Water Trading Options for 2015-16
Rod Luke – Kilter Rural
The southern Murray- Darling Basin (MDB) forms Australia’s largest inter-connected water market.
Significant efforts have been made by governments to expand the coverage of the southern MDB
water markets to the largest possible number of water users and trading is now possible across state
boundaries. The main constraints to trading relate to ensuring that financial transactions can be
supported through the physical movement of water in a system governed by physical, hydrological
and environmental constraints.
The marketplace for water trading covers the regions in green below and includes South Australia,
lower Murray and into Victoria (not the Lachlan or northern NSW):
Entitlement:
An entitlement gives the owner a perpetual entitlement to share in a managed water resource. The
entitlement is classified according to reliability and is transferable and tradable. Water Entitlements
are enforceable in law. Water use is metered and compliance is monitored to ensure that users
extract water in accordance with their rights.
Allocation:
An allocation is the volume allocated to an entitlement in any given year. This is the physical volume
available for consumptive use and is typically expressed as a percentage of the entitlement volume.
Allocations are determined by Water Authorities based on transparent rules and are announced
throughout the water year (July – June). They are also transferable and tradable.
Allocations to entitlements are governed by defined processes and calculations based on
measureable water availability conditions such as inflows and the volume of water in storage. In
general, these allocation processes work well (NWC 2011a). Water authorities produce
transparent publicly available information on a regular basis to help inform market participants:
Available Entitlement (million ML):
Entitlement
Total
Environment
Irrigators
Average
allocation
Highly reliable
3.50
0.69
2.81
2.64
Generally reliable 3.64
0.55
3.08
2.18
Low reliability
1.48
0.04
1.43
0.44
Total
8.63
1.29
7.33
5.26
Features of Water Entitlements
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Secure perpetual property right (akin to real estate title). Water entitlements are statutory
rights. Reforms have been undertaken in recent years to further enshrine the rights assigned
by water entitlements within state water laws.
Water Entitlements recorded in publicly-accessible reliable water registers operated by State
Titles Offices that foster public confidence and disclose unambiguously who owns the asset
and the nature of any encumbrances on it.
Mortgagable, enforceable, able to be leased
Recorded in transparent public registers (or shares thereof)
Separate from land. Entitlements have been separated from land titles for many years.
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Recent ‘unbundling’ reforms have separated Water Entitlements from delivery rights within
an irrigation system and from rights to use water at a particular site. This promotes flexibility
in the trading of Water Entitlements and Water Allocation as it is now able to be fully
recognised as a discrete production input, in much the same way as fertiliser or labour.
Transferable. Both Water Entitlements and Water Allocations are readily tradable directly, or
via a number of established intermediaries, subject to trading rules and regulations
published by the respective water authorities. These regulatory frameworks also facilitate
the efficient leasing of Water Entitlements.
Finite resource
Allocation provides a natural rental income
Climate change hedge
Cannot be impaired
Entitlements are differentiated by various attributes:
 Location (zone)
 Reliability
 Carryover (storage)
 Efficiency dividends
Other things to consider:
 Trading restrictions between zones
 Entitlements or shares within water corporations?
Leasing Entitlement
Key terms will include:
 Lease price: linked to capital value and comparable with other options such as:
o allocation price or
o cost to buy and finance entitlement
 Duration
 Outgoings (any costs associated with managing the entitlement for the duration of the lease)
 Security (recorded on title) & enforceability (check with MI, CIL and MIL how they manage
this)
Options to carryover with different entitlements that were available in 2014-15 season:
 Victorian High Reliability – 100% carryover less 5% losses with spill risk (+$5/ML storage fees
for allocation delivered)
 Victorian Low Reliability – 100% carryover less 5% losses with very low spill risk
o Lower value than High Reliability
o $15/ML to $30/ML lease fees
o $5/ML storage fees
 NSW General Security – Murrumbidgee – 30% carryover, with spill risk above 70%
o NSW Murrumbidgee carryover - $30/ML paid for carryover capacity
 NSW General Security – Murray – 50% carryover, with spill risk above 60% alloc
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NSW High Security – no carryover available
Water Leasing
Water leases are akin to property leases (outgoings are paid by lessee, allocation risk rests with
lessee, all of the features and benefits of owning the asset transfer to the lessee for the period of the
lease).
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Can provide long term access - across seasons
There are benefits to the lessor
o Lessee cannot impair asset
o Terminates simply in the a default event
The benefits of Water Leasing can be:
 Allows lessees to expand without capital expenditure
 Unlocks capital in owned entitlement through sale & leaseback
 Lease pricing and participation governed by interaction and is limited by:
o interest rates
o Loan Value Ratios
o Entitlement market values
o Allocation prices
Annual Allocation Trading
There are reductions in supply (20% less through Government buybacks) and changes in the climate
while demand is increasing.
There are significant investments underway in high value crops including almonds (Olam, Adveq,
Ontario Teachers Pension Fund), walnuts, hazelnuts, new dairy investments, cotton (3 gins in SMDB).
The Water Market has changed in recent times. There are new horticultural plantings largely without
entitlement and established irrigators have sold some entitlement. Pre 2010 there were many
sellers, less buyers. Now there are many buyers, less sellers.
An estimate of predicted changes in the water market from 2013 to 2020 Note the water
requirement is expected to go up from 630,000ML to over 800,000ML:
Producers of higher value crops are using a larger share of the water available for use and are
predicted to gain a larger share in future. Note that the total volume required is only 13% of all
allocation available:
The future water availability will be reduced by Environmental water (Red line). Forward delivery
products are a way of managing allocation availability and price risk. Blue box is the volume
weighted average price/ML for each irrigation season (eg in 2007-08 the volume weighted average
price was the highest at $450/ML:
Allocation Trading Options Presented by Kilter
Forward Sale of water allocations is becoming popular as participants keen to lock away their
budgets for forward sold products:
 Manages allocation availability
 Locks in price
 Volumes delivered periodically on payment
 Locks in budgets – cotton, almonds, dairy
 One season in advance – manages risks for the seller
 Application of Corporations Law in relation to Financial Product definition (specific carve out
of forward contract on water as long as settled by delivery)
Allocation Sale on Terms (providing working capital secured by lien over crop and payment direction
from crop purchaser). It provides certainty around the volume and cost of water (water delivered up
front with payment at harvest) and frees up working capital to establish crop.
 A crop lien is valuable security.
 It provides allocation without payment,
 Locks in price for a specified harvest date,
 Frees up working capital,
 Expect a higher costs than Forward Sale
 Requires a crop lien from grower & merchant payment direction.
 The Allocation is supplied at contract signing and payment of deposit
Water Share farm is akin to a land sharefarm where water is supplied for a fixed percentage of the
crop returns
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Provides allocation without payment
Production risk shared by allocation seller
Higher returns available by allocation seller
Free up working capital
Uses security
Higher costs cf Forward Sale & Allocation Sale on Terms
Requires a crop lien from grower & merchant payment direction
Allocation supplied at contract