First off, my apologies to those looking for updates on issues related to home prices. I've taken on the additional role of market maker in the new CME NASDAQ/Veles water contracts, and am waiting to see how things evolve in this contract before setting up a dedicated website. (However, access to water - or too much of it in South Beach -should be of longer term interests to those with exposure to home prices?!?)
The CME has done a great marketing the new program (see attached link), and has created a program to promote market making, and was rewarded with 94 trades in the first (partial) month of trading (Dec 2020).
I've primarily been tweeting (@CMEWaterFutures) but wanted to compile the posted graphs in one place so that interested users can get a broader perspective. i promise not more than 2-3/x month for now. Wish me/us well with the new contract so that I'm incented to set up a separate website.
At a high level, the first graph is the historical NASDAQ/Veles index (partially reconstructed from past data) for the last 8 years. I've shown the graph by month as there seems to be pronounced seasonal factors in the spring as farmers look to see if there's been "enough" snow that season. BTW -My sense is that prices are driven primarily by changes in the supply as demand for water seems pretty stable. An overlay of these prices with designated drought years (available on request) would confirm that price spikes are tied to water shortages.
This year (the little stub in red) has already started out as one of the highest-priced years for water, based on La Nina forecasts. I can't travel to ski this year, but I keep one eye on the snow forecasts when quoting these contracts.
There have been quotes in the first three contracts (Jan, Feb and March) and the forward curve has been upward sloping (at about 10-12 points per month). I think that makes sense before a possible spring surge (e.g. if no snow) but as the above graph shows, prices are already near all-time highs for January, so a surprise might spur just as large a move to the downside.
Finally, the bar diagram (in black) shows a) how the trading levels have tended to be above spot index (in blue, updated every Wednesday at 9:45 Eastern), and b how markets tend to have magnified moves to changes in the direction of the index. (Note, I've posted a VERY wide bid/ask on the March 2022 contract, as I expect that clearing prices could be +/- 100 points should longer-term weather patterns change.
The graph highlights how expectations and index can diverge, right up to the last day of trading (sound familiar to home price index traders?). For example, the CME quoted a High/Low/Close on Jan 19th for the Jan contract of 509/515/512. The contract settled the next day at 506.66
I just put my toe in the water (!) on this topic. Please feel free to contact me if you have any questions or trading ideas, and please feel free to forward to others in your office/ campus/ who may have an interest in the broader topic of hedging the price of water in California.
Thanks,
John