Buoyant or frothy? The long view on Australia’s water markets

Record entitlement prices Down Under come after wild swings over the past decade, as our interactive chart indicates. We analyze whether investors should take heart in the recent recovery.

Australia’s water entitlement prices have come back from the abyss. An index compiled by Aither, a specialist advisor, has them at 55.12 in April 2013, down from 100 in July 2008; they stood at 120.12 at the end of July, the highest in Aither’s nine-year records.

Entitlements give their holders exclusive access to a given pool of water, which they are then free to sell under an allocation system. In theory, the capital value of water entitlements should be only loosely correlated with the volume of allocations announced in a particular year. They should instead reflect the long-term average yield entitlements are expected to generate, notably through allocation sales.

As the chart shows, however, entitlement prices have since 2008 been strongly influenced by weather patterns, and their impact on the volume of water available to trade. The peak of 2008-09 came on the back of a major drought; prices then cratered as the country suffered floods.

In fairness, the ability of an entitlement holder to sell its entire allocated volume – and the price at which they are able to do it – does impact gross yields returned for the year. Depending on trading conditions, these could vary from between 3 percent to 7 percent, according to Aither.

But the firm says recent swings could signal the relative immaturity and a lack of understanding of Australia’s water entitlement market. In this respect, its expectations that prices are now set to remain higher for longer – underpinned by resilient demand – suggests education is starting to bear fruit.