The Sydney Futures Exchange (SFE) Corporation has conceived of a market in water availability risk to provide affected parties with a tool to hedge against drought conditions. The SFE states that the risk of water availability is a reality for users of water in the Australian rural economy. However, unlike participants in the equity, money or commodity markets, these users have no market into which users and investors can effectively hedge the risk. The SFE regards the implications of this as ‘profound’ not only for farmers but also service providers and investors who seek large scale capital investment opportunities. Such investors will either avoid the sector or price the risk accordingly, which can result in inefficiencies. The key features of market in water availability risk are:
- the development of a series of market benchmarks, or indices, of water availability based on the logical aggregation of key water storage dams (to be known as SFE State Water Indexes);
- the listing of futures contracts on each regional index to provide a market mechanism for parties to hedge against the future value of the index.
The SFE has engaged in widespread key participant and stakeholder consultation in this regard. The New South Wales indexes are scheduled to be launched in Q3, 2005 and are being developed by State Water and the SFE through a project team and steering committee.
The proposed SFE Water Futures Market would be a financial market with the contracts being settled in cash. There would be no physical delivery of water. Rather buyers and sellers would have price exposure to the respective SFE State Water Index that results in realised cash profits or losses.
Source: SFE, July 2005.
