Outlook, Water

FY20 Water Availability and Prices

24 May 2019

With all states releasing their seasonal determination outlooks for the 2019/2020 season (FY20) it is timely to produce a whole of southern Murray-Darling Basin (sMBD) overview of water availability for next season.

Latest climate outlooks

The following images from the Bureau of Meteorology (BOM) show just how little rainfall there has been. The typical winter inflow period last year saw rainfall well below average. This impacted storage inflows and increased demand for water coming out of spring.

More recently, April has been a particularly dry month across Victoria and more importantly the catchments. While this may have increased late-season demand across some sectors, the biggest impact has been felt in the catchments. All jurisdictions have said that year-to-date inflows have been between very dry and extremely dry. On average, the major catchments receive 100+mm of rainfall during April but this year falls barely exceeded 25mm.

The BOM monthly and seasonal climate outlooks have seen extreme oscillations between wet and dry over the last few months. The seasonal outlook released on 16 May has swung back to a drier outlook with a 25-30% chance of exceeding median rainfall across the southern MDB.

Naturally the dry April and BOM outlooks have influenced the determination outlooks from most states. Planning and decision-making for next season should be centred around dry inflow conditions with flexibility to adapt if conditions change.

Forecast water availability 2019/2020

So what do the determination outlooks mean in terms of actual water that may be available in FY20?

A detailed break-down of carryover, supply and demand is provided in the following sections.

Estimated Demand

Demand is always difficult to estimate because there are so many external factors between different commodities including price, input cost and in-paddock rainfall. The following sections summarise each of the major irrigated commodities in the sMDB. Overall, if conditions stay dry we believe water usage will be lower than 2018/19.

Horticulture

Usage: Slightly higher than FY19
Demand: Stable
Market: Buyer

All sectors of horticulture are experiencing strong commodity prices giving them the ability to pay more for water than any other commodity. However, this doesn’t mean they will blindly buy water at any cost and their ability to negotiate may increase as other commodities cease to use water. In addition, horticulture is the most sophisticated water user, understanding the risks and market drivers better than anyone because they are wholly reliant on irrigation to produce their crop.

Due to the market challenges (see below) under low water availability scenarios, many horticultural entities have looked at the breadth of water products available to secure their water requirements for the 2019/2020 season. The top and middle tier producers have minimised their water availability risk through owned entitlement, entitlement leases, forward contracts and carryover. We believe these strategies will see diminished in-season demand from these producers in 2019/2020. The smaller producers will make use of their own carryover and then supplement any shortfall through the allocation market.

Cotton

Usage: Down on FY19
Demand: Low
Market: Seller

2020 cotton price looks similar to that of the current season. With low allocations forecast across southern NSW under dry inflow scenarios and water prices currently exceeding $500/ML it is difficult to see how the numbers can stack up for cotton. Of course there may be producers who have forward cotton contracts to deliver however they are likely to have secured water through various water products to eliminate their water availability risk. Unless there is a significant change in rainfall and water availability, we estimate a reduced area being planted to cotton in FY20.

Dairy

Usage: Down on FY19
Demand: Low
Market: Seller

The dairy industry is in a challenging position at present. The high prices for grain and hay has been driven by large volumes of those key inputs being sent north to assist drought/flood affected farmers earlier in the season. The volume of hay and other fodder being produced also reduced as rainfall dwindled. Water prices in-excess of $400/ML are challenging for dairy and the market has exceeded that number for nearly the whole season. These factors saw many hard decisions being made with plenty of farms selling their herds and moth-balling their dairy infrastructure.

At this stage, the best outcome for dairy would be good winter/spring rainfall across the cropping regions. This would result in increased fodder availability and see lower input prices. Good rainfall will also provide the opportunity to increase on-farm fodder production reducing overall input costs. Exceptional rainfall in the catchments will be required to increase determinations and subdue water prices.

