Page 1 Page 2 Page 3 Page 4 Page 5 Page 6 Page 7 Page 8 Page 9 Page 10 Page 11 Page 12 Page 13 Page 14 Page 15 Page 16 Page 17 Page 18 Page 19 Page 20 Page 21 Page 22 Page 23 Page 24 Page 25 Page 26 Page 27 Page 28 Page 29 Page 30 Page 31 Page 32 Page 33 Page 34 Page 35 Page 36 Page 37 Page 38 Page 39 Page 40 Page 41 Page 4237 IREC Farmers' Newsletter No. 196 — Summer 2016 Have a carryover strategy Carryover strategies aren’t straightforward but irrigators should have a consistent one. Current water allocations throw up some stark lessons about carryover strategies from one year to the next. Many irrigators carried over substantial volumes of water into the 2016–17 season. In the Murrumbidgee Valley, average carryover against general security entitlement was 19%. In the NSW Murray, it was 27%. With Murrumbidgee temporary water prices around $200/ML, and water in the NSW Murray around $260/ML, these high carryover statistics surprised many people. When assessing a carryover strategy, averages are a good place to start. If the allocation is well below average and prices well above, the odds are that the situation will move in the other direction next year. It may not, but the odds are more in favour of a swing back. Likewise, if allocation is high and prices are low, it’s a better bet that it’s not going to stay as good next year. Water agencies will always be conservative in the inflow forecasts they provide to the market, and these shouldn’t be relied on too heavily when developing risk management strategies. Although we couldn’t predict the incredible turnaround we’ve seen this year, even managing a carryover strategy assuming average conditions would have seen irrigators best positioned. Many irrigators carried over water while buyers were in the market paying over $200/ML. For some, carryover assisted winter crop production, even though few would purchase water at that price for that use. Last year (2015–16) was one of the worst years for inflows on record. There are no restrictions to carrying over cash instead of water. Irrigators are always free to get back into the water market the next year to secure production, or stay out if gross margin returns don’t justify it. Had average inflows occurred over this winter and spring, the price would still have been less expensive this year than it was in autumn. Selling water in that situation and securing needs for the following year would have provided more megalitres for irrigators and minimised their risk of account spill. As it happened, the weather turned strongly and those who off-loaded carryover and bought back in, enjoyed a windfall. Parking carryover is sought this year A lot of irrigators will be in the market this season trying to lock in as much carryover water as possible. Many will be looking to buy temporary water and carryover more than the limits against their entitlement by parking some of their water on other irrigators’ licences. These arrangements are currently offered on a $/ML basis, negotiated by water brokers on behalf of irrigators with carryover space on their licence. This year, the price for carryover parking space is currently around $30/ML, though it is usually less in drier years. These arrangements are regularly made between irrigators known to each other, on an informal basis. It’s one of the things that makes it so hard for people analysing water markets to get reliable price data! There is also an opportunity for irrigators to manage their own parking arrangements by owning licences with generous carryover provisions. An option many irrigators are looking at is Victorian low reliability licences, which allows 100% allocation against entitlement. These licences don’t get allocation against them on a regular basis — only when needs for the following year’s high reliability Victorian licences have been met. They may receive an allocation next year under average inflow conditions. The price for Victorian low reliability licences is currently around $250/ML, reflecting the market’s view about the value of occasional allocations and use for parking space in wet years. A new floor under prices One of the other key lessons we can draw from this season is that even with maximum storage supply, it appears unlikely that water will again sit at very low prices for sustained periods across the season. Although prices in the NSW Murray and Murrumbidgee did fall to $50/ML and below, it was brief and only under remarkable circumstances. In a very wet early October, the market was very uncertain about how much cotton and rice was going to be planted. Large downgrades in summer crop plantings would have reduced demand in the market from producers. However, the rain stopped and production will be high this year, as it normally is in times of full allocation. The market now knows there are good crop plantings and the price has rebounded in the Murrumbidgee and Murray valleys. In a full allocation year with the wettest September on record, current prices have caused the market to re-think what it considers to be a floor price. Diversification strategies Seasonal croppers can maximise their opportunities for securing water by diversifying allocation risk, rather than relying only on annual allocations against their licence. For example, instead of holding 2000 ML of Murrumbidgee general security entitlement, an irrigator in the MIA might hold 1000 ML on this licence, plus a spread of NSW general security and Victorian high reliability water. Some cotton and rice farmers even hold parcels of local or interstate high security water. This strategy spreads the risk for irrigtors if one valley has availability well below other valleys. Trade restrictions present risks Irrigators face risk when diversifying their water portfolio. The main challenge is the ability to shift this water into the valley where it’s needed for production. Trade restrictions between trading zones can come into force when natural system constraints prevent the further transfer of water from one part of the system to another. This season, several trade restrictions were in place and water was difficult to move. The ability for Murrumbidgee irrigators to sell into the NSW Murray was restricted, causing higher prices in other parts of the system. Trade from upstream to downstream of the Barmah Choke has also been restricted, though Menindee now contributing to the overall resource will help. The restriction has created a price premium for water downstream of the Barmah Choke. If water can’t be moved due to trade restrictions, then a sale and re- purchase in a different valley may add to the cost of water. Different water supply products Instead of holding entitlement, there are currently two main options for securing supply ahead of seasons, and there are some new innovations on the way. Forward water allows irrigators to lock in a guaranteed volume (ML) of supply for the next season, a product generally offered to the market by high security water holders. It can also be taken up for longer terms. Forward water is basically a one-off parcel of high security water for a set period. There’s often a premium paid on this relative to temporary market purchasing, though it can represent good insurance for those with forward cropping contracts. The other option is leasing entitlement for a set period. The lessee bears the risk of low allocations, but it can be a well-priced product for those without the equity to secure entitlement. In the current investment climate of low returns, investors are potentially responsive to 5% returns. This would place an entitlement lease in the NSW Murray at about $65/ML and about $70/ML in the Murrumbidgee. Further information Jack Bennetto T: 1800 988 118 E: [email protected]