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.

The Aither southern MDB Entitlement Index (AEI) tracks the relative performance of a group of major water entitlement types across the southern MDB, providing a simple overall snapshot of how major water entitlements are performing (Figure 14).

The AEI is updated monthly and is freely available at Aither’s website, so that irrigators, investors, banks, and owners of water can benchmark the capital value performance of their water portfolios over time.

Across the 2018-19 water year, the AEI increased by 24 per cent and gained in almost every month, excluding March.

Over the past five years, an 11 per cent Compound Annual Growth Rate (CAGR) has been observed through the AEI. Since inception of the AEI (11 years ago), an eight per cent CAGR has been observed.

A detailed breakdown of VWAP and volumes transferred by reported entitlement type for high reliability is included in Figure 15, and for low reliability is included in Figure 16.

5.3.1 Higher reliability entitlement types

5.3.2 Lower reliability entitlement types

A large proportion of the Australian water entitlement market is contained within the southern MDB, by both entitlement on issue and value. The estimated total value of major entitlement types on issue in the southern MDB in 2018-19 is approximately $22.7 billion (based on 2018-19 annual prices reported in state registers, not current fair market price valuations which are substantially higher than these VWAP prices).

Table 5 shows that the major entitlement types held for consumptive use in the southern MDB have an estimated combined value of around $17.6 billion, based on 2018-19 annual prices and excluding the Commonwealth Environmental Water Holder (CEWH portfolio).

Reflecting rapid price increases over the past four years, Aither estimates that the combined value of major entitlement types held for consumptive use have more than doubled since 2014-15 and are approx. 3.7 times the value of the market’s low point in April 2013.

The estimated 2018-19 value of entitlements held by the Australian Government in the southern MDB is approximately $5 billion, which has similarly increased rapidly in value in recent years.

In 2018-19, the market turnover value of major southern MDB entitlement types was approximately $699 million (excluding transfers within irrigation corporations) – which is approximately twice the value for 2017-18 (Table 6). This was driven by the increase in entitlement value and a 48 per cent increase in traded volumes during 2018-19.

Market turnover for major entitlement types varied from 2 per cent to 10 per cent of the total entitlement on issue, with an average of 4 per cent – which is higher than 2016-17. Vic 6 (below Choke) LRWS had the highest per centage market turnover at 10 per cent followed by Vic 7 (above Choke) LRWS and Vic 1A Greater Goulburn LRWS at 7 per cent. The high market turnover and market demand of these lower reliability licences can be attributed to their carryover characteristics.

The sale of water allocation made to entitlements can deliver a financial return to entitlement holders, which we estimate by assuming allocations are sold at annual allocation VWAPs. Average annual gross returns varied among individual entitlements in 2018-19, with Vic 6 Murray (above Choke) HRWS returning 11 per cent followed by Vic 1A Greater Goulburn HRWS and Vic 7 (below choke) HRWS at 10 per cent. Lower reliability entitlements had zero returns on account of reduced or no water allocations during 2018-19, but this analysis does not include returns from leasing carryover which can be significant.

Given price increases for regulated surface water, groundwater is increasingly used as a substitute throughout the southern MDB. There has been increasing interest and subsequent market activity for groundwater entitlements over the past three years especially as drought conditions have progressed and high reliability water entitlements have become more difficult to source.

For instance, the Lower Lachlan, Lower Murrumbidgee Deep and Katunga Deep Lead groundwater aquifers — three of the major southern MDB groundwater markets — have observed a significant price increase over the past three years, in part due to expanding demand for reliable water for cotton plantings as well as for potential horticultural development. Since July 2015 the Lower Lachlan Groundwater annual VWAP has increased from $745 to $3,000 per ML— representing an increase of 302 per cent.

Similar price increases have been observed in other major groundwater systems, with annual VWAPs for the Lower Murrumbidgee Deep and Katunga Deep Lead aquifers increasing 275 per cent and 244 per cent respectively over the same period (Figure 17).

Water markets in the northern MDB have also seen increases in entitlement prices in recent years. The northern MDB has generally been affected by more severe drought conditions than the south — in some places reaching record low inflows.

In comparison to southern MDB markets, northern MDB markets are characterised by relative illiquidity, reduced hydrological connectivity, reduced crop diversity, and an increased prevalence of on-farm water storage and groundwater use.

There has been a decrease in the volume of water traded and an increase in prices over the last three years for most major entitlements in the northern MDB.

Not all catchments have significant numbers of trade, with the most active markets shown in Table 7. Due to the limited number of trades, actual current prices can be significantly different from VWAPs for many of these catchments. However, the annual VWAP based on 71Q licence-to-licence transfers (which tend to be unrelated to land transfers) for Lachlan GS entitlements increased 49 per cent from $671 per ML to $996 per ML from 2017-18 to 2018-19. Likewise, Macquarie and Cudgegong GS, Gwydir GS and Lower Namoi GS increased 32 per cent, 19 per cent and 9 per cent respectively over the year.

