Water prices in the Southern Basin have plummeted – much to the pleasure of irrigators – after significant rain and storage inflows. However, the recent drop in temporary prices highlights the need for better reporting of trade data, a more centralised water market and easier access to price-hedging products such as forward contracts and leases.
Allocation updates, climate outlooks and the opening and closing of the Murrumbidgee inter-valley transfer (IVT) have the ability to shift spot market prices as much as 25 per cent in a day.
For example, recent rain and last week’s account reset in the Lachlan Valley has seen allocation prices retreat sharply from $140 a megalitre, in mid-June, to just $20 in early August. General security entitlement holders now hold a healthy allocation of 115 per cent, however, 175,000ML of carryover – worth around $25 million in June – has been withdrawn.
Further south, improved water availability in the Murrumbidgee Valley have caused the allocation spot price to halve since June, while allocation prices are down approximately 30 per cent in the Murray Valley.
Although a sharp decrease in water prices means lower input costs for farmers, one cannot overlook the lost or reduced value of carryover water as a result of market immaturity, and the contrasting price responses that occur during dry periods. Last November, prices in the Murrumbidgee soared 25pc in one day when trade into the Murray re-opened.
Whether bearish or bullish in nature, significant fluxes in allocation prices demonstrate the need for improved trade data reporting, market centralisation and easier access to price-hedging products.
Larger producers and water investors use forward contracts and leases to reduce allocation price risk, however, the use of these simple price-hedging products is far from mainstream. Forward and lease markets currently lack depth, are not transparent and are poorly understood.
Greater centralisation of buyers and sellers and improved reporting of trade data would enhance price discovery, transparency and reduce market volatility. Similarly, more timely and reliable trade data on the NSW Water Register would go a long way towards increasing the efficiency of the water market and would provide the foundations from which more sophisticated derivative products such could be developed.
Farmers have considerably more certainty on the cost of fertiliser, spray and labour. Water is arguably their most important (and expensive) input so why can’t they have more price certainty?
