Water Markets Report

The Aither Water Markets Report is now in its sixth year.

The report provides water market participants, advisors, investors and policy professionals with an up-to-date and accessible overview of recent water market drivers and activity in the southern Murray–Darling Basin (MDB) (Figure 1).

The Aither Water Markets Report 2018-19 highlights the unfolding story of intensifying dry conditions and reduced water available for consumptive users, combined with structural changes in water demand.

Our review of 2018-19 shows that the combination of these structural demand changes, climate change and cyclical conditions is having a significant influence on both entitlement and allocation market prices. Our outlook for 2019-20 explores how these factors may play out over the course of the year ahead.

2.1.1 Persisting dry conditions

2018-19 was another dry year across the MDB. Rainfall was either below or very much below average for most of the MDB (Figure 2).

A key driver of reduced rainfall in 2018-19 was a positive Indian Ocean Dipole (IOD) which tends to shift rainfall patterns, and results in lower rainfall across south-east Australia.

The northern MDB was particularly dry with parts of the Border Rivers region observing the lowest rainfall on record. Rainfall conditions in the southern MDB tended to be better, although many regions recorded average to very much below average rainfall.

These climate dynamics have intensified the drought conditions across the MDB following a similarly dry 2017-18 (Figure 3).

2.1.2 Below average and inconsistent on-farm rainfall

Below average rainfall across the MDB was reflected in below average on-farm rainfall throughout may irrigation regions in the southern MDB.

Figure 4 shows that during the first three months of 2018-19, many growing regions received below average rainfall. This resulted in strong early season demand for irrigation allocations by winter crop growers.

The dryland drought conditions increased fodder prices which meant that it became cost prohibitive for dairy farmers to purchase fodder instead of irrigating.

There was also limited rainfall over the summer in many key irrigation regions which further increased irrigation demand from permanent horticulturalists and those summer croppers that were able to plant in 2018-19.

2.2.1 Declining storage levels

Persistent dry conditions, combined with high levels of water use, have resulted in a significant reduction in water held in the major southern MDB headwater storages. Storage levels have fallen from 63 per cent in July 2018 to 42 per cent in July 2019.

This decline continues the downward trend since late 2016. Storage levels are now at some of the lowest levels experienced since the Millennium Drought  (Figure 5).

2.2.2 Lower total allocations than 2017-18

Across the southern MDB, approximately 3,326 GL was allocated to water entitlements, which is the lowest total volume allocated since 2008-09 (Figure 6).

Total allocations in 2018-19 also continued a downward trend in water availability over the last three water years. Allocations were 33 per cent less than in 2017-18, and 51 percent less than in 2016-17 (Figure 6).

Figure 6 also shows the volume of water allocated to entitlements purchased by the Commonwealth Government through buybacks which are no longer available for consumptive use. In 2018-19, this was approximately 17 per cent of total water allocated.

2.2.3 Lower total opening allocations across the MDB

Opening water allocations to many major southern MDB entitlement types were also lower in 2018-19 than in 2017-18 (Figure 7). While in some cases, allocations eventually reached 100 per cent (equal to 2017-18), delayed allocations meant that users were more likely to turn to the allocation market at the beginning of the season to secure water, rather than wait for allocations to their entitlements.

Notably, NSW Murray General Security allocations remained at zero per cent for the whole year leaving many holders of these entitlements disappointed.

2.3.1 Increasing demand from permanent horticulture

Since 2010-11, irrigated cotton growing has emerged in the southern MDB. As the industry has grown, increased volumes of water have shifted towards cotton, and away from other summer crops, such as rice in the NSW Riverina (ABS, 2018).

A similar story is emerging for permanent horticulture. Recent research by Aither (commissioned by the Victorian Government Department of Environment, Land, Water and Planning) has examined the changing balance of water supply and demand in the southern MDB. Using multiple data sources, we established a more accurate and current estimate of the total volume of horticultural water demand in the connected Murray and Goulburn systems. This estimate is based on existing and planned plantings and orchard maturation trajectories.

While the exact figures remain difficult to confirm, our results show that permanent horticultural crop demands in the southern MDB are higher than previous estimates. This demand will continue to grow as existing plantings mature and new developments proceed across the southern MDB.

Our assessment suggests that there is potentially demand for approximately 1,400 GL per annum in the connected Murray and Goulburn, and potential for approximately 160 GL of additional demand if developments in various stages of planning eventuate.

As a result, in extreme dry conditions in the future (similar to 2007-08), the volume of water allocated across the connected Murray and Goulburn systems may be only slightly higher than the water demand attributable to existing plantings, excluding the effects of carryover, trade constraints and market behaviour (Figure 8).

2.4.1 Market prices are deviating from historical trends

Persistent and intensifying dry conditions that reduce water availability and changing patterns of water demand are combining to reshape the historical relationship between water allocations and water prices.

