Higher Rates Impact Murray Darling Water Markets Despite Buybacks

Aither (a Ricardo company)

In 2022-23, state water register data shows the estimated total value of major entitlements in the southern Murray-Darling Basin was $32.3 billion, up 8%. However, the Aither Entitlement Index, which incorporates market inputs that are timelier than water register data, experienced a 4% contraction over 2022-23. This was the first annual decline in the Aither index in a decade, pointing to the impact of interest rate increases, flagging commodity prices, wet conditions and supply chain issues.
Delivery of the Basin Plan remains the wild card for the water market. Entitlement prices are likely to rise if the Australian government becomes an active market participant attempting to purchase entitlements to meet Basin Plan targets.
A rare triple dip La Niña in 2022-23 brought extensive rainfall across the southern Murray-Darling Basin, resulting in record inflows to storages and the worst flooding in the Murray system for 50 years.
Increased water supply and reduced irrigation water demand saw water allocation prices tumble for the third year in a row. Late in the season, allocation prices approached $0, due to limited private carryover space and market expectations for low allocation prices in 2022-23.
The annual volume weighted average price for allocations across the southern Murray-Darling Basin was $27 per ML, a 62% drop from 2021-22. Only one year since 2004-05 has been lower, 2011-12 at $19 per ML.
Strong opening allocations and the highest opening storage volumes on record mean lower water allocation prices are set to continue in 2022-23, despite the forecast for an El Niño.

Today Aither released their tenth annual Aither Water Markets Report. It summarises water trading activity and trends in the 2022-23 water year and provides insights into the outlook for 2023-24.

Aither's Water Markets Advisory Lead, Ben Williams, said that "wet conditions continued across the southern Murray-Darling Basin in 2022-23, increasing water supply and reducing irrigation water demand. This led to water allocation prices tumbling, with the annual volume weighted average price 62% lower than last year and the second lowest since records began".

A third successive year of wet conditions brought extensive rainfall across the southern Murray-Darling Basin, resulting in record inflows to storages and the worst flooding in the Murray system for 50 years. The conditions affected on-farm activity, leading to both crop quality and harvest issues.

Historically high water availability and opening allocations to entitlements saw allocation prices open at their lowest level since 2013-14. Prices continued to trend down across the year, finishing 80%-94% lower by June 2023.

Looking ahead, "very strong opening allocations and the highest volume of water in storage on record mean low water allocation prices are set to continue in 2022-23. Despite the possibility of an El Niño developing, the good times for irrigators look set to last at least this year", said Mr Williams.

Whilst entitlement prices appreciated slightly through the first half of the year, the last four months saw entitlement prices begin to soften. The Aither Entitlement Index dipped in 2022-23, experiencing a rare decline of -4%. Following a decade of 21% compound annual growth, and despite reaching an all-time high in February 2023, the 2022-23 water year marks the first time the AEI has fallen annually since 2012-13. The decrease reflects that water entitlement values are not immune to economic challenges, including interest rate increases, flagging commodity prices, and supply chain issues.

Looking ahead entitlement markets are likely to remain soft until there is an improvement in economic conditions. However, delivery of the Basin Plan remains the wild card. Entitlement prices are likely to rise if the Australian Government becomes an active market participant attempting to recover entitlements to meet Basin Plan targets.

/Public Release. This material from the originating organization/author(s) might be of the point-in-time nature, and edited for clarity, style and length. Mirage.News does not take institutional positions or sides, and all views, positions, and conclusions expressed herein are solely those of the author(s).

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