Water price squeeze leaves irrigated crops barely breaking even

Murray Darling crop production costs outpace crop values

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Irrigation costs are so high they barely break even with returns received for what farmers grow

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The dizzy high prices now paid for temporary water are pushing some irrigators' production costs so high they barely break even with returns received for commodities they grow.

Murray Darling Basin water shortages in the past two years and a doubling in temporary market values to current highs of $800 to $1100 a megalitre were driving orchard, vineyard and grain industries such as rice and cotton beyond profitability, according to National Australia Bank's agribusiness economist, Phin Ziebell.

Even riskier was the problem for permanent horticulture sector croppers caught by the intense cost-price squeeze.

They did not have options to stop growing crops for a season when water values skyrocketed - they needed supplies to keep established vineyard and orchard plantings alive.

For a Sunraysia temporary-water reliant wine grape producer, the $550/Ml uplift in price equates to roughly $180/tonne of grapes...nearly 40pc of the per-tonne average value. - Phin Ziebell, National Australia Bank

"Temporary water prices in the Victorian Murray irrigation region (from the Barmah Choke to the South Australian border) increased 138pc in the past year, to $950 a megalitre," Mr Ziebell said.

"Upstream of the Barmah Choke, temporary water prices increased 55pc in the same period.

"Our modelling shows that for a Sunraysia temporary-water reliant wine grape producer, the $550/Ml uplift in price equates to roughly $180/tonne of grapes.

"That's nearly 40pc of the per-tonne average value of warm climate wine grapes."

Citrus cost blow-out

Despite recent bullish export citrus demand, Citrus Australia chairman, Ben Cant, confirmed SA Riverland producers would currently expect to receive $600 to $800/t, yet with current temporary water prices above $800Ml, many irrigators may be paying $500/t to $650/t, or more, in growing costs.

He said the industry's production cost benchmark was, until recently, considered $300/t to $400/t for oranges, or about $350/t for juicing fruit

However, rising water prices alone had added a further $250/t to some Victorian and SA growers' costs in the past year.

Penalised for efficiency

Some of those most likely to be penalised because they were more reliant on temporary water were orchardists who gave up permanent water entitlements to qualify for government infrastructure efficiency grants.

"The grants have not necessarily rewarded those who made efficiency commitments with the sort of cost savings which make a big difference in the current market, especially if you now rely on a lot of temporary water," Mr Cant said.

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Meanwhile, NAB's Mr Ziebell noted with most general security entitlements across NSW at zero, based on current prices and average application rates and yields, "neither cotton or rice are overly profitable at a temporary water price of $800/Ml", let alone at higher prices.

The sobering revelations follow last week's calls from permanent crop industry groups for governments to free up water being "hoarded" by traders at the expense of irrigators needing it to grow food and fibre.

"Water needs to be made available to those who use it," said Australian Table Grape Association chairman, John Argiro.

John Argiro.

John Argiro.

"We're not asking to limit water trade - we want governments to intervene to allow water already allocated to be put to consumptive use."

The combined call by 10 peak industry groups, including the Almond Board of Australia, Australian Grape and Wine, the Australian Olive Association and Summerfruit Australia, highlighted how one listed company bought an estimated 140,000Ml of allocation water last financial year.

That was in addition to the volume allocated against its 73,666Ml of water entitlements.

That single company's purchases totalled more than the combined water use (104,000Ml) in Lower Murray Water districts in 2017-18, or the total estimated water use in NSW's Murray and Riverina districts of almost 112,000Ml for fruit trees, nuts or plantation berry fruits in 2017-18.

"When water becomes a commodity for speculation, putting rural and regional Australia at risk, I think it should be obvious to all that Australia has a problem," Mr Argiro said.

Permanent croppers have pleaded with authorities for interim measures to release water held by speculators, or else there face the real risk of a mass exodus from these farming sectors, and even more hardship for drought-stricken towns and small businesses.

The industry group said the impact some "non-irrigator traders and financial investors" had on the market really was alarming.

Tony Battaglene

Tony Battaglene

"When a single company buys around 9pc of the total water allocation traded in the southern Murray Darling Basin in 2018-19, we have a problem, said Australian Grape and Wine chief executive officer, Tony Battaglene.

"Time is critical and interim measures are needed urgently to stop non-irrigators slowly starving irrigators of much needed water while keeping prices high."

Speculators starving industry

He said carryover rules allowed speculators to hold over allocations purchased in one season into successive years.

"Carryover was originally designed to help irrigators manage risk; it was never intended to allow investors to withhold water from the market across seasons for profit," he said.

The industry group has refrained from identifying specific traders in its sights, but plenty of finger pointing in the past year has been in the direction of Duxton Water.

It listed on the Australian Securities in 2016 and reportedly has a $256m water portfolio based on more than 70,000Ml of entitlements.

Duxton leases about half its water to irrigators who subsequently do not need to pay big upfront costs to accumulate their own water portfolio, but it has also boasted nearly 30pc return on its investment in 2018-19.

Irrigators conceded corporate investment in the market had worked well for many croppers and dairy farmers as investors provided an important source of capital and flexibility.

But just as non-water-using entitlement owners needed irrigators to buy or rent their allocation water to make a financial return, irrigators needed investors to sell allocations in a timely manner so crops could be watered.

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The story Water price squeeze leaves irrigated crops barely breaking even first appeared on Farm Online.

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