MURRAY-DARLING BASIN WATER MARKETS NOVEMBER 2017 MARKET UPDATE

Transcription

1 MURRAY-DARLING BASIN WATER MARKETS NOVEMBER 2017 MARKET UPDATE

2 Forew ord Our second Marsden Jacob Associates Water Markets note for the water year reviews the market activities over the first third of the season. Demand for allocation and entitlement water has been high in the Southern Connected Murray-Darling Basin. Demand and trading activity in the Northern Basin has been limited thus far on both markets. We received a lot of positive feedback on our inaugural water markets note earlier this year, and would like to reiterate that further feedback is very much welcomed. We d be happy to hear about the market issues that you d like us to cover in our upcoming market notes, and we also encourage you to participate in our BRII water market transparency project (see page 8 of the report). Our contact details are at the back of this document, please don t hesitate to get in contact with us. Marsden Jacob Associates Water Markets team MDB Water Markets - November 2017 Update II

3 Season thus far - Southern Basin The first third of the irrigation season in the Southern Connected Murray- Darling Basin has seen strong prices both in allocation and entitlement markets. The former has been driven by dry conditions, below average inflows and strong demand from Murrumbidgee irrigators (especially cotton growers). The latter has witnessed strong buyer demand coming from all types of market participants, underpinned by high levels of confidence in irrigated agriculture. Allocation market With the exception of August, rainfall in the main Southern Connected system irrigation areas has been below or very much below average. Dry conditions have resulted in below average inflows in the Murray system throughout the season so far. This has underpinned the strong demand for allocation water, especially in the Murrumbidgee where cotton growers have been actively in the market as they re preparing for a big year. In the Murrumbidgee, more than 65,000 hectares of cotton plantings is being forecast by Cotton Australia 1. This would be more than a 50% increase compared to last season s plantings 2 driven by both favourable seasonal conditions and new growers that have switched from rice to cotton. Intermediaries have commented that some growers have further increased the size of their planting programs "on the go" and have been buying more allocation water from the market as a result, whereas some have bought more water than anticipated due to non-ideal soil moisture levels. Current allocation market prices are presented in Table 1. Strong demand and dry conditions have resulted in allocation market prices that are significantly higher than at the same time in the season. Table 1. Allocation spot prices, as at 16 November 2017 Trading Zones Current spot price range ($ per ML) Trend Murrumbidgee $ Steady NSW Murray above Barmah Choke $ Steady NSW Murray below Barmah Choke $ Steady VIC Murray above Barmah Choke $ q VIC Goulburn $ Steady VIC Murray below Barmah Choke and SA Murray $ Steady Source: Waterfind, Ruralco, Wilks Water, H2Ox, MIL Exchange, NSW Water Register, VIC Water Register Dry conditions and demand side drivers can provide some justification for prices being at this level. However, many market participants have considered prices to be unexpectedly firm given the high overall water availability. Table 2 shows why many may have considered this year's prices unexpected; it compares the estimated water availability in the Southern Connected system after the mid-october allocation announcement in the current and two recent water years. Table 2 highlights that this season there s been an estimated 20% decrease in water availability, but an 80% price increase compared to It could also be interpreted that the correlation between water availability and the market price seems to be more in step when comparing or to Marsden Jacob 2017 MDB Water Markets - November 2017 Update 1

4 Table 2. M id-october water availability comparison Water available 1 minus environmental water 2 (ML) 3,701,648 5,897,689 4,689,731 Temporary water price (market high) 3 ($ per ML) Availability change year on year % % % Price change year on year % % % Availability change to % % Price change to % % Source: NSW Water Register, VIC Water Register, Northern Victoria Resource Manager, Marsden Jacob analysis. Notes: 1. Combined volume of announced allocation + carryover water diversions in the NSW Murray & Lower Darling, Murrumbidgee, SA & Vic Murray and Goulburn systems following mid-october allocation announcement 2. Based on the estimated available water on Commonwealth and State Environmental Water Holders accounts 3. Highest Southern Connected system allocation trade price seen in intermediary exchanges right after mid-october allocation announcement However, it has to be remembered that even though allocation market price is known to correlate heavily with water availability, the relationship is not completely linear, and prices increase more as scarcity increases. It also has to be taken into account that the market outlook was very different in all of these seasons included in this comparison, and that the water market prices in future expectations. For instance, whereas last year the season had already proven to be wet by mid-october, this season is turning out to be on the drier side. This outlook is likely changing the market expectation and firming up prices ahead of the normal peak price period. That sentiment may be part of the reason why we ve seen stronger than expected prices given the high overall water availability. As mentioned, the allocation market has been strongly driven by Murrumbidgee irrigators and water holders. Figures 1 & 2 present the net trading patterns in the Southern Connected system allocation market during the first third of the ongoing and season. In addition to Murrumbidgee being the largest importer of water, a notable change to last year when Murrumbidgee wasn t an importer or exporter due to lower demand for in-trade and out-trade being closed, another evident conclusion is that much more water has been traded this year in general (with the exception of Lower Darling where the trade limit opening triggered water exports in October 2016). This reflects the differences in seasonal conditions. Figure net trading patterns in the Southern Connected system SA Murray Jul 2017 Aug 2017 Sep 2017 Oct 2017 Loddon Campaspe Goulburn VIC Murray NSW Murray Murrumbidgee Lower Darling -20,000-15,000-10,000-5, ,000 10,000 15,000 20,000 Net Change (ML) Marsden Jacob 2017 MDB Water Markets - November 2017 Update 2

