What happens when a farmer and a water index-builder talk for an hour

Last time I wrote here, I responded strongly to the launch of the Nasdaq Veles California Water Index (NQH20). My musings on this new index were provocative and got people talking about the issue, which is exactly what I’d hoped they’d do. I had quite a few really good discussions about NQH20 with several interested parties, but the most interesting was with Clay Landry, one of the index’s chief engineers who lived and breathed its creation.

Clay is the Managing Director of WestWater Research, an economic firm specializing in water market research, pricing, advisory and trading. Clay and his team have over 20 years’ industry experience focused on the Western United States, and they’ve done over $1.5 billion in water-related transactions. Clay comes from a ranching background with a deep understanding of water — his cattle ranch in Idaho focuses on improving soil health. In college, he studied agriculture and resource economics and he wrote his master’s thesis about water markets. In other words, he’s spent his entire life in the industry.

So it’s no surprise that when NASDAQ wanted to create an exchange, they went right to Clay. And it’s no surprise that when I expressed my concerns about opening water to speculation, he reached out to me to talk.

A question of perspective

Clay and I spoke on the phone for about an hour as I drove from field to field checking on crops that were getting close to harvest. He shared his reason for NQH20’s existence: to bring transparency to price discovery. Without this index, he says, if a farmer is short on water, he or she needs to buy it from a neighbor because there’s no clearing house for it. Every water transaction is done privately, so it’s tough to get a true read from a supply-and-demand perspective. NQH20 is meant to provide that perspective so farmers can hedge their risk.

It’s a worthwhile goal, I gave him that. But if it was truly about price discovery for farmers, why not have the index administered through a private organization rather than opening it up to anyone with a brokerage account? Imagine if GameStop or Bed, Bath & Beyond were water. Where would we be now?

Money, not blood, is thicker than water

The most telltale moment in our conversation about NQH20 came when we discussed its genesis. I asked Clay why he approached NASDAQ to start the index, and he said he didn’t: NASDAQ approached him.

There’s only one reason they would do that: to make a profit.

Clay argued that speculation on water is highly doubtful, and he cited an article from the Pacific Institute which specifically discusses the positions of speculators versus hedgers in the water market. He believes that the benefits of price discovery outweigh the little bit of potential that speculators and foreigners might manipulate the market. He thinks NQH20 should allow people with a vested interest to hedge their risk against not having enough water, or not being able to afford it.

He argued his point well, but NQH20 still looks to me like a profit-making mechanism. I believe speculators are attracted any time there’s an opportunity to take advantage of spreads in the marketplace and supply-and-demand. Sure, it may not be as big an issue right now because this water index is in its infancy; water isn’t traded like gold or oil. (Yet.) But as potential for profits increases, money will flow that direction. In fact, that index has gone up 7% just since the end of January. That’s a pretty good-sized jump, especially during one of California’s worst rain seasons in a long time.

Where do we go from here?

I’m not a water engineer; I’m just a farmer who knows he can’t substitute water with anything else. I don’t want people who don’t have a stake in it to manipulate it. And I can see that NASDAQ has the potential to profit off it.

Could Clay and I alleviate each others’ fears and come up with a mutually-beneficial solution? Not yet. For me, the solution is to sit and watch: watch what the spot market does, watch for rain. That’s the only way to know how highly potential speculators value NQH20.

I think if farmers can truly use this index to hedge against the financial impact of the unavailability of water for their crops, it might help them mitigate some of the other water-related hoops they have no control over. If we could keep speculators at bay and actually use the index as a tool — a hedge against an already difficult situation — then it is truly a benefit and something to watch and learn from.

At the end of the day, I appreciate the opportunity to talk about the new NQH20 index with someone who’s been hands-on in creating it. Water is an emotional subject, so much more so than other commodities like silver or gold. It impacts absolutely everyone. It is a need, not a want, and I appreciate that Clay Landry wants to mitigate my own financial and emotional worries about it. I’m looking forward to keeping a close eye on this index as the days, months, and years unfold.