If conditions stay dry across northern Victoria and storage inflow’s are low, it is hard to see dairy being a major consumer of water in the first half of FY20. If dairy businesses can see a path forward they will be prudent with their water use at the end of spring, rely on external inputs over summer and reassess their program in autumn.

Other Irrigated Crops

Usage: Down on FY19
Demand: Low
Market: Seller

This is a particularly difficult commodity to estimate water usage for and is ultimately driven by in-paddock rainfall. Based on current grain prices, water prices over $300/ML are difficult to justify to finish off a crop. Corn, lucerne and other forage crops are also included in this sector and while they can sustain a higher water price, the numbers get very tight over $400/ML. It is therefore unlikely that there will be much demand in spring.

Rice

Usage: Same as FY19
Demand: Low
Market: Seller

FY19 saw the smallest rice crop sown in a long time with 0% against NSW general security and high water prices being the deciding factor.

Rice requires water over the summer period and is absolutely reliant on irrigation rather than in-paddock rainfall. Dry inflow conditions will see 0% allocation on NSW General Security entitlements again this season. Even if Murray Irrigation Limited offer efficiency dividends or other incentives these will amount to relatively small volumes and be an insignificant difference to most irrigators.

Barring any significant changes to storage inflows, rice growers are likely to utilise any carryover water on other commodities (corn, cereals, lucerne) during spring but, more likely, put their water into the market for sale. Some rice growers may elect to keep it in their accounts and delay a decision until autumn 2020.

Carryover

A critical factor in looking at water availability for next season is to know where this season will end up with respect to carryover.

With several weeks remaining before the end of the season, this is a little bit of guess work. Having said that, NSW DOI included some carryover estimates in their recent announcements and the Victorian Water Register (VWR) publishes accurate water accounting information on a daily basis. The Commonwealth Environment Water Holder (CEWH) also publishes data on their allocation holdings although it hadn’t been updated since February 2019 at the time of writing this article.

As shown in the chart below, overall carryover is expected to be close to half of last season. The notable differences are in NSW. It is not surprising to see such a low carryover figure in the Murrumbidgee given trade in has been closed all season. We expect some movement of carryover from the Goulburn to the Murray prior to the end of the season based on the challenges with the Goulburn IVT this season.

Naturally, some of this allocated but unused water is yet to be shuffled around as entities finalise their carryover strategies. Some will also be consumed by unrecorded metered usage. This will see the carryover volumes reduce before the end of the season and this will have a significant impact on availability next season as shown in the next section.

Water Supply

Based on the forecasts from the water authorities, the following charts show our best estimate of water availability next season under Dry and Average inflow scenarios compared to this seasons determinations. The volumes include estimated carryover from the current season.

The picture is sobering under a Dry inflow scenario. The outlooks from the water authorities are suggesting there will be around 2,500GL of water available, including estimated carryover across the sMDB.

Looking at an example, Victoria used 1,700GL in 2018/2019. If a dry inflow scenario eventuates there would be insufficient water available from Victorian determinations to meet the same demand (excluding water traded in from interstate). While overall water usage is forecast to be lower, meeting requirements will be a challenge particularly in the Murrumbidgee (if trade into that system is restricted by the IVT).

Under an Average inflow scenario 4,000GL of water will be available across the sMDB, marginally less than the 4,200GL available in 2018/2019. This would be the best case scenario from our current position and would minimise the challenges in the market.

In both scenarios, the lower carryover volumes have a significant impact on available water, especially at the beginning of the season. This and other factors are likely to put pressure on prices at the opening of the 2019/2020 season even under Average inflow conditions.

Market challenges

While the forecast water availability under a dry scenario indicates there should be sufficient water to meet the estimated demand, this is a whole-of-season, whole of southern MDB view. Many other factors will play a role in determining water availability in specific locations.

