading Simulator

Get hands on experience with the latest Trading Challenge

CME Group is the world’s leading derivatives marketplace. The company is comprised of four Designated Contract Markets (DCMs). 
Further information on each exchange's rules and product listings can be found by clicking on the links to CME, CBOT, NYMEX and COMEX.

© 2022 CME Group Inc. All rights reserved.