Welcome to H2OX’s first water market outlook which aims to provides a summary of the major supply and demand factors in the water markets of the southern-connected Murray-Darling Basin (sMDB).
- Climate outlook is neutral although recent warming of tropical Pacific Ocean
- Median rainfall forecast through to December 2017
- Storages are fuller than last year, but skewed by carryover
- Allocation markets bullish in first quarter
- Estimate similar water use to 2016-17, although high allocation prices could see usage fall
- 1,500GL of carryover forecast at end of 2017-18
- Entitlement prices continue to push higher
The El Niño–Southern Oscillation (ENSO) remains neutral . There has been some recent warming of the tropical Pacific Ocean however the ocean temperatures at depth remain cool. Five out of eight models suggest sea surface temperatures will reach La Nina conditions but are unlikely to be sustained for long. The Indian Ocean Dipole (IOD) is trending positive (typically results in higher rainfall) but unlikely to be sustained at this time of the year.
Rainfall across the MDB was well below average across the whole of NSW and the northern basin for the first quarter of 2017-18 as shown in Figure 1 . While Victoria received average rainfall over the first quarter, this hides the diversity experienced on the ground with a wetter than average August and drier than average September.
Figure 1: Rainfall deciles since July 2017 
The rainfall outlook from BOM  is for a wetter than average October across the northern part of the basin, with median rainfall forecast for the remainder of the calendar year. Rainfall at this time of the year will offset irrigation requirements rather than contributing inflows to storages.
The dry start to the season has seen inflows into storages well below average. Inflows in the Murray system were average in August while Murrumbidgee inflows have been well below average since July, the result of the driest recorded September in the MDB. Eildon inflows were on average for August and September after a very dry May-July.
As a result of the dry conditions, inflows into the Murray are tracking well below the 10 year average – see Figure 2. Recent streamflow forecasts released by BOM  for the Oct-Dec period suggest low to near-median flows will continue across the sMDB (with moderate to high forecast skill at this time of year).
Figure 2: Murray system inflows 
Figure 3 compares water availability across the major sMDB catchments at the beginning of October in 2016 and 2017. The volumes exclude environmental water. There was 150GL more water available this year than at the same time last season (525GL less in allocations but 675GL more carryover) with over 5,500GL of water available.
Murrumbidgee allocations are approximately half of what they were at the same time in 2016 while the volume carried over by irrigators is the same. In NSW Murray about 50% more allocation was carried over into 2017-18 than the previous season.
In Victoria, the Murray system water availability is almost identical to last season however, with Victoria’s share of Hume currently spilling, the volume will reduce marginally.
Carryover in Goulburn was more than 3 times higher into this season. Some of this carryover volume will ultimately be wanted in the Murray and NSW systems and will therefore put pressure on the Goulburn IVT when it does open later in the season.
Figure 3: Water Availability 2016-17 compared to 2017-18 [6,7,8]
To frame the season, Aither released their report summarising the 2016-17 irrigation season and provided their outlook for the 2017-18 season in which, based on the estimated water availability and median inflows, “…average sMDB allocation prices above $100 per ML” would not be supported .
Aither had projected prices of $50 under wet inflow scenarios, $80-95 under median inflows and $100-120 under dry inflow scenarios. As shown in Figure 4, market prices have exceeded the Aither estimates with Volume Weighted Average Prices (VWAP) across all systems exceeding $95 per ML in all major systems. Prices spiked in August with high demand experienced after dry conditions in June & July before coming off again in September.
Figure 4: Allocation VWAP versus Aither price predictions [9,10]
Late September and early October saw demand increase based on extremely hot and dry conditions which resulted in the MDB recording its driest September on record  – a marked difference from a year ago.
Total demand for the 2017-18 irrigation season is currently estimated to be 4,000GL, lower than 2016-17. It is anticipated that this volume will most likely decrease if allocation prices remain strong. Estimated water use by each industry is summarised in the following sections.
The following figure summarises the currently available allocation (including carryover) and the estimated demand for this season. There have already been large volumes of allocation moving into Murrumbidgee from the Murray to offset the estimated under supply. All other systems have sufficient allocation to meet the estimated demand.
Based on the current water availability, 1,500GL of allocation is estimated to remain at the end of 2017-18 (similar to that carried over at the end of 2015-16).
Figure 5: 2017-18 allocation supply compared to estimated demand
Rice – 550GL
Early October is the critical decision time for planting. With a current allocation price of $140/ML and only modest allocation increases anticipated in NSW Murray the area of rice to be planted is debatable.
Sunrice estimated deliveries of 500-600,000 tonnes of rice in 2017-18, down from 800,000 tonnes in 2016-17 which would have consumed 650-750GL of allocation. Some guesstimates are touting water use to be as low as 350GL  which equates to roughly 250-300,000 tonnes.
While seasonal allocations are down, the volume carried over means rice growers are in a similar position to 2016-17. It is most probably that the area planted will be lower than the Sunrice estimate and we are forecasting usage of 550GL.
