Murray-Darling water entitlement prices rise despite wet conditions

Prices for most major water entitlements in the southern Murray-Darling Basin rose in 2021-22 despite wet conditions that saw an increased supply of water in the system.

The latest edition of consultancy Aither’s annual Water Markets Report, published today, found that that the estimated total value of major entitlements in the southern MDB stood at A$30 billion ($20.9 billion; €20.5 billion) at the end of 2021-22, an increase of 13 percent on the previous year. The figure was also a record high for the southern MDB.

The price of water allocations, which is the amount of water allocated to water entitlements, were low compared to the previous three years, thanks to a wet weather cycle that has simultaneously created the “best water availability conditions in the last 15 years” while “suppressing buying demand for water allocations”, Aither said.

But entitlement prices remained high and increased, thanks to a period of stabilization following years of market volatility, as well as being buoyed by favorable economic conditions for Australian agriculture generally, including low interest rates and high commodity prices.

Speaking to Agri Investor, Aither water markets advisory lead Dr Erin Smith said the rise was unusual.

“The fact that entitlement prices have gone up during a wet cycle differs to what we have seen in previous wet cycles. If you go back to the period rom 2011 to 2014 when we had a strong La Nina and which was a very wet time for the Murray-Darling Basin, allocation prices were low, coming down from the highs seen during the Millennium Drought. Entitlement prices also came back then,” she said.

“But over the last 12 months we’ve seen that entitlement prices have actually increased. There are multiple drivers for that. There have been very strong economic conditions for Australian agriculture but we are also hearing that there has just been limited supply [of entitlements] coming to market – in particular, it is becoming a little bit more difficult to purchase large parcel sizes.

“There is definitely evidence that people are playing the long game here with this asset class.”

The rise could also be partly explained by investors feeling safer in taking a long-term view around entitlement prices, now that some regulatory uncertainty over MDB water markets abated in early 2021 following the release of the Australian Competition and Consumer Commission’s final report that found no evidence of market manipulation while recommending greater transparency.

All-time high

The Aither Entitlement Index, which tracks the performance (measured in capital value) of a group of major water entitlements across the southern MDB, increased by 18 percent, compared to rises of 6 percent in each of the previous two water years. Growth slowed slightly in March 2022 and the AEI decreased marginally (by 0.2 percent) in April, before beginning to increase again in the last few month of the year.

The AEI is now at an all-time high, with compound annual growth since inception in 2008-9 of 8 percent. Since 2015-16, the CAGR of the AEI is 17 percent.

The MDB received average to above-average rainfall in eight out of the 12 months in the 2021-22 water year. The rainfall ensured storages in the southern MDB remained topped up, resulting in the smallest irrigation season drawdown of storages since the Millennium Drought broke in 2010-11.

The weather also saw the largest volume of water allocated to major southern MDB entitlements in 15 years, with 7,450 GL of total water allocations. This was 22 percent more than the volume of water allocated in 2020-21 (approximately 6,100 GL) and is 545 GL more than the volume allocated in the last wet year 2016-17.

This resulted in water allocation prices trending downwards for a second consecutive year, Aither found.

Looking ahead, Smith said that water allocation prices would “likely remain low” in 2022-23, given the continuing wet outlook from the Bureau of Meteorology and the fact that major headwater storages in the southern MDB are “incredibly full”.

“This means that, by the time to get to end of this water year [in 2023], there is probably still going to be a  large volume of water held in storage which will underpin another strong start to the 2023 season as well,” she said.

Aither is an independent consultant that advises business and governments on issues relating to water markets, water policy and water infrastructure. It maintains the Aither Entitlement Index, updated monthly, and publishes the Water Markets Report each year.