The New Water Market

The water market isn't something new, what is new is to market water in financial markets, just as crude oil and gold are traded. Panama is a country with a lot of freshwaters, we have more than 2,000 km of coastlines in the country, in the Pacific Ocean and the Caribbean Sea, plus that of the islands. Besides, we have lots of rivers of all sizes and flow, throughout the country, some stronger than others.  But when it rains, even the meekest and small creek becomes a danger to those who live in its surroundings.

We have abused our rivers in many ways, dumped them with garbage, turned them into sewage, and even throwing them with industrial waste dumps, and with this, we pollute our oceans, without anyone doing anything about it. We have filled them with hydroelectrics - mirrors, and pass-through types - but we are not able to make the water reserves for the dry season of the year.

If we go back to ancient history, not all cities were settled near the sea or a river, and somehow you had to take the water from where it was to where it was needed. From this story, the ancient aqueducts were born, which gradually became transformed with better engineering and technology. But the needs of these ancient cities are not the same as the current needs of modern cities. For example, on islands where there are no rivers, seawater is desalinated to be used as drinking water or at least as "hard water" (not for drinking it, but for other needs).

Our reality in Panama is another. Here we have a rainy season at least for about 8 months of the year, and for 4 months we have a dry season. There may be some years when the climate changes due to the effects of El Niño (drought) or La Niña (floods), but regularly the 8/4 rule works quite well in Panama. We also have some regions that are drier than others, the Dry Arch of Pedasí and the Dry Arch of the Beach District of Panama and Coclé, for example, but we also have the other regions where it is more difficult for the rain to stop all year round.

The thing with Panama is that we need our water, not only for the basic needs of the inhabitants of the cities of Panama, Colon, Arraiján, and Chorrera (which are on the boundaries of the Canal Basin) but is also used for the operations of the Panama Canal. And the problem is that we have shared Lake Gatun and Lake Alajuela for this purpose for over 100 years without us making any other reservoirs to improve this issue.

During the dry season months, the same problem prevails as always, and it is something that farmers have not yet learned to prepare, and we see how drought continues to affect them year after year without them finding a solution to their problem, and what they hope is that the government will help them. But farmers who have taken the "bull by the horns" have developed their own "aids" for the dry season, such as making their water ponds (where they harvest their water in the rainy season) in high places and then lowering the water by gravity to the places where they need it.

The government's solutions would be like the Remigio Rojas Water Project in Chiriquí, which takes water to farms from the mountain through an open aqueduct that runs through them. Unfortunately, the Tonisí Irrigation Project (very similar to the Remigio Rojas Project), very close to the Arco Seco de Pedasí was not completed.

But the realities of different countries are different. One city that has caught my eye is Lima, where it does not rain (to such an extent that you see the homeless houses for this very reason). Freshwater must be brought from the jungle, even when Lima is facing the Pacific Ocean because is cheaper to have the water brought from the jungle in the Amazonas Basin than to desalinate the water from the Pacific Ocean.

Where there are water problems is in the Western United States and the main reason why water began to be traded on the Chicago Mercantile Exchange, where the most futures and commodity options are traded in the world. In California, mainly, very severe climate changes are being experienced (for a few years now, but in 2020 they were increased with more than 9 million acres on fire so far), where drought, wildfires, and high temperatures are the constants of the region, which also includes Nevada, Arizona, New Mexico, and even Colorado.

What are you looking for with this? In theory, a water futures market is sought, in which the commodity is purchased in the future to avoid these mismatches. That is, those who need water – physically – in this region, could buy it on the market and send it to them, just as crude oil or gasoline is shipped. It's simple. The future gives you the right and obligation to purchase a raw material (commodity) on a specific date at a set price.

However, just as the futures can be traded, there are also options, a financial derivative that is used to have an "option" to buy some commodity, but that does not involve a total exchange of it. It is used largely to hedge a commodity so that the price at which the future was acquired can be protected. The option gives you the right but not the obligation to purchase the raw material (commodity) on an agreed date at an agreed price.

The problem with options is that they can be used, as they are used, in commodity price speculation at any given time, looking for high and fast returns with transactions. For example, the price of crude oil, which should be the result of the actual supply and demand of the commodity, often is the result more than anything of speculation, taking the price up or down, according to the needs of speculators.

But what is being marketed on the CME is the Nasdaq Veles California Water Index (NQH2O) which does follow the lease price of water rights for sales transactions in the five largest and most traded markets in the California region, which includes surface water and the four groundwater basins (Central Basin, Chinese Basin, San Gabriel Main Basin, and the Mojave Basin). This index reflects the average price of water by volume, at the source, excluding transportation costs and water losses, is valued at US$ per acre-foot, i.e., the volume of water that will be required to cover an acre of land at a depth of one foot and which is equivalent to 325,851 gallons of water. This practice of passing/selling water from farmers left over to those who require it is old-fashioned in California and does not imply that anyone is "playing" with anyone's need.

As you can see, this index is very specific to a particular region and everything indicates that it will be widely used to make risk hedges among those interested in the California region (and indeed anywhere in the world) so that you can have a little more control over any business in California that needs water for your subsistence (and as a cost of production). It will allow farmers, hedge funds, and municipalities to hedge through water hedges based on future water prices and their availability in the Western United States. And since it's an index, there won't be a "water" exchange here either.

Even if the proponents of this new "commodity" argue that this future will eliminate the insecurity of water prices for farmers and municipalities (who are responsible for providing water to their citizens), helping them to make better water price budgets, for some experts, treating water as a commodity that is traded just like crude oil and gold puts a basic right of the human being in the hands of financial institutions and investors. In the first week of the commodity trading in the CME, contracts were marketed for water prices in California for $1.1 billion.

Panama made its first steps in the water market as a commodity, when in January 2020, "the administrator of the Canal, Ricaurte Vásquez established the freshwater charge – Cargo de Agua Dulce (CAD) - as a response to the lack of the resource and the urgency of offering a long-term solution to the issue of supply of this asset, both for human consumption and for the operation of the Canal. The development of the water futures market on the stock exchange is no different from the concept developed by the Panama Canal Authority (ACP) earlier this year."

"Panama Canal Authority (ACP) administrator Ricaurte Vasquez said freshwater surcharges will be a fixed $10,000 and a variable of between 1% and 10% of the toll, depending on the level of Lake Gatun, the main one that feeds the Canal, and will apply from February 15 on. Vasquez recalled that the Canal basin received 20% less rainfall in 2019 than the historical average and the low levels of Lake Gatun raise the fear that it will not reach the right margins to cope with the dry season that began this month."

Did the measurement work? Indeed by 2020, the CAD will reach $130 million in revenue for the ACP that can be used as a fund to make the necessary projects so that water does not remain a problem in the Panama Canal Basin, nor for the inhabitants of the cities that are filled with drinking water from the Gatun and Alajuela Lakes of the Canal Account.

Can Panama be a water exporter in the future? That we can, since the climatic conditions allow it, however, to be able to do this without affecting either the Canal or the inhabitants of Panama is that the government/ACP has to do the necessary infrastructure projects so that the water is not wasted, and that we can "harvest" enough water for internal use and a surplus so that we can sell it to countries that need it.

Will this be the "future" of water? Most likely. And Panama has the option of becoming a raw freshwater exporter, especially for the United States, which is where it is scarce, and we have it closer (remember transportation costs). But for this, Panama has to make the most of its rainy season, first solving the internal water problems, and then think about any type of export (I only remind you that there are already brands of bottled water that are being successfully exported to different countries).