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ABARES water market outlook
ABARES water market outlook
Neal Hughes, Mihir Gupta and Tim WestwoodResearch by the Australian Bureau of Agricultural and Resource Economics and Sciences
Conference paper 18.1March 2019
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ABARES water market outlook
© Commonwealth of Australia 2018
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Cataloguing data
This publication (and any material sourced from it) should be attributed as: Hughes, N, Gupta, M, Westwood, T 2018, ABARES water market outlook, ABARES conference paper 18.1, Canberra, March. CC BY 4.0. https://doi.org/10.25814/5c78557baf5b3
ISBN 978-1-74323-426-6 ISSN: 1447-3666
This publication is available at agriculture.gov.au/publications.
Department of Agriculture and Water ResourcesGPO Box 858 Canberra ACT 2601Telephone 1800 900 090Web agriculture.gov.au
The Australian Government acting through the Department of Agriculture and Water Resources, represented by the Australian Bureau of Agricultural and Resource Economics and Sciences, has exercised due care and skill in preparing and compiling the information and data in this publication. Notwithstanding, the Department of Agriculture and Water Resources, ABARES, its employees and advisers disclaim all liability, including liability for negligence and for any loss, damage, injury, expense or cost incurred by any person as a result of accessing, using or relying on any of the information or data in this publication to the maximum extent permitted by law.
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ABARES water market outlook
ContentsSummary............................................................................................................................................................ 4
Current water market conditions............................................................................................................. 5
2019–20 water market scenarios............................................................................................................. 7
Long term water market outlook............................................................................................................11
References...................................................................................................................................................... 13
TablesTable 1: ABARES water allocation price scenarios for 2019–20.....................................................................8
Table 2: Water carryover outlook for 2019–20......................................................................................................9
FiguresFigure 1 Allocation prices and storage volumes in the southern Murray-Darling Basin....................5`
Figure 2 Water allocation scenarios for 2018–19.................................................................................................6
Figure 3 Water allocation scenarios for 2019–20.................................................................................................7
Figure 4 Total available water allocation supply in the sMDB.........................................................................8
Figure 5 Allocation price scenarios, in the NSW Murray....................................................................................9
Figure 6 Long-run changes in water use (2002–03 compared with 2016–17) at a price of $100 per ML and average seasonal conditions, by region..........................................................................................11
Figure 7 Long-run changes in water use (2002–03 compared with 2016–17) at a price of $100 per ML and average seasonal conditions, by region: modelled demand increase................................12
Figure 8 Historic versus modelled future water allocation price distributions....................................12
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ABARES water market outlook
SummaryThis ABARES water market outlook focuses on prices for water allocations within the southern Murray-Darling Basin (sMDB). A brief summary of market conditions prevailing in 2018–19 is provided along with an outlook for 2019–20.
Three representative scenarios are developed for 2019–20: dry, average and wet, each involving assumptions for future allocation percentages, rainfall and commodity prices. While the scenarios draw on state government allocation outlooks, a number of additional assumptions are also made by ABARES. The ABARES Water Trade model is used to simulate potential 2019-20 water allocation prices for these three scenarios. At this stage of the year much uncertainty remains over allocations for 2019–20: conditions better or worse than those assumed—and water prices higher or lower than those estimated—remain a possibility.
Prices have been high in 2018–19, but understandable given the conditionsDrought conditions in NSW have contributed to low supply and high prices for water allocations during 2018–19. For the southern basin as a whole, 2018–19 has seen the lowest water allocation levels since 2009–10, along with severe low rainfall and high temperatures.
Dry conditions in 2019–20 would increase prices, but a repeat of prices during the Millennium drought is unlikelyDespite the dry conditions, storage volumes are in a better state now than at this time in 2016, with good storage reserves in Victoria in particular. Under the dry scenario water availability would fall in 2019–20 but still remain above the levels observed during the worst of the Millennium drought (2007 to 2009). Under this scenario an average annual water price of $473/ML is estimated (for the Murray trading zones).