5 Figure net trading patterns in the Southern Connected system SA Murray Jul 2016 Aug 2016 Sep 2016 Oct 2016 Loddon Campaspe Goulburn VIC Murray NSW Murray Murrumbidgee Lower Darling -20,000-15,000-10,000-5, ,000 10,000 15,000 20,000 Net Change (ML) As a result of strong net imports of water, trading into Murrumbidgee was closed on 20 Oct 2017 for the first time since September Current trade restrictions in the Southern Connected system are presented in Figure 3. Figure 3. From To 1A A Greater Goulburn 6 VIC Murray - Above Barmah Choke 7 Vic Murray - Below Barmah Choke 10 NSW Murr U/S Barmah Choke 11 NSW Murr D/S Barmah Choke 12 SA Murray 13 Murrumbidgee 14 Lower Darling CHOKE CHOKE CHOKE CHOKE GOULBURN TO MURRAY LIMIT BARMAH CHOKE LIMIT INTO MB BARMAH CHOKE LIMIT INTO MB INTO MB TRADE ALLOWED TRADE RESTRICTED The Goulburn catchment continues to be isolated from the rest of the connected system due to the Goulburn to Murray trade limit still being in place. Consequently, prices in the Goulburn have been lower this season compared to Murray and Murrumbidgee prices (Figure 4). This indicates that the internal demand for allocation water continues to be low in the Goulburn. Marsden Jacob 2017 MDB Water Markets - November 2017 Update 3

6 Figure 4. Price correlations in selected catchments VIC Murray Goulburn Murrumbidgee VWAP ($/ML) Jul 2015 Oct 2015 Jan 2016 Apr 2016 Jul 2016 Oct 2016 Jan 2017 Apr 2017 Jul 2017 Oct 2017 The Goulburn to Murray trade limit stands currently at 66.8GL (as of 16 November 2017). Unless a large amount of in- trade occurs, the limit will remain closed until Goulburn-Murray Water (GMW) commences transfers of inter-valley trade (IVT) water from the Goulburn to the Murray system. GMW has commented that IVT transfers are unlikely to commence until November 2017, when an environmental watering event is planned for delivery in the lower Goulburn River which is likely to involve delivery of Goulburn IVT volumes to the Murray system 3. Table 3 presents the volumes delivered over the last 5 water years from the Goulburn inter-valley trade account to the Murray system. Based on historical deliveries it is likely that Goulburn to Murray trade is going to open up at some point during the season, albeit timing is highly dependent on catchment conditions and system demands for IVT transfers. Table 3. Historical Goulburn system inter-valley trade deliveries per month (GL) Year Oct Nov Dec Jan Feb Mar Apr Total 2012/ / / / / Source: Goulburn-Murray Water Notes: 1. July-September and May-June omitted as no deliveries have occurred during those months In comparison to the Goulburn trade limit, the consequences of the Murrumbidgee in-trade closure remain to be seen. If the demand in the Murrumbidgee continues to be strong, decreased supply should mean that prices in that catchment would rise. On the other hand, if summer croppers have already secured their immediate requirements and/or rice growers choose to sell their allocation instead of growing a crop this year, supply and demand may not be in imbalance after all. The first weeks after the trade closure have seen the Murrumbidgee market remaining steady without significant price movements to one way or another. The upcoming weeks will show whether this has been a result of rainfall events temporarily stalling the demand and price increase, or whether irrigators have already secured most of their water needs which would mean steady prices with downward pressure. 3 Marsden Jacob 2017 MDB Water Markets - November 2017 Update 4

