Murray-Darling water prices dip – but not due to coronavirus

Regulatory risk and climatic conditions are the culprits behind a drop in the value of water entitlements in the southern MDB, the first in four years.

The coronavirus pandemic has led to a fall in value across a range of asset types in recent weeks, with public equities markets suffering the most obvious and severe challenges.

The price of another relatively liquid type of asset has also fallen in that time: water entitlements in Australia’s Murray-Darling Basin.

In fact, this is the first time in more than four years that water entitlement prices have dropped, according to the Aither Entitlement Index. The index, which tracks the relative performance of a group of major water entitlement types across the southern MDB, has declined by 3.3 percent since January, and consultancy Aither expects it to fall again when new figures are released at the end of April.

The difference with equity markets, though, is that the price drop hasn’t been fueled by massive sell-offs as investors seek to turn their more liquid assets into cash.

The index actually first began to decline in mid-February, before the pandemic had a major effect on the global economy. This suggests that other factors are at play, including a change in market confidence.

As Aither co-founder and director Chris Olszak told Agri Investor, this includes the “potential for entitlements to have reached a natural peak based on risk and expected future returns,” following an extended period of growth and high prices.

“A series of major inquiries and reviews have also raised concerns around regulatory risk, despite the weaker dollar making Australia a great destination for foreign capital,” he said.

Short-term climatic factors and allocation prices are also playing a role, with allocation prices falling dramatically in recent months after the end of the irrigation season, and a break in the weather in the fall reducing demand from winter croppers.

Any optimism around plunging allocation prices may be short-lived, though.

“Despite the Bureau of Meteorology forecasting rain, the irrigation drought remains critical in the southern MDB until the storage increases substantially, and this has not yet occurred. The last 36 months remains the driest three-year period on record,” Olszak said.

“Without big inflows to the dams over winter, next summer will be worse than the one just gone.”

The US National Oceanic and Atmospheric Administration this week forecast that 2020 is shaping up to be the hottest year since records began, for example.

Olszak said he expects to see fluctuations in entitlement prices alongside general uncertainty in the market for another 3-6 months, with a further price correction after years of growth. But the underlying asset class “remains strong,” he said.

This view was echoed by Nick Waters, a managing partner at Riparian Capital Partners with experience of water markets in Australia, although he went further in expecting entitlement values to recover lost ground.

“If you look at this from a seasonal point of view, three or four months ago in December and January we were facing widespread bushfires and still deep in drought, and there hadn’t been widespread rain yet. The market just feels completely different now,” he told Agri Investor.

“There’s been some good rainfall, and the system in the southern and northern MDB has received inflows to varying degrees. While this shifts short-term sentiment, our expectation is that farmers will continue to value water entitlements based on the long-term security of water supply they provide.

“So while we are seeing a slight pull back here in values, we expect the longer-term trend to still be higher.”

Lower prices, even if temporary, will be good news for some producers as they plot a course through the pandemic.

But as we reported last week, confidence in general security water entitlements could decline the longer drought continues (recent rains have not been enough to completely see off the spectre of drought yet).

In turn, this could help keep the price of high-security entitlements up as water remains a scarce commodity.

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