To your point, municipalities are most definitely going to need to buy out farmers to prevent water resource depletion. They should do so whenever market conditions value these rights at a discount (“buy low”).
https://www.npr.org/sections/money/2015/07/22/425392169/epis...
Exactly. These futures are a local market much closer to weather futures than fungible markets like crude oil or soybeans or even natural gas to a lesser degree, exactly because it's uneconomical to transport regular water over large distances. So these futures markets have little to tell us directly about anything other than local conditions in California. They allow local farmers to trade risk with other market participants such as speculators or the sellers of the water.
Cities are always going to be able to outbid farmers, in some cases by buying farmland for the water rights. The worst-case result of that is that some farmers in dry areas go out of business and more food is imported.
Food is a global market, water isn't. It's easier to import food than water since it's much lighter for the price.