Aither’s Water Entitlement Index records decline for first time in 10 years

Aither’s annual Water Markets Report shows decline in the Aither Water Entitlement Index, a measure of entitlement values, for the first time in a decade.

Higher interest rates, lower commodity prices, wet conditions and supply chain issues combined to see water entitlement prices in the Murray-Darling Basin (MDB) begin to soften in the months leading to the end of June 2023, according to consultancy Aither.

Aither’s annual Water Markets Report, published today, includes an update on the Aither Entitlement Index, which tracks the relative performance of a group of major water entitlements across the southern MDB. The AEI peaked at an all-time high in February 2023 before softening to finish down 4 percent across the year, compared with 18 percent growth in 2021-22 and 6 percent growth in 2021 and 2020.

It is the first time the index has fallen on an annual basis since 2012-13. The index saw a monthly decrease of 2.6 percent from February to March, followed by a further 1.3 percent drop from April to May.

State water register data showed the estimated total value of major entitlements in the southern MDB stood at A$32.3 billion at June 30, 2023, an increase of 8 percent on the same time a year earlier – but Aither said its index includes more timely market inputs than water register data, so provides a more accurate real-time snapshot of values.

Speaking to Agri Investor, Aither water markets advisory lead Ben Williams said the softening in entitlement prices was evidence that the asset class is not immune to wider economic conditions.

“There is a raft of challenges that are filtering through [and affecting] entitlement prices: higher interest rates; inflation by way of increased input costs for farmers; and challenging commodity markets, particularly in wine grapes, citrus and in almonds, which saw a fall towards the back end of the year. The outlook for almonds is also not great, with a large crop expected out of California this year.

“The other thing [that has had an effect], to a lesser extent, is the reducing rate of return on entitlements by way of cheaper lease rates and low annual allocation prices.”

Williams added that water register data usually lags trades by between six and eight weeks, such that it is expected that official data will also reflect a drop in the volume weighted average price of water entitlements in the coming weeks.

He said the AEI continued to trend downwards in July 2023, the first month after the period covered by this year’s Water Markets Report.

The value of water allocations, which is the amount of water allocated to water entitlements, continued to fall following a third successive year of wet conditions that brought extensive rainfall across the southern MDB. This saw record inflows into storages and severe flooding across parts of the region.

The annual VWAP for allocations was 62 percent lower than 2021-22 and the second lowest since records began, Aither said.

Irrigators’ good times to continue

Looking to the water year ahead to the end of June 2024, Aither said strong levels of allocations to entitlements and the highest volume of water in storage on record mean that low allocation prices will continue.

“We would expect allocation prices to remain below the long-term average for this year, despite a forecast El Niño. What will challenge that is if we get to March 2024, we’re in an El Niño, and the Bureau of Meteorology is forecasting that to be prolonged – then we will very likely see prices trend above A$200 per ML ($130; €119) as people secure water for carryover in 2024-25,” Williams said.

Williams said that entitlement prices are also likely to remain soft, not repeating the rapid rise in values seen in previous years, with the caveat that the delivery of the Murray-Darling Basin Plan remains a “wildcard”.

“Putting aside any [federal government] activity, we expect there to be downward pressure on entitlement pricing until the broader economic drivers change. It’ll be interesting to see how far that goes before people start to dig in and realize value – and some of that might be seen in lease prices increasing, which could bring in some of the smaller investors that create competition at a different end of the market,” he said.

The potential for the Australian government to pursue water buybacks to meet the Murray-Darling Basin Plan’s target of recovering 450GL of water for the environment could lead to entitlement prices rising, though.

“There have been a lot of reports about the potential for the MDB Plan to be extended and we’re waiting on the next MinCo [Murray-Darling Basin Ministerial Council] meeting to hear more about that. It’s clear the plan won’t be delivered by June 30, 2024, but the minister clearly wants to deliver it in full. Therefore an extension will be required to do that,” Williams said.

“Based on comments the minister [Tanya Plibersek] has made, we think that extension is likely to be in the order of around two years. But it’s becoming more and more likely that the minister may look to further [Australian government] purchases with respect to the 450GL target, which has been really challenging for them to acquire any volume under current constraints.”

Overall, though, Williams said that good times for irrigators in the MDB should continue for at least another year.