Murrumbidgee import limit to remain in force, unless conditions improve Under a dry or average scenario the Murrumbidgee import limit is estimated to remain in force leading to higher prices in this region: $489/ML under the dry scenario. The Murrumbidgee is estimated to return to its more usual position of net water exporter under the wet scenario.
If conditions do improve, prices would decrease quickly and substantiallyA return to wetter conditions in the winter of 2019 could see water allocation prices fall significantly, similar to what occurred in 2016–17. Under the wet scenario, average water allocation prices of $190/ML are estimated (for the Murray trading zones).
Water demand in the lower Murray has grown, but this is not unexpected Previous ABARES research (Gupta and Hughes 2018) documents long-run changes in water demand in the sMDB and their long-run implications for water prices, including the effects of new almond plantings in the Victorian Murray. ABARES latest analysis suggests that water demand has increased further in this region in recent years. While this growth in demand has contributed to higher water prices, it is not unexpected, and remains within the bounds of scenarios presented in a previous ABARES study (Gupta and Hughes 2018).
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ABARES water market outlook
Current water market conditionsDrought conditions in NSW have contributed to low supply and high prices for water allocations in the sMDB during 2018–19. Exceptionally hot and dry conditions in January saw allocation prices as high as $500 per ML in the Murray and $700 in the Murrumbidgee. Currently water allocations are trading around $450 per ML in both regions (Figure 1).
Figure 1 Allocation prices and storage volumes in the southern Murray-Darling Basin
GL
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$/ML
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Murrumbidgeeallocation prices(RHS)
NSW Murrayallocation prices(RHS)
sMDB storages(LHS)
Source: BOM, GMW, SAWater, WaterNSWNote: Water prices in 2019 dollar terms. Storages include; Dartmouth, Hume, Yarrawonga Weir, Lake Victoria, Menindee Lakes, Blowering, Burrinjuck, Lake Elidon, Lake Eppalock, Cairn Curran, Laanecoorie. Warranga Basin is excluded due to lack of data.
Prices in 2018–19 have been driven by low water allocations in NSW (0 per cent, and 7 per cent for NSW Murray and Murrumbidgee General entitlements respectively). Water availability has remained stronger in Victoria with 100 per cent allocations for Murray and 94 per cent allocations for Goulburn High Reliability entitlements (Figure 2).
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ABARES water market outlook
Figure 2 Water allocation scenarios for 2018–19
25
25
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% 50 100
Allocation level
Historicalaverage0
7
94
100
% 20 40 60 80 100
VIC Murray High
VIC Goulburn High
Murrumbidgee GS
NSW Murray GS
Source: NVRM, NSW DPI, ABARES
This disparity in water supply has created demand for water imports into the NSW Murray and Murrumbidgee. The NSW Murrumbidgee Inter-valley Transfer (IVT) account has remained near its lower limit for much of the year, constraining imports and leading to periods of higher prices in the Murrumbidgee relative to the Murray.
For the southern basin as a whole, 2018–19 has seen the lowest water availability levels since 2009–10 (taking into account allocations, carryover and water recovery volumes, see Figure 4). While total storage volumes remain higher than 2015–16 (see Figure 1), allocations are lower, because a high proportion of storage is located in Victoria where water sharing rules are more conservative (a smaller proportion of stored water is allocated).
Recent ABARES analysis (based on the ABARES water trade model), suggests that a combination of low supply and high irrigation water requirements – due to low rainfall and high temperatures – can explain most of the observed increase in prices in 2018–19. While some longer-term growth in water demand also appears to have occurred in recent years (likely due to almond plantations) this growth remains within the bounds of prior expectations (see the long-term outlook section below for more details).