Figure 9 presents the last 11 water years ordered from lowest to highest volume-weighted average price (VWAP). This shows that, in general, as the volume of water allocated to entitlements increases, market prices decrease.

However, this relationship shifted considerably in 2018-19. Average prices in 2018-19 were the highest on record, while water allocations were not at the lowest on record. Despite almost 900 GL of additional water being allocated for consumptive use in 2018-19 compared to 2008-09, average allocation prices were 38 per cent higher. This suggests that significant structural change in demand is taking place.

2018-19 was a tumultuous year for water policy and management in the MDB. ​

Following mounting unease with the implementation of some elements of the MDB Plan, significant inter-governmental agreement was reached at the MDB Ministerial Council (MinCo) meeting in December 2018.​

However, the fish death events in the Lower Darling and release of the South Australian Royal Commissioner’s report in January 2019 threw Basin water policy and management into the public spotlight during the New South Wales state and the federal election campaigns. ​

While governments are still working together to refine implementation of the Plan, polarised views persist throughout Basin communities and the Australian public. Amongst other initiatives, these ongoing concerns have prompted the Australian Government to announce two important inquiries: an independent panel to assess the social and economic conditions of irrigated communities across the MDB and the ACCC Inquiry into markets for tradeable water rights.

Figure 10 presents a timeline of key water policy events across the MDB during 2018-19.

Barmah Choke Bypass through Mulwala Canal  

August, 2018

WaterNSW and Murray Irrigation agreed to allow water through the Mulwala canal, bypassing the Barmah Choke (for 2018-19 only). This was designed to improve peak deliverability downstream to the Lower Murray. It was a one-year agreement and it is unclear if it will be extended.

MINCO Deal to complete MDB Plan

14 December, 2018

The MDB Ministerial Council reached a long-awaited agreement on the socio-economic criteria for the 450 GL of additional water recovery under the Plan, as well as a range of other key matters.

Productivity Commission’s five-year Basin Assessment  

25 January, 2019

The Productivity Commission (PC) released its five-yearly assessment of the effectiveness of the Basin Plan implementation. The PC found that Basin states have made significant progress in implementing key elements of the Basin Plan, however further work is required to achieve its full implementation.

South Australian Murray-Darling Basin Royal Commission  

31 January, 2018

The South Australian Government released the findings of the state’s MDB Royal Commission. The Commissioner’s scathing recommendations included: reassessing the sustainable diversion limits (SDL) and the volumes required for further water recovery efforts; full disclosure of all previous modelling, assumptions and other parameters used to develop the Plan; improved monitoring, metering and compliance actions; and enhanced rights for Traditional Owners.

Foreign Ownership Register released 

1 March, 2019

The Australian Government released the first report of the Register of Foreign Ownership of Water Entitlements. It showed that approximately 10 per cent of Australian water entitlements have some level of foreign ownership. The largest volume of foreign owned water entitlements is in Western Australia (26 per cent), followed by Queensland (18 per cent) and New South Wales (9 per cent). The level of foreign ownership of MDB water entitlements (approximately 9 per cent) is slightly lower than the level of foreign ownership of all Australian water entitlements.

Independent Fish Death Assessment released  

10 April, 2019

Large-scale fish deaths in several NSW rivers and storages attracted significant media attention in December 2018 and January 2019. The Federal Government and Federal Opposition established separate independent panels to investigate and propose remedial actions. The final report of the Government-appointed panel — chaired by Aither Senior Associate Robert Vertessy — stated that the fish deaths were caused by a combination of low flows, poor water quality and a sudden change in temperature, causing the weir pools to suddenly de-stratify resulting in low oxygen levels. The panel further noted that there were several other contributing factors, including climate conditions, hydrology and water management, such as the operation of the Menindee Lakes system.

Independent panel to investigate socio-economic conditions in irrigated communities announced

8 April 2019

The Australian Government announced the establishment of an independent panel to undertake an assessment of social and economic conditions in irrigated communities across the MDB.

MDBA Releases Investigation on Price Reporting

31 May 2019

The MDBA released the findings of its investigation into reporting of water trading. The key finding was that complete and accurate consolidated reporting is impossible due to an absence of robust arrangements across Basin governments to gather comprehensive price information

Following the start of the 2019-20 water year:

Victoria slows irrigation growth below the Barmah Choke

11 July, 2019

The Victorian Water Minister, Lisa Neville, announced that no new licences for water extraction in the Victorian Lower Murray will be issued, nor extraction limit increases be granted, unless it can be shown that there will be no increased risks to the environment or entitlement holders. The announcement followed heightened concern about the deliverability of water to downstream water holders and environmental impacts. Minister Neville requested that New South Wales and South Australia put in place similar arrangements.

