ABARES water markets outlook – August 2019
This report provides ABARES outlook for water allocation prices in the southern Murray-Darling Basin (MDB) for 2019-20. This outlook updates the previous March Outlook, using revised allocation announcements from state water agencies and seasonal conditions from the Bureau of Meteorology (BOM). A brief summary of market conditions prevailing in 2018–19 is also provided.
The ABARES Water Trade model (WTM) is used to simulate potential 2019–20 water allocation prices for four representative scenarios: extreme dry, dry, average and wet. Each scenario includes estimates of potential future allocation percentages, rainfall, and commodity prices drawing on state government outlooks, along with a number of additional assumptions made by ABARES (see Appendix A: ABARES outlook scenarios ).
Water supply is low but still above Millennium drought levels
Drought conditions over the last 12 months have led to significant reductions in storage volumes and low opening allocations in 2019-20. Further, the current BOM climate outlook suggests drier than average conditions are likely at least until October. However, water availability is being supported by significant carryover reserves, with around 31% of 2018-19 supply (around 1,600 GL) being carried into 2019-20.
Across the southern basin, around 3,442 GL of water allocation is forecast to be available for irrigation use in the dry scenario by the end of 2019-20 (including carryover and excluding environmental water). This would be a 25% decline relative to 2018-19 but still higher than the worst of the Millennium drought (where supply averaged 2,590 GL between 2007-08 and 2008-09). The less likely extreme dry scenario would see water allocation supply fall to around 2,802 GL. Under the average and wet scenarios water availability is forecast to increase as high as 6,112 GL.
High water allocation prices are likely to continue
Over the course of 2018-19 water allocation prices increased dramatically from around $250 per ML in July 2018 to over $500 per ML in June 2019 (for an annual average price of around $450). Currently water prices have been trading in excess of $600 per ML in most southern MDB regions.
In the dry scenario, an average annual water allocation price for 2019-20 of around $526 per ML is estimated, with $651 estimated under the extreme dry scenario (for the Murray below Barmah trading zones). Prices are expected to decrease substantially if a shift to average or wetter conditions occurs, with annual prices of $332 and $258 estimated under the average and wet scenarios, respectively.
Murrumbidgee import and Barmah choke limits may be in forcee
Water supply remains highly limited in the Murrumbidgee with limited carryover reserves and zero opening general security allocations. Under the dry and average scenarios the Murrumbidgee Inter-valley Trade (IVT) import limit is expected to bind, leading to higher prices in this region compared to other regions in the southern basin. In the wet scenario, the Murrumbidgee reverts to its usual trade position of being a net exporter of water.
The Barmah Choke trade constraint is expected to bind in the dry and extreme dry scenarios, leading to lower water allocation prices in the above Barmah trading zones: $491 and $545 per ML under the dry and extreme dry scenarios respectively.
There is potential for higher prices as we approach 2020–21
If dry or extreme dry conditions do eventuate in 2019–20 storage and carryover reserves would diminish and water supply into 2020-21 could become extremely limited. In this situation higher water prices would be expected prior to the beginning of the 2020-21 water year, driven by demand for carryover water.
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