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ABARES water market outlook
2019–20 water market scenariosABARES outlook scenarios for 2019–20Scenarios for water availability in 2019–20 for key catchments are summarised in Figure 3. These scenarios draw on state government allocation scenarios / outlooks, particularly the Northern Victorian Water Resource Manager (NVRM) outlook scenarios (as at 15 February). The scenarios provide an indication of possible water availability levels under representative ‘dry’, ‘average’ and ‘wet’ conditions (see Figure 4).
Figure 3 Water allocation scenarios for 2019–20
25
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% 50 100
Average scenario
Wet scenario
Dry scenario25
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% 20 40 60 80 100
VIC Murray High
VIC Goulburn High
Murrumbidgee GS
NSW Murray GS
Source: NVRM, NSW DPI, ABARESNote: For NSW regions, only a dry scenario forecast was provided by state agencies. Average and wet scenario are assumed by ABARES.
At present, the NVRM projects a 100 per cent allocation under average and wet conditions for the Victorian Murray and Goulburn, and 58 per cent and 47 per cent under dry conditions. NSW has only provided their allocation outlook under dry conditions. NSW allocations for the average and wet scenarios (along with SA allocations) are assumptions made by ABARES (Figure 3). For modelling purposes the three scenarios include assumptions for catchment level rainfall, based on the 10th, 50th and 90th percentile for historical levels of rainfall. Projections for commodity prices are sourced from the ABARES Agricultural Commodities Outlook.
Similar to the state water allocation outlooks, the scenarios designed by ABARES remain indicative only. Actual water allocations will depend on realised seasonal conditions. At present, the Bureau of Meteorology three month outlook shows below average rainfall forecast in the southern basin for March, April, and May. BOM’s El Niño–Southern Oscillation Outlook suggests there is a 50 per cent chance of an El Nino developing in the current season.
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ABARES water market outlook
Figure 4 Total available water allocation supply in the sMDB
GL
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Source: SA DEWNR, NSW DPI, NVRM. Note: s ABARES estimate. f ABARES forecast.
Modelled water allocation prices in 2019–20The average, wet and dry scenarios are used to simulate annual water market prices and trade flows for 2019–20 using the ABARES Water Trade Model (Gupta, et al. 2018). Based on the assumptions discussed in the previous section, prices would be between $190 per ML in a wet scenario and $490 per ML in a dry scenario in 2019–20 (Table 1).
There are some differences between catchments. For example, in the dry scenario, the lower darling trade limit is modelled to restrict exports of water from the region, leading to lower prices in the darling compared with the rest of the sMDB. A price gap also opens up between the Murrumbidgee and the Murray, discussed further below.
Table 1: ABARES water allocation price scenarios for 2019–20
2019–20
Region Average ($/ML) Wet ($/ML) Dry ($/ML)
NSW Murrumbidgee 324.6 189.7 488.9
VIC Goulburn-Broken 288.5 189.7 472.5
NSW Murray Above 288.5 189.7 472.5
VIC Murray Below 288.5 189.7 472.5
NSW Lower Darling 288.5 189.7 88.0
Source: ABARES estimate
It is important to note that the Water Trade Model estimates the average annual price. In practice, prices are likely to fluctuate throughout the year, around the modelled annual average
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ABARES water market outlook
price. Figure 5 presents the modelled average annual water allocation price and the historical weekly price for the NSW Murray catchment.
Figure 5 Allocation price scenarios, in the NSW Murray
$/ML
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400
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600
Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20
Actualmonthlyprices
Modelledannual prices
Average
Wet
Dry
Source: BOM, ABARES
Prices under the dry seasonal conditions scenarioIn the dry scenario, modelled 2019–20 prices show a relatively modest increase relative to 2018–19 ($473 per ML in 2019–20 compared to $386 per ML in 2018–19 in NSW Murray), and are unlikely to reach the peaks observed during the Millennium drought.
There are a few reasons for this. First, while water availability declines in the southern basin under the dry scenario, it still remains above levels observed during the worst of the Millennium drought (2006–07 to 2008–09). Second, while the dry scenario involves similar allocations to those in 2018–19 for NSW, storage reserves in Victoria help to limit allocation decreases in this scenario. Third, significant volumes of irrigator carryover into 2019–20 are likely (albeit less than was available in 2018–19) (Table 2).