7 Entitlement market The demand for permanent high security/reliability entitlements in the Southern Connected system has been very strong thus far this water year. For instance, in September and October intermediary exchanges have reported record high prices such as a small parcel (10ML) of NSW Murray below Choke high security water changing hands at $4,500 per ML. Even though the market saw this trade more as an outlier rather than a new precedent, both NSW Murray below Choke and Murrumbidgee high security entitlement markets have experienced a marked price increase from season start levels of below $3,500 per ML to $4,000 per ML and above. Victorian Murray below Choke high reliability parcels have been traded at strong prices, up to $3,500 per ML. In general, the reported demand for permanent water is very high especially for all high security/reliability entitlements that are categorised as below Barmah Choke. The demand driving the price increases is coming from both growers (of various sizes and crop types) and institutional investors. As high entitlement prices are decreasing the potential allocation sale returns for investors from pure water investments, we are seeing more interest towards integrated land and water business models, where high value commodities are grown to generate financial return and water is purchased to support these operations. Looking at general security and low reliability entitlements, the NSW general security market remains strong, whereas trading activity for Victorian low reliability entitlements appears to be constrained by lack of supply, especially for Murray below Choke entitlements. There is still significant demand for these entitlements, especially for larger parcels, but holders are increasingly recognising the value of this asset as a carryover instrument that is not subject to risk of spill, so they are not willing to sell. Table 4 presents the estimated current market prices for different entitlement types in the Southern Connected system. Table 4. Current entitlement prices in the Southern Connected system Region Entitlement Type Current Market Price ($/ML) SA Murray Class 3A $3,250 3,450 VIC Murray above Barmah Choke High Reliability $2,750 2,950 VIC Murray above Barmah Choke Low Reliability $ Vic Murray below Barmah Choke High Reliability $3,400 3,500 Vic Murray below Barmah Choke Low Reliability $ Goulburn High Reliability $2,800 3,000 Goulburn Low Reliability $ Campaspe High Reliability $2,300 2,500 Loddon High Reliability $2,000 2,200 NSW Murray above Barmah Choke General Security $1,300 1,450 NSW Murray above Barmah Choke High Security $3,200 3,500 NSW Murray below Barmah Choke General Security $1,450 1,550 NSW Murray below Barmah Choke High Security $4,000 4,200 Murrumbidgee General Security $1,600 1,750 Murrumbidgee High Security $3,900 4,050 Marsden Jacob 2017 MDB Water Markets - November 2017 Update 5

8 Season thus far - Northern Basin On the back of a wet season, demand for allocation water in the Northern Basin has been low. The entitlement markets have seen a marked price increase for general security entitlements, which can be partially attributed to increased temporary water availability enabling more permanent parcels being sold wet, thus absorbing the allocation market price into the unit price. Allocation market Trading activity in the Northern Basin has been limited with the exception of Lachlan and Macquarie valleys. It appears that lack of rain and the decreasing levels of Wyangala and Burrendong dams have eased the irrigators concerns regarding the risk of spill, providing irrigators with the confidence to participate in the temporary market as they are preparing for summer watering. In the Macquarie warm conditions in late September enabled planting of cotton earlier than in previous years, resulting in increased water use. The initial indications are that a total of about 400 GL may be extracted for irrigation this water year 4. Trading activity has gradually increased as irrigators have used the water in their on-farm storages first. In the Lachlan market the increased demand for summer crop programs has resulted in firming prices with trades now being conducted at $120 per ML. In general, the rest of the Northern Basin markets remain quiet in anticipation of summer crop demand, and allocation prices have been at expected levels. For instance, in the Border Rivers irrigators are reported to have lots of water in on-farm storages with no significant irrigation releases anticipated to be required from water storages until November Northern Basin allocation market summary is presented in Table 5. Table 5. Northern Basin allocation market summary Catchment Volume weighted average price ($/ML) Volume Traded (ML) Current Market Oct 17 Sep 17 Aug 17 Jul 17 Oct 17 Sep 17 Aug 17 Jul 17 Price ($/ML) Macquarie $ $ $ $ ,708 3,990 7,986 2,720 $ Namoi $ $ $ $ $ Gwydir $ $ $ , $ Border Rivers $ $ $ $ Lachlan $98.07 $85.45 $70.75 $ ,985 7,635 3,820 1,931 $ Entitlement market Entitlement trading activity in the Northern Basin has been limited during the start of , albeit the market interest is high especially for Lachlan and Macquarie general security water where prices are approaching $800 and $1,400 per ML, respectively, significantly higher than what has been witnessed over the last few years. In addition to cotton growers who are always in the market for permanent water at the right price, investors are increasingly turning their attention to the Northern MDB. This is not surprising as high entitlement prices in the Southern Connected system are making it harder for them to achieve high returns from allocation sales. However, it appears that investors are mostly considering water purchases in conjunction with property purchases instead of typical hold and sell water only strategy often used for Southern Connected water investments. Table 6 presents the estimated current market prices for different entitlement types in the Northern Basin. 4 data/assets/pdf_file/0003/128559/water-availability-report-23-october-2017.pdf Marsden Jacob 2017 MDB Water Markets - November 2017 Update 6