ACCC Inquiry Announced

7 August, 2019

The Australian Government has directed the ACCC to conduct an inquiry into markets for tradeable water rights in the MDB. The Inquiry will span the operations, transparency, regulation, competitiveness and efficiency of markets for tradeable water rights. The ACCC’s interim report is due 31 March 2020, with the final report completed by 30 November 2020.

Annual water allocation VWAPs rose rapidly across 2018-19 — in some cases more than tripling 2017-18 prices (Table 1). 2018-19 average prices diverged across the southern MDB zones – from approx. $375 per ML in the Greater Goulburn to approx. $465 per ML in the Victorian Lower Murray – with the price difference being driven by trade constraints.

For example, the lower VWAP in the Greater Goulburn reflects the inter-valley trade limit (IVT) being in effect throughout much of the year, limiting trade to the Murray where higher prices were obtainable.

The estimated total value of commercial (as opposed to ‘non-commercial’ or related party) allocation trade in the southern MDB for 2018-19 was $566 million, tripling the 2017-18 estimate of $189 million.

This estimate uses allocation transfers reported at $0 per ML as a proxy for non-commercial transfers. This approach may understate the total value of commercial trade because known trade disclosure issues result in the reporting of some commercial allocation trades at $0.

Table 2 shows total 2018-19 allocation transfers across major southern MDB zones. The analysis suggests Vic 7 Murray was a very large net exporter of water allocations, while the SA Murray was a major recipient of transferred water.

However, as noted earlier in this report, separating commercial transfers from non-commercial transfers is important to achieve an accurate picture of the market. Based on current public reporting practices of most state governments, it remains difficult to identify or categorise types of transfers.

When Aither adjusted for transfers reported at $0 per ML (a proxy for non-commercial transfers), a different picture emerged. Table 3 repeats the analysis presented in Table 2, but removes transfers reported at $0.

This approach shows that water allocations were commercially traded downstream along the Murray, revealing the lower Victorian Murray to be a net importer of water. As noted earlier in this report, the increasing water demand from permanent horticulture in the Lower Murray is increasingly driving water demand, especially during current dry conditions.

Average southern MDB allocation prices started the 2018-19 water year at approximately $230 per ML (Figure 11). Average monthly prices closed the year at an annual high of approx. $560 per ML in the Murrumbidgee and $530 per ML elsewhere. Price appreciation in the latter half of the year followed drying conditions and a poor outlook for 2019-20.

For the majority of 2018-19, water allocations in the Murrumbidgee traded at a price premium to the Murray — based on a substantial area planted with cotton. This price premium peaked at 11 per cent in January 2019, when there was an unexpected period of dry weather and substantial volumes were traded in a short period (Figure 12). In particular, cotton growers had planted relatively large areas, had obligations to fulfil contracts and had budgeted for greater improvements in water allocations.

Historically, the NSW Murrumbidgee typically trades at a discount to the rest of the southern MDB, and is a net exporter of water. However in the last two years, the direction of trade has reversed, due to:

• the substantial cotton and corn crops planted in the Murrumbidgee,
• restriction of transfers into the Murrumbidgee, and
• growers’ willingness to pay a premium in order to secure water.

This trade reversal and the imposition of the trade restriction drives the price premium in the months in which it applies.

In contrast, Vic 1A Greater Goulburn allocations traded at a price discount to the Murray throughout 2018-19. This discount reached a maximum of 10 per cent in September 2018. This discount similarly represents a break in the historical price trend for Vic 1A Greater Goulburn. This discount is being driven by restrictions on water allocations trading out of the Goulburn,

stemming from increased water demand in the rest of the southern MDB and relatively lower demand for water at such high prices in the Goulburn.

A detailed breakdown of VWAP and volumes transferred by reported trade zone is included in Figure 13.

For the 11 major water entitlements covered in this report, there was approximately 237 GL transferred between market participants in 2018-19 (Table 4) – which is approximately 48 per cent more than 2017-18. By volume, the most actively traded entitlements in 2018-19 were Vic 7 Murray (Barmah to SA) HRWS and Vic 1A Greater Goulburn HRWS.

The analysis presented in Table 4 does not include transfers that are reported ‘within’ New South Wales irrigation corporation licences. We have excluded these transfers as they are not reported on the New South Wales water register and when they are reported through the Bureau of Meteorology, they are done so without prices.

Water entitlement prices increased significantly during 2018-19. All higher reliability, and most lower reliability entitlement types (notably excluding NSW General Security entitlements), experienced an increase in monthly VWAP (Figure 15, Figure 16). The most significant price increase was for Vic 7 Murray (Barmah to SA) LRWS, increasing 61 per cent from 2017-18 (Figure 16). This reflects the expansion of permanent plantings in the region and demand for carryover.