Year in Review, 2023: Australia’s wild water market

Water entitlement prices fell from all-time highs in February 2023 to near-A$0 in June, before recovering some ground, writes Aither's Ben Williams.

2023 has been a rollercoaster for Australia’s water markets.

In January we were in the middle of the third consecutive La Niña year, with floods and ruined harvests, but by March, the Bureau of Meteorology (BoM) was talking about a “super El Niño”.

With storages and carryover space full, allocation markets fell to near A$0 per ML in June, only to reach A$250 per ML by the end of September and then fall back to A$100 per ML.

Entitlement markets reached all-time highs in February, then fell all the way to November when they started moving up again.

The one constant through this year has been the federal water minister Tanya Plibersek promising that she would deliver the Murray-Darling Basin Plan, in full, including 450GL of environmental water. The minister took a big step towards that promise with the passing of the Restoring Our Rivers Bill through the federal Parliament last month.

So how did all this play out in markets?

Allocation markets

The year began during the midst of the worst flooding in the Lower Murray for more than 50 years. With summer rains providing problems at harvest, allocation prices were not at the top of irrigator concerns.

With irrigator water accounts holding vast volumes of water in autumn, not even the threat of an El Niño alert from the BoM could keep allocation prices from falling to almost A$0 at the end of the water year (June 30) across the southern MDB.

As the 2023-24 water year began, full storages enabled allocations to entitlements to reach 100 per cent very quickly – in all trading zones except the Murrumbidgee. The first trades of the new water year were around A$90 per ML.

Annual croppers were enthusiastic about the high water availability and the prospect of ideal growing conditions. With large summer crops in mind, they were eager buyers.

Some permanent horticulturalists were wary of the “super El Niño” being discussed by the BoM and began buying water, including to carry over into the following water season

Meanwhile, many allocation holders were not selling; they were betting that if the El Niño developed prices would be higher later in the year.

In September, the BoM announced an El Niño, which really kicked the market along with prices doubling from the opening trades of the year, to as high as $250 per ML in the Murrumbidgee.

By the end of September annual croppers had already bought most of the water they would require for summer crops and stepped away from the market. Yet in early October a series of significant rain events unfolded across the southern MDB causing allocation markets to fall sharply.

With above-average rainfall persisting through November, markets continued their decline, returning to a level more reflective of the volume of water available, around A$100-130 per ML.

As we head into the summer months, the BoM’s forecast has softened significantly with average rainfall now expected through until March. The El Niño conditions in the Pacific Ocean appear to be retreating with most international models predicting a return to neutral conditions by the middle of 2024.

If the long-term forecast in March predicts neutral or a return to La Niña conditions, allocation prices could trend downwards towards to the end of the water year.

Entitlement markets

After a decade of double-digit growth, the Aither Entitlement Index, which provides a snapshot of water entitlements across the southern MDB, reached an all-time high in February 2023. Then challenging commodity prices and the largest continuous rise in the Reserve Bank of Australia cash rate’s history began to take their toll, with the AEI falling 11.6 percent to the beginning of November.

All this occurred with the potential for the Australian government to enter the market to recover water against Basin Plan targets. Without this possibility, it is possible that markets could have fallen further.

In November, the government announced it had reached a deal with the Greens that would see its Water Act Amendment to the “Restoring Our Rivers” Bill pass through the Senate, enabling the government to recommence direct water recovery.

Entitlement markets reacted to this news swiftly, even before the bill eventually passed later that week. Some buyers, who had been holding the whip hand to that point, appeared to decide that it was time to act and get ahead of the Commonwealth. This was reflected in November’s AEI figure which rose 1.6 percent.

The government’s specific water recovery strategy is unclear at this stage. Entitlement sellers, buoyed by market whispers of prices paid through the smaller Bridging the Gap tender in the NSW Murray system, are likely to hold out for the Commonwealth if they can.

However, some irrigators may be forced to sell smaller parcels to meet financial commitments, with the viticulture industry facing serious pain.

Looking ahead to 2024, the Basin Plan water recovery might be the most discussed issue – but it’s unlikely to be the immediate concern for many irrigators as challenging commodity prices and broader economic headwinds continue.

Ben Williams is water markets sector lead and a principal at Aither.