9 Table 6. Current entitlement prices in the Northern Basin Region Entitlement Type Current Market Price ($/ML) Lachlan General Security $ Lachlan High Security $1,950 2,000 Macquarie General Security $1,350 1,400 Lower Namoi General Security $2,600 2,700 Upper Namoi General Security $2,700 2,800 Gwydir General Security $2,500 2,700 NSW Border Rivers General Security A $3,700 3,850 NSW Border Rivers General Security B $2,150 2,250 QLD Border Rivers Medium Priority $2,400 2,500 Outlook for the remainder of the season According to the Bureau of Meteorology (BOM) climate outlook for November to January, most of the country is likely to receive average rainfall. Albeit the Pacific Ocean is likely to continue cooling towards La Niña levels over the coming months, according to the BOM Australia is unlikely to receive the widespread heavy rainfall that is typical of most La Niña events due to cooler waters in the eastern Indian Ocean 5. Average rainfall and inflows would mean that significant allocation increases for NSW general security entitlements are unlikely to occur, especially in the Murrumbidgee 6. If constrained additional supply would be combined with stronger summer demand for allocation water, this could mean increasing market prices in the Southern Connected system. However, increased supply may come in the form of Goulburn inter-valley trade opening and/or Murrumbidgee and Murray rice growers selling their allocation instead of growing a crop this year, and almost 140 GL was returned from Victorian Murray spillable accounts for trade or use on 10 November when the low risk of spill was declared in the Murray system 7. Furthermore, from speaking with growers and brokers we understand many summer crop growers have secured most of their water requirements for the year. This means supply and demand may not be in imbalance after all (especially given the overall water availability as detailed in Table 2), resulting in fairly steady markets. Based on the current market sentiment, Marsden Jacob believes that Southern Connected allocation prices are not anticipated to peak at very high levels (i.e. at $200 per ML or above) over summer irrigation period unless particularly hot and dry conditions prevail for a prolonged period. This is also supported by intra-season forward market contracts in the intermediary exchanges being written at $ per ML for summer delivery. For the entitlement market outlook, we see that confidence in irrigated agriculture is very high amongst market participants. As there are a lot of buyers in the market competing for scarce resources, we are observing that the market expectation has shifted from steady towards a rising market for Southern Basin high security/reliability entitlements for the remainder of and beyond i.e. the market sentiment is that these assets are not yet fully valued and so we would not be surprised to see more upward movement data/assets/pdf_file/0008/739160/ water-allocation-statement-murrumbidgee_int pdf 7 Marsden Jacob 2017 MDB Water Markets - November 2017 Update 7