Cotton – 680GL
With strong cotton prices and growing ginning capacity in the southern region, plantings are estimated to be higher than 2016-17. According to farmer planting intentions, over 66 ,000Ha (a 50% increase on 2016-17) is planned in the Murrumbidgee while 4,000Ha (30% increase) is planned in NSW Murray .
Cotton growers were a key driver in Forward Sale contracts at the end of 2016-17 and have continued to influence the allocation prices in the Murrumbidgee. We estimate that 680GL of water will be consumed by the cotton industry across the sMDB.
Dairy – 750GL
Milk prices are reasonable. The availability of large volumes of fodder from failed dryland crops is likely to mean reduced on-farm water demand. The quality of fodder and increasing grain prices will be critical factors in determining how much water is used. As a result the dairy industry is estimated to use approximately 750GL of water in 2017-18, similar to last year.
Fruit & Nuts – 870GL
The areas of nuts continues to increased with new plantings. While these will have relatively low water requirements, maturation of existing plantings and increasing water application to maximise yields will increase water use.
Grapes – 560GL
Water use by the 80,000Ha of grapes across the sMDB is estimated 7ML/Ha.
Vegetables – 120GL
This value remains relatively static year on year.
Other irrigated crops – 500GL
Combined total usage for other crops including irrigated summer crops such is estimated at 500GL.
Entitlement prices have hit historical highs. Aithers Entitlement Index  has climbed over 110% since its lowest point in Nov 2013 as shown in Figure 6. There has been a remarkable increase of 5.7% in the Jul-Sep quarter of FY18 alone. Further increases to the index are anticipated as it is derived from transactions recorded in the various state registers which are typically 2+ months after the contract date.
Figure 6: Aither Entitlement Index 
Victorian Murray High Reliability (HR) and NSW High Security (HS) have seen the most dramatic increases with prices now in excess of $3,400/ML and $3,800/ML respectively. Lack of supply and strong demand from all sectors is the key driver.
Goulburn HR prices have been steady around $2,600-2,700/ML however buyer demand is increasing with parties now bidding in excess of $2,800/ML to secure volume.
Victorian Low Reliability (LR) is continuing to demand a premium ($350+/ML). Increasing demand from irrigators outside of Victoria and the ability to source reasonable size volumes of entitlement are contributing factors to the recent price increases. The question is whether these prices can be sustained.
LR entitlement is prized for its carryover capabilities at near-zero risk of spill. When allocation prices are low at the end of the season, as it was in 2016-17, it makes sense to utilise the carryover space. However, as allocation prices increase the benefits of utilising the space start to diminish and demand for leasing carryover space typically decreases.
 BOM. “ENSO Wrap-Up,” n.d. http://www.bom.gov.au/climate/enso/.
 BOM. “Rainfall Latest,” 2017. http://www.bom.gov.au/jsp/awap/rain/index.jsp.
 BOM. “Climate Outlooks – Monthly and Seasonal,” September 28, 2017. http://www.bom.gov.au/climate/outlooks/#/overview/summary.
 MDBA. “River Murray Weekly Report,” October 4, 2017. https://www.mdba.gov.au/sites/default/files/weeklyreports/River-Murray-Operations-Weekly-Report-4th-October-2017.pdf.
 BOM. “Seasonal Streamflow Forecasts.” Accessed October 10, 2017. http://www.bom.gov.au/water/ssf/.
 Victorian Water Register. “Unused Water,” n.d. http://waterregister.vic.gov.au/water-availability-and-use/unused-water.
 NSW Department of Primary Industries. “Water Allocation Statement – Murrumbidgee,” October 3, 2017. http://www.water.nsw.gov.au/__data/assets/pdf_file/0005/737996/171003-water-allocation-statement-murrumbidgee_INT17-211634.pdf.
 NSW Department of Primary Industries. “Water Allocation Statement – NSW Murray and Lower Darling,” October 3, 2017. http://www.water.nsw.gov.au/__data/assets/pdf_file/0012/737994/171003-water-allocation-statement-murray_INT17-211632.pdf.
 Aither. “Southern MDB Water Market Update,” September 30, 2017. http://h2ox.com/wp-content/uploads/2017/10/17-09-27_H2OX_monthly-report_STC.pdf.
 Victorian Government. “Victorian Water Register,” 2017. http://waterregister.vic.gov.au/.
 BOM. “Australia in September 2017,” October 2, 2017. http://www.bom.gov.au/climate/current/month/aus/summary.shtml.
 Morton, Jeremy. “My Gut Feel for Murray Valley Rice Demand Is No More than 350GL but I’m a Mug Punter,” October 6, 2017. https://twitter.com/Jeremy_Morton_/status/916038407523930113.
 The Weekly Times. “Cotton Plantings in Southern NSW to Outstrip Rice for First Time,” October 10, 2017. https://amp.weeklytimesnow.com.au/agribusiness/cotton-plantings-in-southern-nsw-to-outstrip-rice-for-first-time/news-story/571a8ff95e7cff002be96a6b09fc7a6d.
 Aither. “Aither Southern MDB Entitlement Index,” July 2017. http://www.aither.com.au/water-markets/aither-southern-mdb-entitlement-index1/.