Global shortages of water could lead to the precious liquid being exchanged in a similar way to permission schemes used by countries for carbon dioxide, the head of one of the world’s leading exchanges said yesterday.

Craig Donohue, chief executive of the Chicago Mercantile Exchange (CME), said that water could become a commodity as droughts and demand place huge pressures on river systems and water tables.

Trading water as a commodity would, it is argued, put financial pressure on users to keep consumption down, in the same way that carbon emission trading schemes penalise the biggest polluters.

It would be a market-based mechanism to force greater efficiency among business users by penalising heavy consumption. While offering a lucrative option for traders, the market would be designed to reduce the pressures that are already said to have contributed to war and starvation.

Some analysts forecast that over the coming century water shortages will become an even more critical geopolitical issue than climate change.

Plans for international “water futures” trading are understood to be at an embryonic stage and it could be only a few years before water joins crude oil, pork bellies, orange futures and other commodities traded on global markets.

Mr Donohue said that such a plan “would not surprise me”. His comments come as a variety of experts have increased their warnings on global water supplies and the ability to support the rising demand for food around the world.

A recent report by the International Water Management Institute concluded that it was “probable that today’s food production and environmental trends, if continued, will lead to crises in many parts of the world”.

Record crude oil and grain prices, intense pressure on grain stocks and other trading phenomena have rocked commodity markets, and Mr Donohue said: “This is not just a cyclical change. This is an entirely new market.”

Dramatic shifts in the demand patterns of commodities around the world were, he said, transforming the trading scene. The increasing use of corn as a source of ethanol to fuel cars was creating a “tremendous convergence” between energy and food markets.

That convergence has already produced substantial imbalances in some commodity markets. Rising corn prices have persuaded many farmers in the United States to plant fewer soya beans, which has in turn squeezed world markets for edible oils.

Large corporations such as Coca-Cola have already vowed to achieve “water neutrality” by replacing the water they use to make their products. Australia, large portions of which which suffer from extreme drought, has created a vibrant market for buying and selling water entitlements.

The demands of industrial users such as the soft drinks industry are tiny compared with those of agriculture. Changing diets in China are a source of concern to water experts, who point out that while a kilo of grain requires about a tonne of water to produce, a kilo of beef requires about 15 times that.

Climate change is one of the factors contributing to the uncertainties surrounding water supplies. Rainfall patterns are expected to change over the next few decades, with regions of Australia, southern Europe, the US and much of Asia forecast to get less.

How it would work

— A water future would be an agreement to buy or sell a certain number of litres of water at a pre-agreed price on a certain date

— Futures are priced, like shares, with a bid and an offer price — bid being the price at which a trader is willing to buy a futures contract and offer being the price at which they are willing to sell

— They are used to hedge against risk. In the case of water, risk that water would not be available

— They are also used for speculating. A speculator might invest in water futures in the hope that farmers would need it in the summer and be prepared to pay more

— If a farmer wanted to protect himself against rising water prices, he would buy futures to cover the amount he is likely to need

— Information on the availability of water in local storage facilities would help buyers and sellers to determine the risk of water shortages — and therefore the price of the asset

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