Murray-Darling Basin water markets ‘on a knife’s edge’ – Aither

The outlook for water availability and pricing looks more positive for the 2020-21 water year than previously, but more rainfall is needed to ease the pressure on irrigators, consultancy Aither has said.

The firm set out its views in the annual Aither Water Markets Report, published this week, which found markets are “on a knife’s edge” and will need further inflows into the system to see a material improvement in water availability over a challenging 2019-20.

“One month into the new water year, conditions are dry, trade constraints are binding, and water allocation prices are already starting to tick upwards. Spring rainfall and inflows will be crucial in determining allocation price trajectories through the season,” Aither said, adding that constraints on inter-valley trades could also affect prices.

If rains do not come, demand from winter croppers who have already sown during a wet start to the season could combine with demand from permanent horticulturalists, putting further upward pressure on prices.

Without rainfall, “water allocation prices are likely to rapidly increase as they did in 2019-20, particularly in the lower Murray,” Aither said.

Continued rainfall could see allocation prices return to historical average levels of between A$100 and A$200 per megaliter, though. The current three-month rainfall outlook from the Bureau of Meteorology suggests irrigators can expect a wetter-than-average three-month period from August to September.

The volume weighted average price of various types of water allocations in 2019-20 varied, but almost all were higher than in 2018-19 (see table).

The long-term outlook for water entitlement markets remains strong, Aither said, but short-term factors such as commodity markets, the economic impact of covid-19, and ongoing regulatory uncertainty as a result of the Australian Competition and Consumer Commission’s inquiry into water markets could affect prices in the coming year.

“High reliability and high security entitlement markets may continue the recent trend of softening in 2020-21. However, depending on the extent of the price correction and resolution of regulatory uncertainty, some market participants may re-enter the entitlement market and underpin prices,” the report said.

“With many permanent horticulturalists needing to secure increased volumes of water as their plantings mature, demand for Victorian low reliability water shares, particularly those in Zone 7, will likely be sustained.”

In a webinar launching the report, Aither principal Erin Smith said the firm’s view is that fundamental drivers of entitlement prices remain in place.

“Increasing competition for water is likely to be a feature of markets in the southern Murray-Darling Basin, particularly from permanent horticulturalists. The expansion of permanent horticulture in the southern Murray-Darling Basin has been a key driver of demand over the last 10 years, and many of these plantings are yet to mature.

“The other thing to remember as well is that the recent sequence of dry years has taught us about the value of high reliability or high security entitlements, particularly those in the lower Murray. So, it may only take one or two participants to decide to increase the higher reliability position to underpin prices again.”

The Aither Entitlement Index, which tracks the relative performance of a group of major water entitlement types across the southern MDB, stood at 237 points at June 30, 2020. This was an increase of 6 percent over the year, compared to a 24 percent rise in 2018-19.

The index increased 13 per cent between July 2019 and January 2020, before February to June saw the first month-on-month fall in the index for more than three years (down 6 per cent).