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Climate is the biggest influence on water prices

The water market has largely corrected itself since the price heights reached a little over twelve months ago, during a period, which as data shows was one of the driest on record. Murray Darling Basin storages have increased active storage capacity (water in the dams) by 40%, compared to this same time last year (March 2020). What this has taught many of us is, climate really is the biggest influence on water prices. In 2019, rainfall deficiencies and historically low catchment inflows were the biggest factor in driving the demand for water in the Murray Darling Basin. At the time, speculation and criticisms of the Basin and its management were hotly contested topics, and in many respects they still are. A final report, following inquiry, by the Australian Competition and Consumer Commission (ACCC) is due to be released in the near future, this will seek to provide further clarity surrounding tradable water rights in the Basin.

The 2019 drought has in many respects reminded water market stakeholders of one key aspect of any trading market, the principal of supply and demand. While there were at the time speculation of corporate investors “with-holding” water for financial gain during this period, researchers from the University of Adelaide have just completed research which dispels this claim. Instead highlighting the fact that there must be greater transparency regarding trade activity and trade data, and trading data available during the period of 2017 and 2020 showed no evidence of such a thing.

We cannot deny that in future years, upon the further maturity of horticultural developments already in the ground, that should a dry/drought year occur there will be a shortage of irrigatable water required to service all industries at a full capacity. Mother nature, the most influential yet most irrational stakeholder in the water market, has the power to greatly affect the equilibrium price of water. The principle of supply and demand is most important to understand; and as supply for water becomes tight – prices for water will rise. A seller can charge no more than the market is willing to pay, and as we saw in 2019, the market was willing to pay quite a lot more than previous years. Despite the unfavourable outcomes this may lead to for some stakeholders, all markets including the water market, are not bound by what is most rational, yet they are constrained and dictated by supply and demand.

On the back of such heightened demand for water in 2019/20, entitlement trading has become increasingly scarce in the current water year. Often trades showing on the water registers are between 5 megalitres to 20 megalitres, which doesn’t suggest much market movement is occurring.

Many entitlement owners are becoming more aware of the benefits of diversifying their risk by owning water entitlements, water been another tradable commodity they can invest or divest in should the need arise. As a result, entitlement pricing has largely held firm in the past year. As seen in the SMDB Entitlement Allocation yield chart, yields have sharpened to around 2% for all zones due to the softening of allocation prices and the continuous demand and competition for entitlement water. For example, the Volume Weighted Average Price (VWAP) for Murray Zone 7 High Reliability water entitlements have increased from ~$5,600/ml in 2019/20 to~$6,400/ml in 2020/21.

Outlook

The remainder of 2020/21 water year and the first half of the 2021/22 water year will continue with a heightened sense of optimism. The La Nina bought welcome rain to catchments and farms which had been suffering the effects of drought. Water market participants have recently seen the effects drought can have on the water market, with historically high-water prices a not so distant memory.

Most importantly, powerful knowledge has originated from the 2019/20 water season, and ongoing research and commentary surrounding the Australian water markets is providing market participants with an increased level of understanding, this allowing all stakeholders to make greater informed decisions when participating in the usage, buying, leasing or selling of water as a tradable commodity.

 

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Amy Retell

Assistant Valuer | Valuation & Advisory Services

Valuation & Advisory Services

Melbourne CBD

Amy has specialist knowledge in the valuation of Rural and Agribusiness assets across Australia.  Amy focuses on the valuation of Murray Darling Basin water markets, Horticulture, Wine Industry, Beef, Forestry, Dairy and leased agricultural assets. 

The valuations she has worked on have been for a number of purposes including Mortgage Security, Financial Reporting, Potential Acquisition/Disposal, Estate Planning/Settlement, Compulsory Acquisition and Insurance purposes.

Amy commenced her career with Colliers International as a Graduate in February 2018, having completed a Bachelor of Property and Real Estate (Major in Management) at Deakin University. 

 

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