Water allocation prices ‘trending downwards’ in the Murray-Darling Basin

Water allocation prices have fallen, although stability in high-security water entitlement prices suggests a maturing of that part of the market.

Consultancy Aither released its annual Water Markets Report this week, looking back at the year that was in Australia’s Murray-Darling Basin, as well as casting an eye ahead to what irrigators and water investors can expect from the coming 12 months.

In a nutshell, following a year of much wetter weather than in recent times, “the trend in allocation prices has largely been downwards,” Aither principal Erin Smith told Agri Investor, pointing out the trend began at the end of the 2019-20 water year after the drought broke.

Primarily, there has been a turnaround in water supply conditions in the Murray-Darling Basin, with higher allocations granted in 2020-21 following high inflows.

Smith said there were three other factors that have contributed to the downwards pricing trend: “We had large volumes of carryover from 2019-20; we had quite mild summer temperatures which meant many irrigators used less water than budgeted; and we got some pretty regular in-crop rainfall as well.”

The difference in prices is striking. The average price of water allocations topped A$800 ($586; €500) per ML in 2019-20 following the extended dry period. In July 2020, following increased inflows, this had fallen to just over A$300, declining throughout the year to end at A$94.

For investors in irrigated agriculture, whether permanent or annual plantings, this is obviously good news.

“The prices we are seeing will mean the year is going to be a lot more manageable for all irrigators, with annual croppers able to think about committing to large planting programs,” Smith said.

On the flip side, investors in water entitlements will see less return for the allocations that they sell into the market, but it isn’t an existential crisis.

“We are going into a period where, probably for the next two seasons, prices will be relatively low. But the key thing is to differentiate between those who have been invested in water for some time, and those who are maybe thinking of getting into the asset class,” Smith said.

“I don’t think we’ll see much restructuring from those who have been in the market for some time. For those who are yet to invest, the current conditions might lead to a bit of a delay in their participation, or slow down decision-making. It comes down to timing.

“Overall, investments in water are a long-term prospect and the outlook for water assets over the longer term is still very strong.”

Price rises for high-security water entitlements have been rapid in the last few years as supply grew scarcer, but that appears to have stabilized, Smith said, signaling an increased maturity in the asset class as it continues to demonstrate a track record of solid returns for investors.

“That was underpinned by the fact that Australian agriculture did quite well [during the pandemic] and is set for a pretty strong outlook going forward,” she said.

Stay tuned for further analysis of Aither’s Water Markets Report this week at Agri Investor.