ABARES water market outlook March 2019

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Authors: Neal Hughes, Mihir Gupta and Tim Westwood

Summary

This 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 conditions

Drought 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 unlikely

Despite 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 substantially

A 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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Last reviewed: 4 November 2019
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