High temporary water prices are likely to be temporary, say leading experts.
The cost of temporary water has climbed to around $350/megalitre, with Marsden Jacob principal, Simo Tervonen, saying demand was still exceeding supply.
He said he believed it was a temporary price spike, dependent on rainfall, storage inflows and decisions taken by annual crop producers.
“In our view, these early 2018–19 allocation prices reflect the considerable pessimism about the climate and water availability outlook,” Mr Tervonen said.
In our view, these early 2018–19 allocation prices reflect the considerable pessimism about the climate and water availability outlook.
- Simo Tervonen, Marsden Jacob director
The Bureau of Meteorology has predicted below average rainfall, across much of mainland Australia, in the next three months, particularly in the south east.
Mr Servonen said markets were heated and high prices would turn many participants from buyers to sellers – where they had the flexibility to do so - which could bring more water onto the market.
“The water year is still young, trade volumes have been relatively low, and the overall water availability is not terrible if you look at the Southern Basin as a whole,” Mr Servonen said.
Storage capacity
He said there was significantly more water in the Murray Darling storages than late 2015 - the last time temporary prices hit $300/ML.
Storages stood at 50.4 per cent of capacity, in 2015, compared with 56.7pc, at the end of July this year, or 1000 gigalitres more.
“Trade limits are in play for some catchments, and it’s hard for participants to know where the prices are really at, so there may a bit of confusion going on as well,” Mr Servonen said.
There was a rapid price increase during the second half of the 2017/18 water year, as entitlement prices saw an unprecedented 20-50 pc increase.
“We just don’t see what could drive the market to behave like that again,” he said.
“Typically markets tend to have a steady period after a rapid increase phase.”
Dry July
The Bureau of Meteorology reported the area-average rainfall for the Basin in July was 12.6 millimetres, which was 68 per cent below the average.
It ranked 12th driest out of 119 years of historical record, while inflows into the River Murray system for July totalled 254GL, or the lowest five pc on record for July.
Waterpool chief executive Peter Lawson said where prices ended up was very dependent on how the season unfolded.
Dairy farmers, in particular, would be shoring up their positions.
“It’s the threat of a dry season and the scarcity of hay and grain,” Mr Lawson said.
“Because of high prices in that space, on-farm production is the key, and they can’t do that without water.”
Spike factors
Key Water’s Anthony McCloskey said there were a number of factors behind the sudden spike in prices.
It could have been driven by nut and horticultural producers, while cotton producers were also looking to buy.
“During the last big dry, nut and horticulture producers ended up having to pay a lot of money for water, perhaps they are hedging their positions,” Mr McCloskey said.
“Cotton prices are very strong and people may well have locked themselves into contracts where they have to produce.”
Farmers who had planted winter cereals could also be seeking to keep crops growing, with an expectation that returns would outweigh the current cost of temporary water.
Mr McCloskey said every time water prices went up, it meant it was not financially viable to produce certain commodities, bringing more water onto the market.
“That will normally have an effect of dropping the price, softening or slowing its increase,” Mr McCloskey said.
Decision time
Wilks Water’s Tom Wilks, Wagga Wagga, NSW, said Victorian prices appeared to be on the high side, given the amount of water held in storage.
“It may be overcooked for the southern part of the connected Basin, but the Murrumbidgee is Robinson Crusoe – it’s isolated and you can’t bring water in from the Murray,” Mr Wilks said.
Mr Wilks said it was getting to the point where rice and cotton growers would have to think hard about selling what water they had and “sitting on their hands.
“The outlook is pretty horrible for the weather, too.”
Low carryover
H2OX business development manager Craig Feuerhardt said it was difficult to see how the high price could be sustained.
He said even in 2007-08, when the price hit between $1100-$1200/ML, the weighted average for the year was $430/ML.
Higher prices were partly being driven by lower carryover volumes from last season.
Every major system had 300GL less available water than at the same time last year, meaning there was less ‘surplus’ available for trade.
He agreed buyers included those hoping to top up irrigation on winter crops or dairy farmers, looking to grow pasture.
“People are holding onto water, to make sure they have enough available to do what they want to do this year,” Mr Feuerhardt said.
But he predicted supply would soon even out and prices would come down.
“Once we get into September you will find things will calm down again, as irrigators will have locked in their water use.”