Everyone is wandering what is going on with the temporary water (allocation) market at the moment. Why is it that the prices have climbed steadily over the last month?
There are many factors which influence allocation prices. Some of these are outlined below along with the implication on the current prices.
Rainfall typically has the largest and most reactive influence on allocation prices. There are several reasons for this. Firstly it can reduce immediate watering requirements which delays the need to acquire allocation if it falls in the irrigation districts. The magnitude of the rainfall event is typically correlated with the price change – the larger the fall the greater the price reduction.
The outlook for rain (or no rain!) can also impact prices. A good example was the large rainfall event forecast at the beginning of December 2017. It was talked-up by the BOM and the allocation prices took a significant dive. While the event resulted in good falls across the irrigation districts and catchments it wasn’t as great as forecast and allocation prices started to rebound soon after.
The dry start to the year combined with recent outlooks from the BOM of below median rainfall has been a significant factor on allocation prices. This has been exacerbated by the relatively insignificant rainfall events over the last month.
Water availability refers to the volume of water which is allocated but unused. This is less than the volume of water in the storages (dam levels) which also includes reserves for the subsequent season. It must also be remembered that dam levels may not be a true representation of the resources available to a particular state due to water sharing plans.
The chart below shows the water available to irrigators (not environmental water). At this stage, based on the numbers reported by the various water authorities, there is currently 2,200GL of allocation remaining to be used and/or carried over into 2018/19. This is 120GL more than the volume carried over at the end of last season with substantial irrigation still continuing.
Surprisingly there is a lot of unused allocation in NSW Murray – currently 100GL more than can be carried over against General Security licences. There is typically a delay in metering water usage and we anticipate this volume will reduce quite substantially in the coming month as meters are read.
Trade volumes in the Murray have been substantially less than last year however there has been a marked increase in April demonstrating the need to secure water for immediate irrigation and acquisition for carryover. Goulburn trade volumes are roughly the same as last season.
Water availability outlooks
Both NSW and Victorian authorities have released outlooks on water availability for next season based on various inflow scenarios. With such a dry start to this year, inflows are likely to be delayed which in turn will delay determinations. Combine this with a reduced volume of carryover (see above) and early season water availability is likely to be low.
These outlooks have resulted in irrigators looking to purchase allocation for carryover and/or sourcing other water products to ensure they have sufficient early season water to meet their requirements. However, based on the remaining volume of allocation and the current prices of allocation the demand for parking space has been low. Parking against Goulburn HR would be the most cost effective option at this stage with a low risk of spill but there are still risks.
The changing ownership structure of water entitlements has also been playing a part in the allocation market. Entitlement is continuing to be consolidated. The largest entitlement owner (environmental water holders) now hold more than 30% of the entitlement.
With entitlement prices continuing to increase, owners are taking the opportunity to sell some portion of their asset which adds to further consolidation. It also means that irrigators are increasingly reliant on the temporary water market. Depending on how well irrigators are managing their water assets this can mean purchases being made in a “mad rush” which in turn results in price spikes.
With carryover estimated to be well below last season and an outlook of average rainfall and slow seasonal determinations predicted, the upward pressure on allocation price is likely to continue.
Both the Goulburn IVT and Barmah choke are open, the ability to shift water across the southern catchments is maintaining liquidity however sellers are controlling the market.
At this stage there is nothing to suggest a significant reduction in allocation prices in the short to medium term. This may change once the majority of irrigation ceases mid-May and water owners assess what resources they have on hand.