ASX Water Futures Concept

"The listing of futures contracts on water indexes would create a market in forward water storage expectations against which parties would be able to hedge water availability risk."

Background

Water Index Futures mapThe risk of water availability is a painful reality of life for much of the Australian rural economy. In this sector, risks are borne not only by users of water, but by all parties that make up that rural economy including banks, insurers, processors and suppliers. Unlike for participants in the equity, money or commodity markets, there is no market into which users and investors exposed to water availability risk, can effectively hedge that risk.

The implications of this missing piece of economic infrastructure are profound. Farmers with water availability risk have no means of hedging against drought conditions. Service providers to these farmers therefore assume similar exposure and add the requisite risk premium increasing the cost of doing business for farmers. And finally investors seeking large scale capital investment opportunities either avoid this sector, or are forced to price this risk accordingly. The result is increasingly high costs compounded by even greater inefficiency.

Concept

ASX has conceptualised a market in water availability risk which would provide parties with this risk a tool to hedge. Key features of the concept are:

  • The development of a series of market benchmarks or indexes of water availability (the ASX State Water Indexes) based on the logical aggregation of key water storage dams (see map above). These indexes, are calculated by State Water and are excellent proxies for determining water availability.
  • The listing of futures contracts on each index to provide a market mechanism for parties to hedge against the future value of the index.  

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