With all states releasing their seasonal determination outlooks for the 2020/2021 season (FY21) it is timely to produce a whole of southern Murray-Darling Basin (sMBD) overview of potential water availability for next season.
With improved rainfall conditions and significant carryover volumes, water availability for 2020-2021 (FY21) will be higher than 2019-2020 (FY20). However, the interesting question is not how much water will be available but rather how the market will function in such conditions. To understand this the demand and supply side of the market must be understood.
Mentioned extensively in H2OX’s recent May 2020 Water Availability report there is a 70% increase in carryover in both Victoria and NSW compared to the end of the 2018-19 season. Our hypothesis is that irrigators sought to mitigate the risks associated with dry conditions persisting into FY21.
H2OX believes that there are two factors at play. First, permanent horticulture was fearful of dry conditions continuing and acted early to acquire carryover throughout the season. This supported the high market prices. Once the rain started in March and April, prices had dropped below $200/ML by May across all systems. This spurred annual irrigators to enter the market which ultimately pushed the prices back to $250/ML at the beginning of June.
Second, the high prices at the beginning of FY20 resulted in minimal water usage in Spring. Entitlement holders held their meagre determinations anticipating using it in Autumn. By the time Autumn came around, good rainfall events were occurring and the need to irrigate was reduced. By this time prices had receded, and irrigators took the preference of holding their allocation rather than selling “at such low prices”.
Rainfall across the MDB has been well above average over the 3 months from March to April and, surprisingly, the 6 months to the end of May as shown in the maps below. This had a positive impact on the major storages along the eastern fringe of the basin (discussed below).
It must be remembered that the climate outlook maps show the “chance of exceeding median rainfall” at a given location. Remember mean, median and mode from high school math? Do you know the median rainfall at your location – difficult when all the other numbers produced by the BOM are “average” (or mean).
Lets say the median rainfall for Griffith in July is 50mm (not sure what it is). Using the outlook map below, there is a 55-60% chance of exceedance. It is nothing about how much wetter (or drier in the case of brown colours) it will be. Be careful of how you interpret the data.
The following chart shows the status of the major storages in the sMDB along with the volume-weighted allocation price (VWAP) across all trading zones. The detail is interesting, but the trend is what we are looking at.
Storages in all valleys have been drawn down since their last peak in 2016-17. The recent good rainfall has seen improvements to storages ahead of the traditional inflow season of July-October which is promising however the storages are only marginally better than at the end of the millennium drought.
There were multiple drivers for these price increases, not least of which being the dry conditions. The acquisition of carryover as discussed above played a significant factor as did the underlying availability of volume in the market.
The following chart shows the VWAP across the various regions throughout the season. The Victorian Murray (no distinction between above and below choke) had sustained high prices throughout the season with Goulburn seeing the lowest prices. The price oscillation in SA generally aligns with the quarterly meter readings – with irrigators entering the market to top up their accounts creating the serious price rises.
All markets came together in June as water was being moved around for parking which opened up the trade constraints through the Barmah Choke and Goulburn IVT. Murrumbidgee prices climbed once trade into was closed in early June.
The long-term VWAP across the southern-connected Murray-Darling Basin from July 2007 until June 2019 was $143/ML. The sustained high prices in FY20 saw the long term VWAP increase to $180/ML – an exceptional increase off a single years trade.
The following chart shows the monthly prices and seasonal VWAP for the last 13 seasons. The VWAP in 7 seasons were well below the long term, 2 were on the boundary and 4 were significantly higher. This is a simplified view of the VWAP which aggregates trades from all zones regardless of trading constraints however it can be used (along with other information) to assist in making decisions to transact allocation.
The information presented in this article provides a summary of the potential water availability across the southern Murray-Darling Basin in the 2020/2021 irrigation season. It is based on information provided by the relevant state water authorities and extracted from state water registers.
Download the full report.
If you have any queries regarding the information presented in this article or availability of water products please contact H2OX.