Trade restrictions

Trade restrictions between valleys and because of physical limitations can hamper the movement of water. Looking to FY20

  • Goulburn IVT – This IVT restricts the trade of water into/out of the Goulburn. This has traditionally been a volatile IVT which opens and closes rapidly. In previous seasons large volumes of water have been carried over in the Goulburn system at the end of the season even though the ultimate destination for the use is along the Murray. This has put pressure on the IVT in the first half of each season and has created challenges for users. FY19 saw a record volume of water called out of the Goulburn by the MDBA to meet the downstream demands along the Murray. This has seen the IVT having the capacity to transfer 88GL into the Murray at time of writing. While there are end of season water accounting transfers to be completed, we expect the Goulburn IVT to be open at the beginning of the FY20 season.
  • Murrumbidgee IVT – This IVT restricts the transfer of water from/to the Murrumbidgee.  For most of the FY19 season the IVT has prevented water being traded into the Murrumbidgee. As a result prices for water in the Murrumbidgee were often substantially higher than across other regions of the southern MDB. Given the state of the Murrumbidgee storages we expect the IVT to remain closed for trade into the Murrumbidgee for most of FY20.
  • Barmah Choke – This is a physical restriction in the Murray River which limits the flow of the river to approximately 9,000ML per day. Allocations trades from above the choke (NSW Murray zone 10, Murray Irrigation Limited and Vic Murray zone 6) to below the choke are deducted from the balance. The volume of water trading down through the choke is estimated to be low in FY20 due to reduced determinations forecast against many entitlement types, particularily NSW General Security and therefore the Barmah Choke should be open all season.
  • NSW to VIC – This trade restriction has an influence at the beginning of the season. Trade of water from NSW into Victoria is prevented until the (Victorian) spill risk in Hume Dam falls below 50%. With Hume so low at present, this won’t be a factor unless we see higher than average rainfall events in the coming months.

Market compression

The allocation market is very inefficient due to a range of factors including lack of knowledge, price and liquidity discovery and varying market information. These factors mean a large volume of allocation is never traded in the market.

The chart below shows the volume of allocation available across the southern MDB (excluding Irrigation corporations) shown as blue bars, and the volume of commercial trades (grey bars). As at the end of January 2019, about 800GL of allocation had been traded from an available pool of just over 5,300GL equating to a turnover of 15% (assuming no megalitre was traded twice).

If these turnover volumes are extrapolated into next season, its possible we’ll see less than 20GL traded in July 2019 and 65GL in August 2019 under a Dry inflow scenario. This assumes the market is working efficiently, however there is another factor at play.

The composition of entitlements has a major influence on water availability and this is further compounded when seasonal determinations are low. The following chart shows the distribution of Victorian HRWS across the Goulburn and Murray systems by number (blue) and volume (orange). These volumes include entitlements held by the environment and water authorities that aren’t traditionally traded.

There are 13,693 Victorian HRWS with a volume of 10ML or less with a combined volume 44,248.3ML. At the other end of the scale, there are 174 Victorian HRWS with a volume greater than 1,000ML with a combined volume of 644,803ML (many of which will be held by environmental holders).

The above chart makes sense when seasonal determination are 100%. But what happens when determinations are very low, like they are predicted to be at the beginning of FY20? Which of the entitlement holders in the above chart is going to provide supply into the market?

Lets assume Victorian entitlement is allocated 10% by 1 August 2019. That means someone who owns a 100ML HRWS has only 10ML of allocation available and someone who owns 20ML only has 2ML.  How many transactions does a larger horticultural enterprise need to buy 100ML let alone 500ML?

While spring demand is likely to be lower, the allocation market may be an interesting place in the first quarter of the 2019/2020 season. Ensuring water availability through carryover/parking may be cheap insurance against a tight market.

Summary

The information presented in this article provides a summary of the potential water availability across the southern Murray-Darling Basin in the 2019/2020 irrigation season. It is based on information provided by the relevant state water authorities and extracted from state water registers.

There are a range of water products available to help secure your water in 2019/2020. If you have any queries regarding the information presented in this article or availability of water products please contact H2OX.