Aither’s Water Markets Report 2020-21 – four takeaways

Consultancy Aither has published the eighth edition of its annual Water Markets Report, which offers a comprehensive overview of the Murray-Darling Basin’s water trading system.

Giving an insight into the year that has just been, as well as the season ahead, Aither found that prices have eased, setting irrigators up for a positive start to the season – but the long-term trend in water prices is still edging upwards as structural changes to agriculture in the region take hold.

Here are four key takeaways from the report:

1) 2021-22 will see the pressure on prices ease…

Improved inflows to the Murray-Darling Basin over the last 12 months have allowed many irrigators to carry over large amounts of water into the coming season. This, coupled with a favorable outlook for spring rainfall, means that irrigators are likely to see lower prices for water on the market, as well as receiving good allocations for any entitlements they hold.

“Annual croppers will be gearing up for a big season and hoping that further inflows extend the good times for another year or two,” Aither said in the report.

Aither principal Erin Smith told Agri Investor that there has been a lot of certainty in allocations for the new season already, which could lead to further downward pressure on prices if rainfall continues.

“The real question is what happens over that summer period when we get peak irrigation. We know there will be high demand from annual croppers which could push prices up, but of course, if we get timely in-crop rainfall it could have a suppressing effect [on prices]. A lot of irrigators should have a successful 12 months and be able to set themselves up quite well for the following year as well,” Smith said.

2) … but the long-term pricing trend is still upwards

Aither noted that the downward trend in water allocation prices began in the middle of the 2019-20 season, continuing into last year, but that over time, the long-term trend is still for rising prices.

The volume weighted average price for 2020-21 across major trading zones in the southern MDB was A$132 per ML. This was only slightly lower than the annual VWAP in 2009-10 of A$144 per ML, despite the fact that in 2009-10 64 percent less water was allocated than 2020-21.

“The clearing price of water allocations has risen over time, which is reflective of changes in the water market. Irrigators have an increased capacity to pay for allocations as they convert to higher-value cropping systems, as well as becoming more efficient in their operations – it enables them to out-compete lower-value producers for that important input,” said Nick Waters, managing partner at Riparian Capital Partners.

3) There are signs that the market for water entitlements is maturing

Prices for high-reliability and high-security water entitlements softened last year “after two years of double-digit increases,” Aither said. The decreases were still relatively modest, though (in the single digits in most cases) and prices are still between 13 percent and 40 percent higher than they were in 2018-19.

“This stabilization against a backdrop of wetter conditions, rapidly falling water allocation prices and lower returns, indicates a maturing of the market and the long-term expectations of water market participants,” the report said.

Smith expanded on this: “We think that’s a good news story – those prices didn’t keep falling despite there being a lot of disruption globally, and it’s probably underpinned by the fact the Australian agriculture sector has done pretty well recently and is set for a strong outlook going forward.”

Prices for low-reliability and general-security allocations have risen, as wetter conditions provide a higher certainty that those allocations will be filled this year.

“When we invest in water, we don’t just look at general or high-security entitlements in isolation, we look at both,” Waters said.

He added: “If you have the right blend of those two entitlement types in your portfolio, we’ve found that you’re not as exposed to seasonal changes that occur within the market and you typically get smoother returns from season to season. If you only held high-security entitlements, for example, you might expect lower returns under the current high supply conditions. But in our view to get the right level of diversification in your portfolio, you really need to have both types as well as being spread across different regions.”

4) Regulatory uncertainty has faded

At the time of last year’s Water Report, there were still question marks over what the Australian Competition and Consumer Commission would ultimately recommend in its inquiry into Murray-Darling Basin water markets.

While the sector still awaits the government’s implementation of the ACCC’s recommendations, what was proposed did not strike many market participations as especially onerous. In fact, most saw the ACCC’s findings as positive, as increased transparency and efficiency should only help the water market mature, benefiting all participants (including investors).

Waters said: “The regulatory questions have mostly been resolved, and importantly we can now see a path forward. What was really encouraging was that the findings of the ACCC didn’t throw the baby out with the bathwater – it was more about fine tuning and getting things right within the current market structure rather than proposing large-scale changes.

“For market participants, confidence has definitely increased, both because of the improved supply conditions and the regulatory hurdles being removed.”