THE water trading fund managed by listed private equity company Blue Sky Alternative Investments has achieved a return of more than 32 per cent in fiscal 2015 as farmers flock to cheaper land and invest in high-return crops in the areas where the fund has purchased water.
In a private report sent to unitholders, the fund's managers said they anticipated the southern Murray Darling Basin would see further appreciation alongside the impact of El Niño and the significant investment that has occurred in the area's irrigated farming including cotton, almonds, walnuts, dairy and citrus.
"While we have long held the view that Water Entitlements in the southern Murray Darling Basin were fundamentally undervalued, these gains occurred more quickly than we anticipated."
The fund manger said annual crop producers, most especially cotton and rice, were likely to start to rethinking their planting programs for 2015-16.
"At some point it may become more rewarding to sell their meagre allocated volumes than it is to grow a summer crop. We're not at that point yet, but unless we do start to see some decent winter rainfalls, prices are likely to break higher to commence the process of rationing scarce water volumes going into spring.
"Our portfolio is well positioned for this dry scenario as we've aggregated a high proportion of high-reliability water entitlements."
The fund, which started in fiscal 2013 has made strong gains each year and has also attracted the interest of institutional investors who realise there is scale in Australia's $30 billion water entitlement market.
Cotton prices are also well up in Australian dollar terms, making such crops very profitable if water is available.
In the southern Murray Darling Basin three huge cotton milling gins have been constructed in the last few years as farmers and investors convert many of the existing farms to higher margin cotton production.
Farmers have come to the region because of the relatively cheaper prices of land compared to traditional cotton farming regions of northern NSW such as Moree.
Blue Sky Water Fund's managing director, Kim Morison - a former Macquarie Group commodity trader - said the difference in land costs was a key driver.
"When you look at the cost of land and water values in an area such as Moree and compare them with the Murrumbidgee it is quite compelling."
Much of the new capital being injected into the sector revolves around water. One of Australia's oldest businesses, the listed Webster Ltd, purchased prime Riverina cropping aggregation, Kooba last year for $116 million.
