The new derivatives market in California water: disaster natural resources capitalism at work
I attended a rain dance 40 years ago in the Southwest. At the end of the 6-hour ceremony, it rained. My final memory of the event was a small, elderly lady chasing an immense clown, who had ritually molested her in the ceremony, beating him about the head and shoulders with an umbrella. The next day the clown showed me the welts and bruises she left on him. Regardless, the dancing, drumming, and sanctified elder-lady groping had produced the desired result, more water. Some of those clouds sailing over the plateau had heard the call, lingered, and shared some of their precious cargo with needy, righteous folks below.
It’s not an experience any farmer from the drought plagued West is likely to forget. And so, decades later, the rain dance surfaced in my memory when I read that the Chicago Mercantile Exchange (now the CME Group) had opened up a futures market in California water (Nasdaq Veles California Water Index [NQH2O]) last week.
One can imagine derivative tranches composed of portions of irrigation-district allotments of riparian water, some private well water, water from the odd ephemeral creek, pre-1914 rights water, added to a slice or two of federal bureau water and some of that State Water Project water that has remained, as some say, “notional.”
Of course, we here in the San Joaquin Valley, which without millions of acre feet of irrigation water would dry up in a dusty cough in one season, are familiar with the derivative-market deal from our experience with real estate-mortgage tranches, derivatives described by Warren Buffett 20 years ago as “weapons of mass destruction.” And many a former homeowner, now a renter without savings and living on the Social Security check, would agree. That’s the view of ordinary folks. But, according to the Public Trust Doctrine, enshrined in California water law, at least surface water is held in trust by the state and nation for the use and enjoyment of all the people, not just agribusiness or the kinds of water-management distortions that would arise as the result of a derivative market in an “asset” no one ought to be allowed to speculate on. And groundwater is undergoing a very imperfect process of regulation of its own, too little too late but at least it saves the faces of the regulatory agencies involved.
But, for Big Shots, those large enough to rank a numbered and colored ball on the great Thomas Hobbes Memorial Pool Table of Agribusiness, where those balls are constantly crashing into one another over the heads of ordinary folk, now that they’ve rigged the Farm Bills to where they cannot lose however badly they farm and little water gets delivered, playing the futures market in bundles of water of various dubious provenances might be better than Poker Night at the Country Club. The next Farm Bill will probably have a feature that protects agriculture from any harm arising from water derivatives and the inevitably following collateralized debt obligations that created such joy in the mortgage markets.
But will it make another more water?
It might stimulate renewed interest in putting new dams in rivers that already have dams so that less water will escape – free, with some Salmon smolts and Steelhead fry – into the ocean. Maybe the Chicago derivative traders can figure away to monetize that water, too, and call it the Revolutionary Green Futures Market, so that not one drop of fresh water, produced from ice, snow, sleet, rain, or from deep, deeper and much deeper in the earth, will go unwagered upon into the Bounding Main.
And how about a market devoted to subsidence futures, predictions of how far what land where sinks over a season? What about a Selenium Index derivative, estimating the increase in poisonous concentration per acre-foot? Or a Chromium Index derivative to estimate the increase in that poison from groundwater? Or a Migratory Water Fowl Index, betting on the rate of decline per season of water fowl on the Pacific Flyway? And while we are at it, why couldn’t they develop a futures market based on the state’s Cancer Registry? How about a Wildfire Index, kind of like counting jelly beans in a jar only estimates of burned acres in the thousands?
It's like a story I heard when I was a kid about two gamblers at Stateline betting big money on which of two raindrops would travel faster down the window to the sill.
The San Joaquin Valley, which can be regarded along with arid urban Southern California, as the table on which this game is to be played, has always rested on two absolute poles: every inch of farmland is for sale; and water runs uphill to money. This derivative market, far from “rationalizing” water distribution in the state, is going to disturb the magnetic field that is the Prime Mover and Original Cause of all economic activity in our region. How are you going to determine the price of an acre of “prime” farm land, i.e. irrigated farm land, if some commodity trader in Chicago or New York is using the precious acre-feet required to irrigate those almonds in some elaborate “play” that flops and suddenly our almond farmer doesn’t get his water because nobody knows who might have owned it or had the right to use it when and where anyway; but the only thing for certain is that somebody didn’t pay his derivative contract on time so … Maybe, the farmer’s irrigation district got a better deal selling it to Los Angeles than to him, so off it went and the farmer can’t get the water he needs when he needs it at any price. But no, he can get it from some well owner west of Oroville for $200/acre-foot if he can wheel it through Marysville down to the Delta, through the Delta-Mendota and maybe part of the San Luis canals. But, of course, it isn’t really the well water from west of Oroville at all, but off of some westside sedge farm that has some federal water for sale at $500 an acre-foot.
When Acme, ABC, and XYZ hedge funds take big plunges into the California water-derivative market while federal and state resource-regulation agencies are still trying to do their job, for example, continuing to make some water available for the environment, then Acme and its competitors are going to get together, hire themselves lobbyists and buy chunks of local members of Congress, who are going to apply even more pressure than is already applied by agribusiness on these agencies to perform one great task: Non-enforcement of state and federal environmental laws and regulations. Not that any old real estate developer in the state can’t already buy non-enforcement of any environmental law or regulation, sometimes just for the asking, if he knows how to ask right.
And so, the Invisible Pool Cue of the Free Market will scatter the precariously racked balls in all directions at once and a new game will develop, even more remote from the actual work of growing food and fiber.
However, it won’t make it rain, more water, or any prosperity for ordinary people in the San Joaquin Valley.