No reprieve on water prices

By Dairy News

WATER ALLOCATION prices in the southern Murray-Darling Basin are likely to remain high in 2019–20, according to the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) latest Water Market Outlook.

“Over the past 12 months, water allocation prices have increased dramatically from around $250 per ML in July 2018 to over $600 per ML,” ABARES Head of Farm Performance and Resource Economics, David Galeano said.

ABARES modelling suggests a combination of low supply caused by drought, and growth in water demand in recent years explains the observed increase in prices.

The latest ABARES Water Market Outlook provides a range of possible allocation prices for 2019–20 under average, dry, extreme dry, and wet seasonal condition scenarios.

“Under the dry and extreme dry scenarios, total water availability in the southern basin in 2019–20 would be well below last year but still above levels observed during the worst of the Millennium Drought (2007 to 2009), with ABARES estimating average annual water prices of between $526 and $650 per ML.

“Of course, if we do see a shift to wetter conditions, prices are expected to fall quickly and substantially, as they did in 2016–17.

“Water supply in the Murrumbidgee region remains highly limited and so we could see the region’s water trade import limit in force. If this occurs, higher allocation prices would be expected in the Murrumbidgee as occurred during parts of 2018–19.

“While the current BOM climate outlook suggests drier than average conditions at least until October, it’s important to remember there’s still much uncertainty. Conditions better or worse than the scenarios tested are possible — and hence water prices higher or lower than those estimated in our latest outlook — remain a possibility.”

Water supply remains highly limited in the Murrumbidgee with limited carryover reserves and zero opening general security allocations.

Under the dry and average scenarios the Murrumbidgee Inter-valley Trade (IVT) import limit is expected to bind, leading to higher prices in this region compared to other regions in the southern basin. In the wet scenario, the Murrumbidgee reverts to its usual trade position of being a net exporter of water.

The Barmah Choke trade constraint is expected to bind in the dry and extreme dry scenarios, leading to lower water allocation prices in the above Barmah trading zones: $491 and $545 per ML under the dry and extreme dry scenarios respectively.

The ABARES report found for the southern basin as a whole, 2018–19 has seen the lowest level of water available for irrigation since 2009–10 (taking into account allocations, carryover and water recovery volumes).

While total storage volumes were higher in 2018–19 than 2015–16, allocations were lower, because a higher proportion of water was stored in Victoria where water sharing rules are more conservative (a smaller proportion of stored water is allocated).

The disparity in water supply also created demand for water imports into New South Wales in 2018–19. The Murrumbidgee IVT account remained near its lower limit for most of the year, constraining imports and leading to periods of higher prices in the Murrumbidgee relative to the Murray.

Initial allocation forecasts for 2019–20 from state water agencies were also relatively low, further driving up prices towards the end of the water year. Water markets in the southern basin closed the 2018–19 water year at a price of around $548 per ML.

ABARES modelling results suggest that a combination of low supply and high irrigation water requirements — due to low rainfall and high temperatures — can explain much of the observed increase in prices in 2018–19. Growth in water demand also appears to have occurred in recent years (likely in part due to maturing almond plantations) and this has also contributed to higher prices.