Allocation prices have been high this year with many in the market questioning the reasons. The most immediate response is “speculators”
Below is a short summary of what H2OX has seen in the market this season.
All of the numbers in this article are derived from trade data in SA Murray, NSW Murray, Murrumbidgee, Vic Murray and Goulburn regions as reported in the relevant state registers. We have also included Murray Irrigation Water Exchange daily aggregate trade data because it is publicly accessible. Trade data from other smaller exchanges run by private irrigation corporations isn’t published.
Volume Weighted Average Prices (VWAP) are the “standard” used when reporting water prices.
- The VWAP until the end of May 2019 is $382/ML
- The VWAP in April was $502/ML and increased to $561/ML in May
- The last time monthly VWAP prices exceeded $500/ML was in September 2008 when the seasonal VWAP was $345/ML.
- The highest recorded seasonal VWAP (based on availability of accurate data) was in the 2007/08 season when it was $420/ML. That same season, allocation prices spiked over $1,000/ML at the beginning of the year.
The following chart plots the monthly VWAP for 3 specific seasons in which the VWAP exceeded $500/ML for at least one month.
The water market has changed a lot in the last decade specifically the number of new water products that have been introduced and adopted by the market. Forwards are the predominant reason why the VWAPs were so low in the first half of this season.
Large volumes of Forward contracts were written at the end of the 2017-18 irrigation season for delivery in 2018-19. A large volume of Forwards are typically delivered in July, but they generally roll out through the first half of the season. These Forwards were written between $200-300/ML and have dampened the seasonal VWAP.
How much the Forward market affected the VWAP this season is unknown because none of the water register provide the capability to record the type of contractual agreement underwriting the transactions ie spot trade, forward, transfer associated with lease etc. This makes analysis very difficult – impossible even.
By our reckoning, removing the Forwards would have seen the VWAP $50-100/ML higher in the first half of 2018-19. This means the curve in the above chart is actually much “flatter”, demonstrating that we are starting to see less variation in prices across the season. While no one wants to be paying high prices, more stable prices are a good sign that the market is starting to work more efficiently.
The recent Water Trade Price report from the MDBA highlighted the lack of recording transaction type in the water register as a significant issue specifically for zero dollar trades. The reality is, recording the transaction type when lodging a trade would provide substantially more transparency to market participants. H2OX has long advocated such changes be made in the Victorian Water Register.
Making such capabilities available in the water registers is one thing, ensuring data is entered accurately is another. Given that the majority of trade applications are lodged by water brokers (especially in Victoria), this shouldn’t be an issue with some training and more importantly, more stringent auditing of transaction prices.
This leads into the imminent ACCC review into water market transparency announced by the Coalition during the election campaign. Hon David Littleproud is currently working on the Terms of Reference for the review.
H2OX supports all initiatives to increase transparency in the Australian water market. We believe further regulation is needed in the market and for intermediaries. A centralised exchange for all water transactions would provide absolute transparency for water market participants – a goal that H2OX has remained committed to since starting 5 years ago.