2019-20 opening season allocations were at near record lows (Table 7). Goulburn HRWS did open at a record low of 2 per cent (and equal lowest for the Victorian Murray). South Australian Murray opened at the lowest levels since the end of the Millennium Drought. The estimated volume of water allocated to entitlements held by consumptive users on 1 July was approximately 680 GL.

The lower 2019-20 opening season allocations are equivalent to a reduction of approximately 1,300 GL of water available to consumptive users compared to opening allocations in 2018-19 (not accounting for carryover), approximately a 65 per cent reduction.

Aither estimates that 835 GL of carryover water was retained from 2018-19 to 2019-20 by consumptive users. This is a little over half of the consumptive carryover estimated to be carried into 2018-19 (approximately 1,500 GL).

This estimated volume of carryover, combined with opening season allocations, provided southern MDB consumptive users with more than 1,500 GL of water in accounts in the first week of the current water year (2019-20). To put this in perspective, at the same point in time in 2018-19, consumptive users had access to more than 3,500 GL of water.

The volume available for consumptive purposes — including consumptive carryover — has increased to 2,200 GL by 15 August following allocation increases.

6.2.1 Market conditions and drivers

Dry opening conditions

Reflecting poor opening allocations, the market opened the 2019-20 water year above $600 per ML.

Market participants have been slow to begin trading this year. Only 38 GL was commercially traded over the month, approximately half of the volume traded in July of 2018-19. In part, this is due to less water being available. However, brokers report that many buyers have been put off by the high price point and are waiting to see if prices will decline.

The reduced water availability will likely dominate market conditions over 2019-20, and potentially into 2020-21. Bureau of Meteorology and international forecasts of the major climate drivers suggest the winter and spring period — in which the southern MDB normally receives its most important inflows — are likely to remain unfavourable (Figure 18). This suggests that this year’s inflows could be below average, compounding several years of low inflows.

6.2.2 Market conditions and drivers

Developing conditions and cropping decisions

Rainfall and inflows from August to November will be critical in determining if there is any sort of water availability turnaround, thereby driving annual cropping production decisions for 2019-20, and allocation prices for this year and next year.

At current prices, Aither expects that many cotton, rice and other cropping enterprises will become sellers, provided they receive any water allocations at all. As a consequence, production would be low in these industries without a quick and significant turnaround in water availability. Continuing the trend from recent years, we may see more irrigation farmers exiting this year.

Horticulture, Lower Murray water demand and trade restrictions

While some permanent horticulturalists have already secured their water for the year, others will be waiting and hoping for an improvement in allocations before entering the market to secure their needs for this year and next. We expect this to keep prices high, particularly in the Lower Murray.

Aither expects that inter-valley trade (IVT) rules will have large impacts on the distribution of water use and prices in 2019-20. At the time of writing, Lower Murray irrigators were unable to access water markets in the Murrumbidgee, Goulburn, Lower Darling or Upper Murray as the Murrumbidgee IVT, Goulburn IVT and Barmah Choke are closed (Figure 19). If this continues, the price in the Lower Murray is expected to rise above current levels, in the absence of a big increase in allocations. Meanwhile Upper Murray, Goulburn, and Murrumbidgee prices may flatten or even ease if the trade restrictions continue

Price forecast for 2019-20

Based on current climate outlooks, a major turnaround in water availability appears unlikely. Inflows over the year-to-date and state-based seasonal determinations outlooks suggest that it will remain dry or worse, with allocations lower than the same time in 2018-19.

Based on a dry or extreme dry outlook in 2019-20, we expect between approximately 2,500 and 3,300 GL of water to be available for consumptive use from allocations to entitlements across major southern MDB surface water systems (including approximately 835 GL of consumptive carryover).

Using Aither’s water markets model, we estimate that the average annual allocation price in the southern MDB (excl. Murrumbidgee) will be approximately $425 per ML under a dry scenario and $590 per ML under an extreme dry scenario. However, this assumes a degree of inter-regional trade which we are unlikely to see this season as a result of IVT limits, as noted above. Depending on the arrangement of these trade restrictions, we expect the Lower Murray could trade at or above this price level, while the Goulburn and Upper Murray is expected to trade at or below this level — meaning a range of prices is ultimately possible (Figure 20).

Under current conditions, our model predicts trade will move the maximum volume out of the Murrumbidgee, which will be left with an average price of between $360 and $380 per ML, but this will be strongly influenced by allocations to General Security entitlements.

Goulburn

Trade has already closed from the Goulburn to the rest of the southern MDB — and accordingly the price has already fallen below other southern MDB allocation prices. We expect this divergence to grow and only come back to an equilibrium with the Murray if the IVT re-opens or towards the end of the season. With much less high-value horticulture in the Goulburn, prices could drop substantially if the IVT remains closed.

