They could soon be betting on water supplies

Financial markets on which speculators can bet on the cost of clean water supplies are getting closer, STEVE DRURY writes.

Food policy commentator Frederick Kaufman has called on financial market regulators to stop the betting on water supplies before it starts, in an article in the renowned scientific weekly Nature.

“Currently, no-one is trading water futures, but it won’t take much to spark the market into life”, Kaufman warned. After the recent drought in the USA, academics set about theorising how the water of the Rio Grande river might be indexed for a futures market.

Thailand’s financial market regulators have been studying the possibility of financial derivatives indexed to rainfall and dams, after damaging floods last year.

“Economists have begun to model a global water-based futures market featuring financial puts, calls, shorts, longs, exchange-traded funds, indices of indices, options piled on top of options, and all sorts of opportunity for over-the-counter swaps”, Kaufman wrote.

The background to this threat is that prices on the world markets in staple foods, especially grains, have broken records three times since 2007.

With demand for foodstuffs increasing, the diversion of land into biofuels and a quickening pace of climate crises – such as the recent heatwaves and droughts in Russia, and the south-western USA, and Europe’s cold, wet summer of 2012 – speculation in food commodities, and the land on which they are grown, is bound to increase. (See previous article here.)

Much of the global inflation in food prices hinges on the growing interest by “investors” in a financial derivative that tracks 24 major commodities, ranging from precious metals and energy to food, expressed in the Goldman Sachs Commodity Index (GSCI), which was set up in 1991.

After the USA’s Commodities Futures Trading Commission deregulated futures markets in commodities in 1999, speculation “leaked” from its traditional instruments towards essentials, and the GSCI began to boom.

The reason for that lay in the GSCI design, which was for “long only” transactions – meaning that bets on future prices were possible, but there was no mechanism for selling or “shorting” the commodities involved.

This became a major driver in the massive increases in global food prices, as other instruments such as credit default swaps became “toxic” in the 2007-08 global crisis. According to Kaufman in an earlier article:

This imbalance undermined the innate structure of the commodities markets, requiring bankers to buy and keep buying –no matter what the price. Every time the due date of a longonly commodity index futures contract neared, bankers were required to “roll” their multi-billion dollar backlog of buy orders over into the next futures contract, two or three months down the line. And since the deflationary impact of shorting a position simply wasn’t part of the GSCI, professional grain traders could make a killing by anticipating the market fluctuations these “rolls” would inevitably cause.

The volume of trading on GSCI, which had been about $13 billion in 2003, leaped up to $55 billion in the first two months of 2008 alone, and hit a total of a third of trillion dollars by July 2008.

This is where things have stood ever since, as food-related derivatives sprang from the fevered collective brain of global casino capital: “Imaginary wheat dominates the price of real wheat, as speculators (traditionally one-fifth of the market) now outnumber bona-fide hedgers four-to-one”, Kaufman wrote.

It is already possible for the financial speculators to bet on the weather, and the logic of capitalist markets now leads to speculation on clean, fresh water.

About 2.5 billion people (37% of the developing world’s population) lack sanitation that is adequate for healthy living, and more than 780 millon people use unsafe drinking water sources, according to a World Health Organisation/UNICEF monitoring programme.

Poor water supplies are the main contributor to deaths of African children under five years old.  For hundreds of millions of people, getting water for domestic use consumes much of their daily labour, which involves mainly women and children trudging twice daily to distant water sources – as often as not poor quality – and carrying it home.

The International Conference on Water and Sustainable Development, held in Paris during March 1998, marked a turn towards the commodification of water. Its proceedings included many fine “visions” regarding the “mission” of UN agencies, governmental “aid” arms of well-off countries and a host of NGOs. 

The reason why the visions have come to nothing, for the hundreds of millions of people without sanitation and clean drinking water, was clear at the time. Clare Short, then New Labour’s Minister for International Development, said at the gathering: “Partnerships among governments, the private sector and civil society are critical to sustainable development [of water resources].”

Since then the “private sector” – read capital – has been eager for such partnerships, and Short’s sentiments have been echoed repeatedly.  Throughout Europe, privatised water and sanitation utilities are hugely profitable, and are likely to remain so, for giving up water is not the first choice for most people falling on hard times.

Short’s world view is increasingly shared by environmentalists as well as many NGOs, parastatals and the UN. Commodification of water is one of many aspects of the PES (payment for ecosystem services) movement, which aims to put a value on every bit of ecology to shoehorn nature into the capital system.

So from being a free “given”, water has become viewed as a central economic issue, whether because of capital-damaging events such as the 2012 US drought, or ventures that range from agri-business to “fracking” gas from shale rock. Governments’ reports are full of fears of “water conflict” in major river basins such as that of the Nile. The World Bank and International Monetary Fund (IMF) bully poorer countries to privatise their resources, including water.

For capital, financialisation is the natural next step. Indexes of water-related industrial stock (see here) show attractive returns compared with general indexes such as the Dow Jones (New York) or the FTSE (London).

As well as being the number one necessity for life, water has a number of features that make it attractive to capital. First among these is that, provided that it is fit for use, it doesn’t matter whether it comes from a lake, a spring or a captive iceberg. More and more often it has a price structure, e.g. through water metering. Most significantly, high-quality water is becoming universally scarce.

Financial firms are preparing for a water market, and there are few signs that calls for regulatory action to stop it will be heeded.

Swiss commodity specialists at Prana Sustainable Water may well get a head start – and feel-good points – through Ethical Water Titles futures contracts. South Indian economists are close behind, in exploring the trading possibilities from the increasingly unpredictable monsoon rainfall. Perhaps even global warming is being commoditised, and certainly the three great holy rivers (Cauvery, Godavari and Krishna) are being looked at as prospects for profit.

There can be little doubt that great swathes of the world face water crises of some kind or other, but – if world food prices are anything to go by – capital’s interest will be nothing but deadly.

■ A group of agronomists, earth scientists and geographers argued last year (in an article available on line here) that global food production – which currently accounts for 70% of freshwater use – could be doubled, while the environmental impact of agriculture is reduced, Gabriel Levy adds. Advances in scientific technique have made it possible to monitor the physical limits to agriculture more accurately than before, they point out. They make implicit criticisms of the industrial-agricultural complex, pointing out for example that the expansion of farming into sensitive eco-systems is unnecessary and damaging – but give no broad account of the role of capital. They look at issues such as the development of GM crops only from the standpoint of agricultural systems, not the social and economic context. I think we should be aiming for a socialist critique of this important work.

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