Outlook, Water

FY19 Water Availability and Prices

22 August 2018

There has been a lot of discussion about the current temporary water prices this season.

It may be useful to compare water availability and prices across recent seasons to put things in perspective and to understand what may be going on.

Water Availability

The following charts show the water availability as at August in each season since 2013/14. This is comprised on announced seasonal determinations (dark blue column) and carryover (light blue column) excluding environmental entitlements. The charts also show the Volume Weighted Allocation Price (VWAP) for both the season (black cross) and for the trades done in August each year (orange cross).

2015/16 is a good analogue across all major systems when looking at the current water availability. This goes for both the allocated water and volumes available as carryover. If we compare the prices the prevailing VWAP in August was at least $100/ML lower in 2015/16 than it is today across all systems.

Chart showing Goulburn Water Availability at August since 2013/14 Chart showing Goulburn Water Availability at August since 2013/14

Note carryover figures for 2013/14 and 2014/15 are not shown on following charts.

Chart showing Murrumbidgee Water Availability at August since 2013/14 Chart showing NSW Murray Water Availability at August since 2013/14

Water Storages

While it has been dry, the volume of water in storage is nowhere near as low as the 2007-2010 period when prices were last sustained in the $300/ML range.

There is no doubt it has been dry with the MDB receiving 150-600mm less rainfall compared to average since 1 January 2018. This has meant less than optimal inflows into the major storages however, the volumes in storage are generally better than they were in 2015/16 when we saw the last price spikes.

The following chart shows the volumes of the major southern MDB (sMDB) storages since July 2013. This shows the variability over the seasons between the storages. A lot of water is being held in Darmouth (light blue line) at present. The volume in Hume (dark blue line) is slightly lower  than the same time in 2015. Burrinjuck (dark green line) is substantially lower than it has been over the last 5 years.

Volumes in major sMDB storages from July 2013

Current market prices

So what is going on with the price?

Price increases tarted at the end of the previous season when parties were securing carryover water with the projection of El Nino conditions forming this Spring. The season opened in the mid $200’s and quickly gathered momentum as each frontal system failed to deliver any substantive rainfall across the irrigation districts.

The current supply and demand factors influencing prices are summarised in the sections below.

Demand

Demand has been steady but with prices well into the $3-400/ML range it is difficult to make the numbers work for most commodities. Some entities don’t have any choice but to endure the prices such as cotton growers who’ve forward sold cotton.

There are also tough decisions being made in the dairy industry. Access to feed (grain, hay) is decreasing with every hay truck heading north into NSW. Prices for feed have jumped markedly in recent weeks and this in turn has put upward pressure on allocation prices. In July, many dairy farmers suggested they’d be allocation sellers when prices reached $300/ML but they are now considering buying at prices up to $350/ML such is the pressure of ensuring on-farm feed for their herds.

SunRice announced prices of $500+/tonne to encourage growers. We have seen a reasonable amount of allocation being transferred out of the Victorian Murray into NSW Murray (Murray Irrigation Limited) in recent weeks. The majority of this is likely to be going towards finishing winter crops and many will be hoping the price softens ahead of planting. With the current climate outlooks it would be a brave person to plant a crop without having access to the required volume of water.

Horticulture and cotton are the other major commodities across the sMDB. Both have a major impact on prices in the Murrumbidgee and we are likely to see some upward price pressure there over the summer period. Horticulturalists in the Murray system have moved toward securing more and more of their requirements through forwards and leasing which removes them from the early season volatility.

Supply

Allocation supply has been thin.

Those with water have been reluctant to sell it, predicting better prices with the dry outlook and to date they have made the correct call.

Traditional large volume institutional sellers have also been out of the market. With a shift toward deploying a larger proportion of their holdings through leases and forward sales a substantial volume of this water has already been committed.

Water authorities and some environmental agencies are currently erring on the conservative side, reluctant to sell allocation until outlooks improve to ensure availability for urban areas should it remain dry.

2018/19 Outlook

Its always dangerous to put a flag in the sand at this time of the year especially with so many external factors driving the current market.

Prices in the Goulburn seem over the odds especially considering the IVT is closed. There has been some leveraging of tagged accounts however the Goulburn system is a traditional exporter of water and we expect prices to soften especially if prices remain high, putting further pressure on dairy which will likely see summer demand disappear.

With low seasonal determinations in NSW Murray we see price pressures continuing with Vic Murray underwriting a lot of the demand. This will continue until September/October when decisions around planting rice and other summer crops are made.

Murrumbidgee is closed to the other systems. Recently prices have come back close to parity with the Victorian Murray. We don’t see the IVT opening at this stage and even if the area of summer crops is low we expect water to be held and carried over as security for FY20.

Summary

In our opinion, the current media regarding drought conditions and calls for environmental water holders to release allocation to the market has resulted in an unnecessarily negative perception on water availability.

The last time the market saw prices sustained over $300/ML was in the 2007-2010 period at the back end of the millennium drought. Combined storages were lower than 30% during that period.

The Commonwealth currently holds somewhere in the order of 30% of all available allocation in the southern MDB, but even taking that into consideration, there is no less water available to irrigators than 2015/16.