NQH2O: Nasdaq Veles Water Index April 2021 Market Update

By Market Insite8 days ago

If any doubt persisted over the first months of the year, it has now become clear that this past winters dry conditions will not be reversing anytime soon. With 88% of California classified as experiencing severe drought and no less than 53% classified as extreme, according to the California drought monitor, there is no question that conditions have worsened, confirming fears that another dangerously dry summer looms on the horizon.

In fact, so troubling is the situation that on April 21, amid the barren backdrop of a greatly depleted Lake Mendocino, Governor Newsom issued a state of emergency declaration for Mendocino and Sonoma counties, stopping short of a statewide order, but insistent that the declaration could be extended to other counties should circumstances warrant it. Signaling the potential for enforced curtailments while guaranteeing specific assistance for urban and agricultural water users in the region, the move was necessary, particularlyfor the highly concentrated grape growers and wineries operating along the Russian River watershed.


However, with Central Valley growers unable to benefit from the lifting of regulatory constraints that the order would provide, frustrations continue to mount, as Valley lawmakers voice concerns over their exclusion.

Just weeks prior to Newsoms announcement, the State Water Project and Central Valley Project (for South of the Delta agricultural users) reacted to deteriorating conditions with significant reductions to annual allocations, both matching a historically low 5% of the maximum allowable entitlement. As our partners at West Water Research recently explained, nearly 27 million residents and 750,000 acres of farmland are to be impacted by the decision, bringing users to the spot market to make up for the difference. As expected, the impact of these developments to the spot water market has been abrupt and extreme.

Reflecting the shifting supply shortage, the Nasdaq Veles California Index (NQH2O) has, as a result, reached new highs in an uncharacteristically short period of time:

  • 13% increase MoM:While much of the recent upswing in prices took place over the course of the final two weeks of March, the index saw a continuation of the trend throughout the month of April as we closed the month at $868.70 per Acre Foot as compared to $772.10 per AF on 3/31/21. This move can be largely attributed to worsening drought, with the recent state of emergency declaration bolstering prices in the spot market.
  • 76% increase YTD:As NQH2O index history suggests, the California water market has typically been very sensitive to seasonal price pressures, with warmer temperatures during the growing season pushing prices upward following the significantly reduced demand of the Winter months. This year has been no different in that respect, albeit with a much sharper increase than weve seen in recent years. On top of this, an unusually dry winter sent an early signal of the severity of this years hydorologic shortage, with the April snowpack survey, which bookends the states wet season, indicating only 59% of average levels: a grim warning for a state that relies on melting snowpack for up to 30% of its annual water supply.
  • 121% increase YoY:Perhaps most strikingly, the degree to which prices remained elevated through the winter months this year has stood in contrast to substantially lower prices during last years winter months. While the expected seasonal pattern has remained in place, its clear that an expectation for prolonged dry conditions have taken hold, whereas last year, this was not yet the case. Considering last years seasonal high of $254.16, its instructive that this years seasonal low bottomed out at $476.75, a baseline 88% increase, well before we observe any seasonal price movement occur. Likewise, before March of this year had even ended, we had already seen the index exceeding the 2020 high of $703.99. With pricing having opened the month of May at $868.70, the index is now pricing in expectations for the further worsening of an already alarmingly dry season.

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