— 14 IREC Farmers' Newsletter No. 200 — Spring 2018 Entitlement holders with spare carry over space will sell “carry over capacity” late in the water season for $25–35/ML. Temporary surface water was listed for sale in mid-August 2018 at $390/ML. There are a few crops that justify the purchase of water at this price and still generate a worthy return. At the same time, groundwater was listed for sale at $150/ML (Zone 3). When pumping costs are taken into account worthy returns at this price from some crops are possible. Purchasing entitlements (as set out in Table 1) usually requires finance. Increasing debt increases business risk, so purchasing entitlements requires a strong balance sheet. Entitlements provide a return on capital and have shown strong capital growth in recent years. Groundwater is highly reliable but the true cost of groundwater also includes energy and depreciation costs. A new irrigation bore costs $200,000–300,000 (or more) to install and has an expected lifespan of 25 years. So a $250,000 bore, over 25 years is a capital cost of $10,000 per annum (plus interest), which is $20/ML based on pumping 500 ML per annum. Subject to pumping depth and type of energy, pumping costs (including repairs and maintenance) are about $75/ML. Government charges are about $5/ML. Total cost of a new irrigation bore is $20 + $75 +$5 = $100/ML. What is the best option? There is no simple answer, you need a range of water sources to manage your balance sheet, cashflow and risk. It is important to understand the impact of each option on the whole of the business, don’t just rely on a simple gross margin. Think and act long. For those reliant on temporary purchases it is important to understand volatility of the market and have access to funds to buy water when the market dips. You need to know your cut off price, which could be rice at $125/ML, cotton returning $500/bale at $150/ML, and cotton returning $600/bale at $200/ML. Many possibilities, same principles There are numerous combinations of how growers can set up their water portfolio, depending on historic access to water, capital development of their operation, risk aversion, location and available water sources. Following are six real life examples of how irrigators may secure and manage different water sources for their irrigation business. Grower 1 started with general security water only and used 30% carryover. Purchased high security entitlements, constructed on farm storage and installed a bore. Supplements with temporary purchases and carry forward water. Grower 2 has general security water only and uses 30% carryover. Supplements with temporary purchases and carry forward water. Grower 3 has high security and general security water and uses carryover. Installed a bore to reduce exposure to general security allocation volatility. Grower 4 has high security and general security water plus on farm storage and uses 30% carryover. Supplements with temporary purchases and carry forward water. A range of water products are needed to manage the balance sheet, cashflow and risk, with each option having its own impact on the farm business. — 14 IREC Farmers' Newsletter No. 200 — Spring 2018 Water products