Background

Australian water management has undergone a significant period of reform over the past three decades. The establishment of water markets has been a key component of this reform story.

Water markets are now an established part of agricultural, urban and environmental water policy, management and investment in Australia.

The Aither Water Markets Report provides an overview of current water market activity in the southern Murray–Darling Basin, compares market outcomes with recent years and comments on the future outlook.

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2021 Water Markets Report
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About Aither

Our Water Market Services

We are a team of award-winning, independent water markets, policy, and infrastructure advisors.

Every day, we help businesses and governments make better decisions about scarce water resources.

We do this by providing high-quality information, insights and analysis that help our clients design and implement strategies for successfully participating in Australia’s water markets. Our team also provides policy, regulatory and infrastructure advisory services.

Whether you need custom-designed water strategies or assessments of your exposure to water-related risks and opportunities, we’ll help you make clear, informed and confident water decisions.

Executive Summary

Facts at a glance – 2020-21

  • Estimated value of commercial allocation trade in major southern MDB trading zones: $189 million.
  • Annual average southern MDB allocation prices: $95 per ML in NSW Murray (above Barmah) to $191 per ML in SA Murray.
  • Estimated value of major southern MDB entitlements on issue (including environmental and Victorian water corporation holdings): $26.5 billion.
  • Aither Entitlement Index (AEI) 30 June 2021: 251 points (up 6 per cent over 12 months).
  • Value of total entitlement transfers: $744 million.
  • Total volume of entitlement transfers or trades (outside of irrigation corporations): 239 GL (down 7 per cent on 2019-20).
  • Entitlement market turnover: 4 per cent.
  • Average annual high security and high reliability entitlement returns (sale of allocations): between 1 and 3 per cent.

Summary of 2020-21

2020-21 will be remembered as the first wet year after the driest 36 months on record for the southern Murray-Darling Basin (MDB). Regular rainfall and lower allocation prices than the last two water years brought welcome relief for irrigators across the Basin.

Allocation markets

  • Large areas of the MDB received above average rainfall most months between July 2020 and March 2021. Regular rainfall and good inflows into storages improved water supply conditions in all systems across the southern MDB compared to the last three water years.
  • Average water allocation prices started the water year just above $300 per ML, and then tumbled throughout the year as allocations to entitlements increased and timely in-crop rainfall arrived.
  • Binding trade constraints in the first half of the season created price differentials between upstream zones and the lower Murray again. But, with increased water supply in all zones, the differentials were not as large as in 2019-20 (in absolute terms).
  • The combination of high volumes of carryover from 2019-20, improved water availability in 2020-21, and water usage below budget for many permanent horticulturalists created the second largest volume of carryover in all major trading zones.

Entitlement markets

  • Prices for high reliability and high security entitlements generally stabilised in 2020-21 after the price decreases between January and June 2020. This price stabilisation was likely underpinned by the strength of the Australian agricultural sector, and the long-term expectations of market participants.
  • Market activity for low reliability and general security entitlements was again influenced by demand for carryover space. Increased returns from improved allocations to NSW general security entitlements also revived entitlement market activity.
  • The 2020-21 price increases in low reliability and general security entitlements were the primary driver of the return to month-on-month increases in the Aither Entitlement Index between January and June 2021.

Facts at a glance – Outlook

  • Comparison of 2020-21 and 2021-22 opening season allocations to consumptive users (excluding carryover): 600 GL more water allocated at opening of 2020-21.
  • Estimated 2021-22 total volume of water available to southern MDB consumptive users before peak irrigation season under average inflows scenario (including carryover): approximately 5,300 GL.
  • Bureau of Meteorology three-month rainfall outlook (August to October) for southern MDB: Above average.
  • Current (early August 2021) southern MDB allocation prices: $65 to $120 per ML.

Outlook for 2020-21

At the start of 2021-22, the large volumes of carryover and favourable outlook for spring rain mean that many irrigation businesses are set for a successful year. Annual croppers will be gearing up for a big season and hoping that further inflows extend the good times for another year or two.

Allocation markets

  • Quick increases in allocations to most entitlements in the southern MDB in the first six weeks of the water year mean many market participants can afford to be patient. As a result, allocation markets have generally been quiet.
  • If average inflows eventuate from here (early August 2021), by peak irrigation season, consumptive water availability could be higher than the volume available by mid-December in 2020. If this happens, allocation prices could settle around or below prices seen in the final months of 2020-21. It will likely take a marked return to drier conditions to push prices up from current levels this water year, although the key driver to watch will be buying demand from annual croppers as summer approaches.
  • With downstream trade opportunities closed, prices will be higher in the lower Murray than the upstream zones. But the 2021-22 price differentials will likely be relatively small in absolute terms because of the increased water availability in all zones.
  • The key dynamics to watch are: (1) If irrigators need to draw on their carryover from 2020-21. With increased allocations to entitlements, and positive rainfall outlooks, conditions are set for there to be another year of high volumes of carryover which will mean many irrigators will be well placed entering 2022-23. (2) The timing of in-crop rainfall and summer temperatures. With large areas of winter crops planted, and promising rainfall and allocation outlooks likely to encourage summer crop planting, 2021-22 could be a high water usage year. Depending on how these factors combine, the drawdown on storages could be much larger than the last two water years. If it stays wet, then the good times will continue for another year.

Entitlement markets

  • The long-term outlook for entitlement markets remains strong. However, compared to last year, key uncertainties that may have been creating caution among water market participants have eased.
  • High reliability and high security entitlement prices seem to have stabilised, possibly reaching a new equilibrium after five years of rapid appreciation.
  • Against the backdrop of firming commodity prices, low interest rates and a positive outlook for the Australian agricultural sector, there seems to be limited supply of high reliability and high security entitlements coming to market. If this continues, prices for these entitlements may start to increase.
  • Demand for carryover space will likely continue to be a feature of water markets in the southern MDB. Many permanent horticulturalists still have immature plantings, and will continue to look for secure carryover space to cover their water needs. With limited supply of carryover space in the lower Murray, demand for all low reliability entitlements will likely continue.
  • 2021-22 is likely to be a strong year for NSW general security entitlement values. Current allocations are already better than they were at the same time during the last three water years. This will support improved returns for general security entitlement holders.

1.0 Introduction

1.1 Introduction

Now in its eighth year, the Aither Water Markets Report provides water market participants, advisors, investors, and policy professionals with an annual snapshot of recent water market drivers and activity in the southern Murray-Darling Basin (MDB) (Figure 1).

This year’s report highlights the key drivers of the lower water allocation prices observed in 2020-21 compared to the last three years, including:

  • the 2020-21 La Niña event and increased allocations to general security entitlements.
  • cooler summer conditions that meant many permanent horticulturalists’ water use was below budget.
  • high volumes of carryover from 2019-20 that suppressed buying demand throughout the year.

We also draw attention to how low allocation prices and, therefore, lower returns for entitlement holders have not materially influenced high reliability and high security entitlement prices. After entitlement prices declined in early 2020, high reliability and high security entitlement prices generally stabilised in 2020-21. This stabilisation potentially indicates a maturing of the market and the long-term expectations of market participants.

As we look ahead from August 2021 (the time of writing), our outlook for 2021-22 explores how these factors may influence water markets in the southern MDB over the next 12 months.

Figure 1. Water trading zones in the southern Murray-Darling Basin.

Source: Aither, 2021.