Cotton, Dairy, Rice, Water managment, water markets

Getting carry-over right this season

3 April 2017

Jack Bennetto

The Land

Preparations for the 2017/18 water season are in full force. While large volumes of unused water are currently held in Southern Basin storages, conservative water availability outlooks and the Bureau’s El Nino “watch” have made choosing an appropriate carry-over strategy for 2017-18 challenging.

On March 15, Department of Primary Industry Water estimated that carry-over would be close to the maximum 30 per cent in the Murrumbidgee Valley, and somewhere near 40-45pc in the NSW Murray by season’s end. After last year’s wet spring and dam spill events, irrigators are cautious of carrying over too much water and risking forfeiture.

Tempering this sentiment is the Bureau’s upgrading of its ENSO Outlook to El Nino “watch” in mid-February. Six of eight international models surveyed suggest an El Nino by July; however, a strong disclaimer must be applied to this outlook because of lower model accuracy when forecasting during the autumn months.

Irrespective of the wet conditions experienced in both the Murrumbidgee and Murray valleys this water year, allocation outlooks are conservative. Assuming extreme dry conditions for the remainder of the current water year (2016-17), Murrumbidgee general security entitlement holders can expect a commencing allocation of 39pc (which includes 30pc carry-over) next water season. Murray water users can expect to start with at least 3pc under dry conditions, which means a figure closer to 50pc when predicted carry-over is added.

The difficulty faced by water users in deciphering weather and water availability outlooks is being reflected by large forward market price spreads. In the NSW Murray, sellers are offering $90-100 a megalitre while buy bids are closer to $50-60ML for inter-season forwards (delivery in 2017/18). In the Murrumbidgee – where spot prices have dropped to as low as $12/ML – nailing down a legitimate forward price is even more troublesome.

Water users wishing to carry-over more water than their entitlements permit have a range of options available in the water market. These include parking, leasing and forward water, and are all offered at varied prices based on the perceived level of allocation, price and counterparty risk.

Weather bearish or bullish about next season’s water availability, large movements in allocation prices this season, and the unpredictability of Australia’s climate, demonstrate the need for water users to employ a diversified mix of price-hedging strategies to maximise on-farm returns.

 

Read the full article here