Water

Water market finely balanced

13 August 2020

The 2020-21 season opened reasonably strong, however, allocation prices have softened in all markets over recent weeks with increased rainfall. This is positive for both annual and permanent irrigators. Everyone is considering their strategy as we head toward summer.

The BOM climate outlooks released 6 August 2020 are indicating a high chance of exceeding median rainfall across much of the MDB right through until the end of December 2020. Remember these are probabilities, not guarantees.

BOM rainfall outlook for September 2020.

The other significant factor is the volume of carryover bought into the 2020-21 season as discussed in our Water Availability Outlook released in June. This is another positive factor which will curb dramatic price increases.

The majority of buyers are looking at the current situation believing prices will continue to soften while sellers continue to hold their nerve believing summer will bring increased demand and higher prices. As a result, the market is at a stalemate. While buyers are probably in the best position, there are several factors they should consider.

Carryover

The large volume of carryover bought into this season increases overall availability however there are two questions which need to be asked – who holds it and, where is it being held?

There is a big difference in demand depending on who holds the carryover volume. If it is irrigators then overall demand will be reduced as they already have it in their accounts, ready to use. If on the other hand it is held by non-irrigators, prices will have to increase to draw it into the market. We believe a significant volume of carryover is likely to be held by permanent horticulture plantings as they couldn’t risk going into another dry season without a substantial volume of water already available.

The challenge of finding space at the end of last season saw record prices paid for parking due to volume constraints below the choke. As a result, many entities moved their water into alternative trading zones, above trading constraints including the Goulburn IVT, Barmah Choke and Murrumbidgee IVT for carryover. Transferring water through these constraints is unlikely to be possible before the new calendar year and will likely put upward pressure on the below choke prices.

Determinations

Surprisingly, major storage levels are roughly the same as last season and this includes the higher volumes carried over. The BOM rainfall outlooks (mentioned above) are positive, however substantially more rain is required across the catchments to generate consequential inflows.

Determinations against NSW General Security (mostly above the choke) have provided some certainty to irrigators. We have also seen Murray Irrigation Limited offer a “sustainability product” to their irrigators, allowing the purchase of allocation at $216/ML with payment due later in the season. The recent rain saw many delivery entitlement owners opt out of buying that water in the belief the market will fall further.

Commodity Prices

Current commodity prices are presenting a challenge to annual irrigators. With water prices around $200/ML above the choke there is scant margin for rice, maize or cotton.

The good recent in-paddock rainfall (and determinations) has seen allocation prices drop which in turn increases the potential profit margin for annual summer crops. With a positive outlook, irrigators may become complacent that water prices will continue to fall and choose to grow a crop without sufficient water in the account.

If the season pans out drier than expected, these irrigators may need to purchase water. Depending on the demand, allocation prices could climb quite dramatically through the middle of summer. Once a crop is in the ground and growing it is very difficult (impossible) to make the hard decision to turn the water off.

Summary

The water market is finely poised. The positive outlook for rainfall has many believing water prices will continue to fall, however, each commodity has an “attractive” water price.

Relying on the allocation market to continue falling is risky. Giving away some up-side by locking in a reasonable volume of your crops requirements also means you remove the down-side risk of needing to purchase water above your break-even price.

Prices in the Murray below choke (including SA) are unlikely to drop dramatically unless there are large rainfall events in the catchments to increase determinations sharply.

Prices in the Goulburn will remain soft due to a general oversupply. The Goulburn IVT may also entities sell allocation they carried over and redeploy the cash below the choke.

Prices above the choke are tricky to predict. In the short-term, they are likely to soften and incentivise irrigators to plant summer crops. The resulting increased demand will see prices firm through summer. Further pressure could be put on prices if the choke starts opening and entities try to take advantage of the price difference.

Murrumbidgee prices will continue to fall due to recent rainfall events and increasing determinations. Supply will be good and prices won’t vary too much into summer.

If you have any queries regarding the information presented in this article please contact H2OX on 1800 988 118.