Background

The Aither Water Markets Report is now in its sixth year. Aither publishes the report as a freely available market resource. The report provides the market with an overview of recent water market activity in the southern Murray–Darling Basin (MDB) (Figure 1). The report also provides market insights and commentary on the future outlook. ​

Over the short-term, water availability is the main driver of water market variability. Reliability of water storages, allocations, inflows, and rainfall will drive the market price — never more evident than during the current dry conditions. Wide-spread dry conditions are forcing the hand of many market participants and are the defining story of 2018-19 and will continue to be into 2019-20.​

In the background, longer-term changes in water supply through environmental water recovery have increased the scarcity of consumptive water.​

Increasingly, another long-term trend of water demand changes are radically reshaping the water markets. We are currently observing a step-change in water demand and market dynamics.​

The Aither Water Markets Report 2018-19 explores this story of dry conditions and changing water demand, and outlines our view of the year ahead.

sMDB water allocation market prices are strongly influenced by the availability of irrigation of water. 

In-crop rainfall is one determinant of water availability. However, rainfall generally only meets a portion of crop water requirements and is unlikely to be sufficient to meet total annual water requirements in all cases. It can also vary widely from year to year. 

Therefore, the application of irrigation water is used to supplement rainfall. Allocations made to entitlements that are available for consumptive use are the primary supply-side factor in determining the availability of irrigation water.

On the basis that the supply of water is variable, water allocation prices can also vary significantly between and within years (Figure 2). In years of low water availability, allocation prices are generally high and vice versa.

Outside extremely low water allocation seasons, long-term changes in water demands from different irrigation industries have not been large aggregate drivers of water allocation prices over the last decade. However, as explored in Section 1.3 over page and across the remainder of this report, this is changing.

Second Open text block after sliding gallery. On the basis that the supply of water is variable, water allocation prices can also vary significantly between and within years (Figure 2). In years of low water availability, allocation prices are generally high and vice versa.

Outside extremely low water allocation seasons, long-term changes in water demands from different irrigation industries have not been large aggregate drivers of water allocation prices over the last decade. However, as explored in Section 1.3 over page and across the remainder of this report, this is changing.

As noted, there has been large new investment into almond, citrus, table grape and cotton production across the sMDB in recent years (Figure 3). 

Growth in these industries is a clear sign that the sMDB is an attractive place for investment, however, as these industries continue to grow, they will require an increasing volume of irrigation water. This changing and increasing demand for water will change the dynamics of the sMDB water market.

It is therefore important that governments, water users and investors are aware of these changing dynamics and are considering:

• Market risk: How are water allocation and entitlement prices expected to change in the future?
• Deliverability risk: How will the growth of permanent plantings and resulting water demands below the Barmah Choke in the Murray system increase deliverability risk in the Sunraysia and Riverland regions?
• Regulatory risk: How implementation of the Basin Plan and other regulatory changes could influence future water market conditions?

For the past five years Aither has published the Aither Water Markets Report. Aither publishes this report as a freely available annual market resource. The report provides the market with an overview of recent water market activity in the southern Murray-Darling Basin (sMDB) (Figure 1). The report also provides market insights and commentary on the future outlook.

Water availability and environmental water recovery programs have historically been particularly important in driving sMDB water markets. We have explained these market relationships and drivers in previous editions of the Aither Water Markets Report.

Whilst these drivers remain important in explaining the sMDB water market, over the period of publishing the Aither Water Markets Report, we have observed rapid changes on the demand side.

Aither is of the view that this changing production landscape is driving a fundamental step-change in demand in the sMDB water market, the way participants are using the market and how we think about the future of the market.
The Aither Water Markets Report 2017-18 explores this story of change and explains what it means for the future.

Table 1A shows total 2017-18 allocation transfers across major southern Murray-Darling Basin (sMDB) zones. The analysis suggests Vic 7 Murray was a very large net exporter of water allocations. However, Table 1A includes $0 and other non-commercial transactions (such as environmental or carryover transfers), which can be substantial in volume. 

As we continue to reiterate, identifying 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 with total certainty and timeliness.

In previous versions of this report, Aither has used transfers reported at $0 per ML as a rough proxy for non-commercial transfers. After excluding $0 allocation transfers from Table 1A, Table 1B suggests that water allocations were primarily transferred to commercial buyers in NSW Murrumbidgee and NSW Murray. There are two primary dynamics which explain this result:

• Water allocations were bought by irrigators in the NSW Murrumbidgee to support the large cotton crop planted in 2017-18.
• Water allocations are being transferred into the NSW Murray to support maturing permanent crop developments which may not yet have large coverage through owned or leased water entitlements.