Table 2: Water carryover outlook for 2019–20
Unused water Carryover Unused water Carryover in to 2019-20
Region Units (Feb 2018) in to 2018-19 (Feb 2019) State outlook a
Model estimate b
NSW Murrumbidgee ML 416,239 100,000 217,466
NSW Murray ML 518,350 290,000 171,951
VIC Murray ML 1,194,112 484,441 990,728 407,112
VIC Goulburn-Broken ML 1,048,196 437,221 762,232 321,106
Source: ABARES, NSW DPI, VMRNote: a Based on NSW state government allocation outlook b ABARES model estimate
It is important to note that higher water allocation prices are possible, particularly if conditions more severe than the dry scenario are realised. Further, as mentioned previously, prices are
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ABARES water market outlook
likely to fluctuate throughout the year. In particular, under a dry scenario, higher water prices could emerge later in the water year, as storage volumes decline and the potential for water shortages into 2020–21 drives demand for carryover.
Prices under the average seasonal conditions scenarioThe average scenario sees a slight improvement in total water availability relative to 2018–19 with an increase in allocation levels partially offset by smaller carryover reserves, (Figure 4). Modelled allocation prices under the average scenario are lower than those in 2018–19 (down to $288 per ML in NSW Murray), due mostly to the assumed higher rainfall and its effect on irrigation crop requirements (relative to the drought conditions of 2018–19).
Prices under the wet seasonal conditions scenarioUnder the wet scenario water prices are modelled at around $190 per ML. This is primarily driven by higher rainfall and significantly higher allocations in NSW (ABARES assumed NSW general security allocations reach 50 per cent).
Allocation prices below this level also remain a possibility. At this stage there is still potential for the 2019 winter to see a shift to wetter conditions (beyond those assumed in the wet scenario) in which case allocation prices could fall significantly, as they did for example in 2016–17.
Price gaps between the Murrumbidgee and the MurrayAs shown in Table 1, in 2019–20 Murrumbidgee prices are estimated to be higher than the Murray in the dry and average scenarios. This is because in these scenarios, seasonal conditions and allocation levels are lower in the Murrumbidgee (compared to the wet scenario) leading to greater demand for water. However, the binding Inter-Valley Trade (IVT) limit restricts the volume of water that can be imported into this region, leading to higher prices and a gap between the Murrumbidgee and Murray water price. Nevertheless, in the wet scenario, the Murrumbidgee shifts to become a net exporter of water, equalising water prices across the sMDB.
It is important to note that given the outlook for 2019–20 carryover and the IVT trade limits, there remains some upside risk for Murrumbidgee water allocation prices under a dry scenario. Particularly since in this region, the 2019–20 dry scenario would see water availability fall below that recorded during the worst of the Millennium drought.
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ABARES water market outlook
Long term water market outlookOver the last decade, the sMDB water market has seen some significant structural changes. This includes growth in water demand for cotton and almonds, reductions in water demand for pasture (dairy) and rice, water recovery activity related to the Murray Darling Basin plan, along with changes in inter-regional trading and carryover limits. The ABARES report Future scenarios for the southern Murray Darling Basin (Gupta and Hughes 2018) provides long-term scenarios for the sMDB, which estimate potential future allocation prices, under a repeat of historical climate conditions, but with current (as at 2016–17) levels of water demand, water recovery and market rules.
Figure 6 presents some results from that report, showing the estimated changes in water demand between 2002–03 and 2016–17 in the sMDB. Significant growth in water demand has been observed in the Vic. Murray region due to an expansion of almond plantings, while decreases have been observed in other regions including the Murrumbidgee. The report also presents a sensitivity scenario allowing for additional growth in horticultural water demand, as recently planted almond trees mature (Figure 7). ABARES latest analysis suggests that water demand in the Vic. Murray has increased since 2016–17, however this growth appears to be within the bounds of the previously reported sensitivity scenario.
