As market intermediaries we are constantly asked “When is the best time to trade my water?”
The water market is influenced by a range of factors from short-term weather outlooks, rainfall events, commodity prices, market sentiment, trade restrictions and carryover capacity to name a few. As a result, no water market participant can answer this question because they can’t predict the future. In fact, alarm bells should start ringing when any market intermediary (broker) says “Now is the best time to trade!”
Since unbundling in 2007, all state governments have collected data about allocation trades. Many intermediaries present this trade data to validate their price predictions. While these charts are useful, they aren’t good at showing the relative trends within a particular season.
The following article looks at this historical allocation trade data since 2007 to look at some of the inter-season market trends in Victorian Murray Zone 7 (below choke) zone.
Allocation trade data is typically shown in a chart by plotting price against date. This makes it easy to spot highs, lows and general trends as can be seen in the following chart.
Likewise we can plot each individual season with a separate line like the following chart. This makes it easier to compare relative price trends across seasons however it is still difficult to see trends within a season unless the prices fluctuate dramatically as happened in 2007-08.
So how can we better compare price variations between seasons?
In order to see trends within a particular season and determine whether that trend exists in other seasons we need to normalise the trade data. We can do this by using the mean (volume weighted) price and the deviation from the mean.
So, using the monthly summary data provided by the Victorian Water Register for Murray Zone 7 we can generate the following chart which shows the relative price of water throughout a given season.
The vertical axis (-3 to +3) represents the number of deviations from the mean price. So as an example, in 2010-2011 each deviation had a value of $22.12/ML and the mean price for the season was $18.90/ML (0 on the chart above). So in July 2010, the price for a ML of water was 2.3 standard deviations (2.3x$221.12 or $50.87) higher than the season mean ie water was trading around $70/ML in July. The numbers are only relevant to the 2010-11 season, every other line on the chart is based on different numbers relevant to that particular season.
So what can we tell from this chart?
In about half of the seasons since 2007-08 (dotted lines) it was best to sell water early because the prices reduced as the season progressed. In the other seasons, sellers should have waited until the second half of the season to sell. But that is a very simplistic interpretation and takes no consideration of all the other factors influencing the market at the time for instance the varying carryover rules over various seasons which changed the volume of water carried forward or the seasonal outlook from the authorities which influenced demand for carryover at the end of particular seasons.
It is better to look at this chart from a higher level for recurring trends. By just looking at the chart, with no additional context regarding water availability or climate outlooks we can see some common themes;
- Prices typically stabilise or increase during spring as demand for water to finish winter crops and to start summer crops increases
- Prices are typically stable through the summer months before a slight softening at the start of autumn when they increase again coinciding with pre-irrigation of winter crops
- Prices are generally stable towards the end of the season – prices have only increased dramatically 3 out of 10 seasons
You will probably spot other trends in the chart.
Can the remainder of the season be predicted by using the data in any of the above charts? No.
What it can be used for is to assist you in planning the potential scenarios which could play out and help you determine a strategy as we head toward the end of the season. You can use those scenarios to determine the intrinsic value of water products in the market.
Data represented in charts is often presented as “proof” of someones assumption. The reality is historic data is exactly that – historic. It happened because of a unique set of circumstances at the time and it is highly unlikely those set of circumstances will eventuate again.
What all reputable market intermediaries should do is provide information and context to whats happening in the water market at a specific point in time.
So when someone tells you “Now is the best time to trade water!” question them. Listen to their logic, question it further and spend some time validating your logic before making a decision.