10 Other Updates CEWO update The Commonwealth Environmental Water Office s (CEWO) October to mid-november portfolio management update 8 identifies a possible sale of 5 GL of Gwydir allocation water from November onwards. The potential sale reflects successful environmental watering in the system in recent years and a likely temporary surplus of allocations in Across the Southern Basin high environmental demands and low allocations have delayed consideration of possible allocation sales. This situation will be reviewed in late November when it is anticipated that most of the winter-spring environmental demand will have been delivered and there will be greater clarity about allocations and seasonal conditions over summer. The Commonwealth Environmental Water Holder (CEWH) has also released a discussion paper in relation to recent changes to the Water Act 2007 that have increased the flexibility for the CEWH to sell water allocations if the proceeds are used for water acquisitions or environmental activities. Under the legislation, the CEWH can only invest in environmental activities that will improve environmental outcomes, and are undertaken for the purpose of protecting and restoring environmental assets in the Murray-Darling Basin. The CEWH is seeking feedback on what type of environmental activities the community would like to be considered when developing a framework for future investments. The paper is open for public consultation until 30 November 2017 and it can be found at BRII Water M arket Challenge Marsden Jacob Associates has received a $1 million grant to develop and test an innovative solution to improve transparency and reliability of Australian water market information. Funded through the Commonwealth Government s Business Research and Innovation Initiative (BRII), Marsden Jacob Associates was one of nine businesses to share in $8.75 million to solve government policy and service delivery challenges. For the BRII challenge Marsden Jacob Associates has partnered with Alliance Software, an Agile Software Development firm founded in Australia is a global leader in the development of water markets to support irrigated agriculture. Despite being a global leader, many water market participants cannot easily access customised water market information at low cost in one easy-to-use interface. Our water market information solution addresses this challenge directly. The feasibility study grant provided us with the time and funding to interview a large number water market participants and stakeholders and inform the design of a prototype water market information platform. We ve used a co-design approach to develop the prototype of the water market information platform, this means it will be more customisable, easier to use and more intuitive than many of the existing water market information sources and platforms currently available. The interviews also confirmed there is considerable market interest and support for the solution. The $1 million in BRII funding will allow us to take the water market information platform from prototype to full proof of concept stage with a fully functioning platform developed. Over the next 12 months Marsden Jacob Associates will be working closely with water market stakeholders across the Australian water markets to further develop and refine the offering. We re going to be consulting with water market participants to help us develop the app, and to trial beta versions of the app and help us make improvements. We ll also be looking to present beta versions of the app at regional workshops, and using social media to get feedback from water market participants on how we can make our offering better. Ultimately, this is about developing the best product for water market participants, so we want your input. Please get in contact with Rod Carr and Simo Tervonen if you want to be involved. This is a fantastic opportunity to create something lasting that will benefit Australian water markets and industries associated with it. 8 Marsden Jacob 2017 MDB Water Markets - November 2017 Update 8

11 Want to discuss further? If you want to really understand what s happening with Australian water markets, policy, trade rules and opportunities, give us a call. Australian water market consists of multiple levels of legislation governed by a large number of regulators. Market information is scattered and trading rules often hard to interpret. To make the best-informed decisions, you need the best independent advice, backed by deep expertise and real practical experience that can only be gained from direct experience in markets. Marsden Jacob Associates are one of Australia s leading independent water market advisory practices. We offer independent, end-to-end in-house service across market policy and design, water portfolio optimisation, market trading strategies, market reporting, valuation and analysis, commercial due diligence, developing new water market products, and application of water trading rules across Australia. We are the leading water market advisors to the Commonwealth and State Governments across Australia. Rod Carr Rod is a Director at Marsden Jacob Associates and leads our water market practice. Rod has been involved in the development of water market in Australia since their inception over two decades ago. Rod leads water market engagements for public and private sector clients, and has advised on some of the largest on and off-market water transactions in the Southern and Northern systems. He is a leading advisor to State and Commonwealth Governments on water markets, and produces the Department of Agriculture and Water Resources monthly market price information for Murray Darling Basin water entitlements report. E rcarr@marsdenjacob.com.au M Simo Tervonen Simo has recently joined Marsden Jacob as a Principal in our Sydney office. He is recognised as one of the leading experts in Australian water markets and water trading rules, and has strong networks across all water markets and water market participants in Australia. Prior to joining Marsden Jacob Associates, he was responsible for managing trade, policy and water market operations at Waterfind, one of Australia s leading water trading companies. E stervonen@marsdenjacob.com.au M Disclaimer The professional analysis and advice in this report has been prepared by Marsden Jacob Associates. This report is supplied in good faith and reflects the knowledge, expertise and experience of the consultants involved. In conducting the analysis for this report Marsden Jacob Associates has endeavoured to use what it considers is the best information available at the date of publication. Although Marsden Jacob Associates exercises reasonable care in its analysis and when making forecasts or projections, factors in the process (such as future market behaviour) are inherently uncertain and cannot be forecast or projected reliably. Marsden Jacob Associates makes no representation or warranty as to the accuracy of any calculation, projection, assumption or estimate contained in this report. The contents of this document do not constitute legal, financial or commercial advice, or a recommendation of any services or products. You should consider obtaining independent advice before making any investment, financial or legal decision. To the extent permitted by law, Marsden Jacob Associates disclaim any liability whatsoever in connection with, reliance upon or the use of this document. Marsden Jacob 2017 MDB Water Markets - November 2017 Update 9