Australian water entitlement prices point to a maturing market

A rise in entitlement prices despite an abundance of water during a wet cycle was unexpected – but proves investors and owners of water are taking the long view.

Something unusual has happened in Australia’s water markets over the past 12 months, in the southern Murray-Darling Basin at least.

Ordinarily, during times of wet weather, the logical consequence is that water prices drop.

For water allocations – essentially, the amount of water that each holder of a water entitlement is allocated in a given year, which can be bought and sold on the spot market – this has happened.

Prices of allocations have fallen in the southern MDB thanks to what consultancy Aither has noted is a “double whammy” effect in its annual Water Markets Report, published this week: an abundance of rain has ensured that water storages are full, while also leading to lower demand from irrigators to draw down on those storages to water their crops.

But entitlements – the equivalent of a property deed, giving the holder a permanent right to receive that entitlement’s allocation for as long as they hold it – did not follow this pattern.

Instead, after softening ever-so-slightly last year, prices grew again, buoyed by strong economic conditions for Australian agriculture, including low interest rates and high commodity prices for most irrigated crops.

But Aither also noted that there has been a lower volume of entitlements available to purchase than normal, too, meaning that the recent trend has been for these to be more tightly held, whether by investors or other irrigated producers.

It seems likely that holders of entitlements have become more sophisticated in their views of them, more reluctant to trade away that permanent right to receive an allocation for a short-term monetary gain. Of course, there is always a price – but as we saw recently with goFARM’s acquisition of a portfolio from Aware Super, the price was too high for the asset manager, and so the superannuation fund retained the water while selling a portfolio of properties.

Investors who have owned water entitlements have done extremely well since Australian water markets were established – just take a glance at the results reported by Kilter Rural’s two open-end water funds this week for evidence of that.

Before the most recent drought broke, investors (although by no means all) raised concerns about the ESG risks of owning water – but as water has returned to the river system, those concerns have abated. Regulatory risk was also a real worry, with the Australian Competition and Consumer Commission launching a wide-ranging inquiry into the state of the market.

The ACCC’s final report, though, found unequivocally that private investors had not manipulated water markets, as they were often accused of doing, and that high water prices were caused by dry conditions, not dodgy trading. Reform to the markets, including increases in transparency, should still come, but any more apocalyptic scenarios for investors have been put to bed (until the next drought, perhaps).

The unusual movement of entitlement prices in the past 12 months, particularly when viewed in the context of results like Kilter’s, shows how attractive water remains as an asset class for investors.

Water fund managers have told Agri Investor repeatedly, both publicly and privately, over the past several years that anyone calling the top of the market in entitlement prices was premature, as the vast increases in permanent plantings in the southern Murray-Darling Basin in particular would ensure that water would remain a very valuable commodity.

It seems they have been proven right up to now.

And given that these price rises have occurred during a wet cycle, when water is in abundance, there is only one logical conclusion to draw about what will happen to the value of entitlements when the next dry spell arrives and water becomes scarce again.