Figure 6 Long-run changes in water use (2002–03 compared with 2016–17) at a price of $100 per ML and average seasonal conditions, by region
- 500 - 250 GL 250 500
VIC Murray b
VIC Murray a
Loddon-Campaspe
SA Murray
NSW Murray b
Goulburn- Broken
NSW Murray a
Murrumbidgee
sMDB Total
Source: Gupta and Hughes 2018Note: a above Barmah. b below Barmah.
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ABARES water market outlook
Figure 7 Long-run changes in water use (2002–03 compared with 2016–17) at a price of $100 per ML and average seasonal conditions, by region: modelled demand increase
- 500 - 250 GL 250 500
VIC Murray b
VIC Murray a
Loddon-Campaspe
SA Murray
NSW Murray b
Goulburn- Broken
NSW Murray a
Murrumbidgee
sMDB Total
- 500 - 250 GL 250 500
Change in demandVIC Murray b
VIC Murray a
Loddon-Campaspe
SA Murray
NSW Murray b
Goulburn- Broken
NSW Murray a
Murrumbidgee
Change in demandsMDB Total
Source: Gupta and Hughes 2018Note: a above Barmah. b below Barmah.
Figure 8 compares the historical distribution of water allocation prices in the sMDB with those estimated under current market conditions (but with historical climatic conditions) (Scenario 4, in Gupta and Hughes 2018). These modelling results suggest a shift in the price distribution with fewer years of lower prices, more years with moderate water prices, and a similar frequency of very high prices. However, these results rely on a limited climate sequence (2002–03 to 2016–17) which may not represent the full range of future conditions.
Figure 8 Historic versus modelled future water allocation price distributions
Likelihood
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0.003
$/ML 200 400 600 800 1 000
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Source: ABARES
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ABARES water market outlook
ReferencesABARES, Agricultural commodities: December quarter 2018, Australian Bureau of Agricultural and Resource Economics and Sciences, accessed 22 February 2019.
ABS 2019, Consumer price index, Australia, Dec 2018, cat. No. 6401.0, Australia Bureau of Statistics, Canberra, accessed 18 February 2019.
BOM, Water information, Bureau of Meteorology, Victoria, accessed 14 January 2019.
GMW, Storage levels, Goulburn-Murray Water, Victoria, accessed 14 January 2019.
Gupta, M, Hughes, N & Wakerman Powell, Kai 2018, A model for water trade and irrigation activity in the southern Murray-Darling Basin, ABARES conference paper, Canberra, January.
Gupta, M & Hughes, N 2018, Future scenarios for the southern Murray–Darling Basin water market, ABARES research report, Canberra, August. CC BY 4.0.
NSW DPI, 2018, Murrumbidgee valley, water allocation statement (pdf 154kb), New South Wales Department of Primary Industries, NSW.
NSW DPI, 2018, NSW Murray and Lower Darling, water allocation statement (pdf 190kb), New South Wales Department of Primary Industries, NSW.
NSW DPI, 2019, Murrumbidgee valley, water allocation statement (pdf 452kb), New South Wales Department of Primary Industries, NSW.
NSW DPI, 2019, NSW Murray and Lower Darling, water allocation statement (pdf 610kb), New South Wales Department of Primary Industries, NSW.
NVRM, Current Outlook, Northern Victoria Resource Manager, accessed 15 February 2019.
Ruralco water, Water markets, Ruralco water, accessed 25 February 2019.
SA DEW, Historical water allocations, Government of South Australia Department for Environment and Water, accessed 14 January 2019.
SAWater, Daily flow report, South Australian Water, South Australia, accessed 14 January 2019.
VWR, Unused water, Victorian Water Register, Victoria, accessed 13 February 2019.
WaterNSW, Real-time water data, Water New South Wales, New South Wales, accessed 14 January 2019.
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