Murrumbidgee

Allocation trade movements have reversed from 2018-19 when the limits on the volume of water into the Murrumbidgee were reached. The high price combined with full allocations to High Security entitlements in the Murrumbidgee has increasingly moved water out to the Murray and the limit on trade out of the Murrumbidgee was reached on 16 August 2019. We expect trade to remain closed from the Murrumbidgee throughout 2019-20. The eventual allocations, demand for carryover to 2020-21 and the area of cotton planted will ultimately determine the local price, although it is expected to be lower than in the Lower Murray.

Murray and end of season dynamics

As discussed above, the water demand in the Lower Murray has grown rapidly, and is inflexible, based on the ongoing needs of permanent horticulture. Trade into the Lower Murray is already prohibited from above the Barmah Choke, the Murrumbidgee, the Goulburn and the Lower Darling. If conditions remain poor, and the other regions are unable to supply water to the Lower Murray, prices may rise further over 2019-20.

As the season progresses, these enterprises will increasingly look forward to 2020-21 and will seek to secure water supply — which has the potential to leave water demand outstripping supply, potentially driving prices up further.

6.2.3 Previous model accuracy

For the 2017-18 Aither Water Markets Report, we estimated 2018-19 water market prices using our previous water allocation price model. Under dry conditions, the model estimated the annual price would be $240 per ML throughout the southern MDB. In last year’s report, under extreme dry conditions, the model estimated the price would be $315 per ML throughout the southern MDB.

Despite there being no single price for water allocations across the southern MDB in 2018-19, the approximate average annual price for the connected southern MDB was around $423 per ML, which is significantly higher than Aither’s estimates based on outlooks available at the time (Figure 21).

The source of the discrepancy stems from both supply and demand factors. On the supply side, actual conditions were extremely unfavourable — especially for General Security entitlements in NSW and in-crop rainfall.

On the demand side, as described previously, significant new water demand has entered the market from cotton and permanent horticulture throughout the southern MDB. As well as having a higher willingness to pay (raising the price in all water years), permanent horticulture has much less flexible water demand, which means prices are likely to increase at a faster rate under dry and extreme dry conditions.

6.2.4 Changes to the water market model

Aither’s water market model has developed over time. In addition to splitting the Murrumbidgee from the connected Murray, Aither has made more recent changes to the model. To better reflect the change in water demand, there has been a structural change to the model, as well as improvements to the input data. As a result, the model performs better when estimating dry and extreme dry conditions.

Aither is continuing to re-develop the model in 2019 to enable greater accuracy and enhanced insights across trade zones.

Entitlement price increases continued throughout 2018-19, particularly for high security/reliability entitlements which yielded strong returns from selling water allocations this year (Table 6).

Reflecting high demand, prices have particularly increased for the high-reliability entitlements that can supply water to the Lower Murray: Vic Murray Zone 7 HRWS, NSW Murray Zone 11 HS, and SA Murray Class 3 — and, to a certain extent, Murrumbidgee HS.

Accordingly, significantly sized parcels of these entitlement types appear to be increasingly difficult to source from markets. In the last few months, prices for Victorian Murray Zone 6 and Goulburn 1A HRWS entitlements have increased, but there remains a very large price differential when compared to entitlements held below the Barmah Choke.

These increasing entitlement values reflect the positive conditions for several irrigated commodities (cotton, almonds, citrus and table grapes), and increasingly the trade restrictions which limit inter-valley movement of water. Prices also reflect the low-interest rate environment and strong demand for real assets.

According to brokers, buyers remain diverse and include:

• Enterprises topping up smaller water portfolios to secure their long term needs.
• Water funds and investors continuing to see value in entitlements on the basis of lease products and forward contracts.
• Some large corporate agribusinesses that are making strategic purchases to manage risk and underpin long-term permanent developments.

High Reliability

With limited supply and strong demand, prices continue to increase for high-reliability entitlements. There are no signs of a turnaround in the market and early entitlement trading in 2019-20 indicates further upward movement in some entitlements. However, the value of these entitlements are ultimately determined by the value of the agricultural products that can be produced. As such, we anticipate that while prices may increase, the rate of increase will eventually begin to slow. Reflecting the highly fragmented markets in 2019-20, we anticipate that entitlement price movements will increasingly be dominated by the tradability of allocations associated with each entitlement type.

General Security and Low Reliability

Over 2018-19, poor allocations contributed to price decreases for NSW GS entitlement types. It appears unlikely these entitlements will receive significant allocation over 2019-20 and pressure to sell may keep entitlement prices subdued, with further declines possible but strong demand likely to kick in if the price for Murray GS does drop further.

Given there is likely to be an abundance of potential carryover space relative to water supply, the value of low-reliability entitlements for this purpose is somewhat constrained in the short-term. However, carryover space remains in demand by horticulturalists looking to manage their own supply security from year to year.