Water market outlook – March 2020
Authors: Tim Westwood, Linden Whittle and Mihir Gupta
The March Water Market Outlook report provides ABARES initial outlook for water allocation prices in the southern Murray-Darling Basin (sMDB) for 2020-21. This outlook uses forecasts provided by state water agencies for allocations, and seasonal conditions from the Bureau of Meteorology (BOM). A summary of market conditions prevailing in 2019–20 is also provided. The ABARES Water Trade model is used to simulate potential 2020–21 water allocation prices for four representative scenarios; extreme dry, dry, average and wet. Each scenario includes estimates of potential future allocation percentages, carryover volumes and rainfall.
Water supply very low in 2019–20, significant uncertainty for 2020-21
During 2019, Australia experienced the warmest year on record, and the driest year in over 100 years. Water storage volumes declined in 2019−20 to an average of 9,382GL in February 2020, the lowest level since 2009–10 (BOM water storage). Nevertheless, the volume of water available for irrigation in 2019−20 (3,527GL) remained well above the volume observed during the Millennium drought (2007−08 to 2008−09), where supply averaged 2,477GL.
In 2020-21, water supply for irrigation in 2020-21 is expected to increase significantly in the average scenario to 4,774GL, reflecting an increase in forecast allocations (from state water agencies) from the very low levels experienced in 2019-20. In the wet scenario, water supply could improve further to 5,533GL, comparable to 2014–15. In the dry scenario water allocation supply is expected to decrease to 2,459GL, while in the extreme dry scenario water supply decreases to 1,661GL.
Water allocation prices likely to remain high next year
Water allocation prices rose significantly during 2019-20, with prices peaking at over $950 per ML at the end of October 2019 for regions below the Barmah Choke (Waterflow, Ruralco). Average prices across the sMDB in 2019–20 up to February 2020 are $673 per ML. Prices were driven by limited water supply and binding trade limits coupled with strong water demand from horticulture plantings.
In the average scenario, water allocation prices in 2020–21 are expected to remain well above the historical average, averaging $435 per ML across the sMDB. In the wet scenario, prices are forecast to fall to an annual average of $293 per ML, while in the dry and extreme dry scenarios prices are estimated to increase to an annual average of $735 per ML and $776 per ML respectively.
A number of binding trade limits are expected in 2020–21
The increase in water demand, possible decrease in water supply (under the dry and extreme dry scenarios) and changes to the Goulburn-Murray Inter-Valley Trade (IVT) limit, will likely lead to a number of binding trade limits under all scenarios in 2020–21. As a result, a number of price gaps between catchments above and below the Barmah choke are expected in 2020–21. Previous ABARES research (Gupta and Hughes 2018, Hughes et al. 2016) has shown inter-regional trade limits are likely to be binding more often in the future. Managing inter-regional water trade more efficiently may be possible, to allow more trade to occur that leads to increased benefits for the irrigation sector, while still adhering to the physical limits underpinning the IVTs.
Current water market conditions
Water markets in 2019–20
Allocations against entitlements in 2019–20 are well below average in NSW and Victoria (Figure 1 ). Across the Murray Darling Basin, average rainfall in 2019 was 53% below the mean, the lowest level on record. Seasonal conditions have generally been worse in NSW than in Victoria, leading to very low allocations for general security entitlements in NSW (0% for NSW Murray and 6% for NSW Murrumbidgee). In contrast, high security entitlements in Victoria have received much higher allocations – 65% in the Vic. Murray and 76% in the Goulburn – although they still remain well below the historic average.
Low allocations and rainfall drove prices up across the sMDB in 2019–20, with prices averaging $673 per ML to February 2020, compared to $446 per ML in 2018–19. However, this is still below the average price observed during the Millennium Drought ($717 per ML in 2007–08), in large part due to the high volumes of carryover into 2019–20 which have helped smooth prices. Carryover accounts for 43% of available water in 2019–20, compared to an average of 19% during the Millennium Drought, when carryover rules were still being introduced in Victoria.
While water storage volumes declined during 2019–20, dropping to an average of 9,382GL in February 2020 (Figure 2 ), they remain higher than volumes observed during the Millennium Drought (5,567GL on average).
Note: Water prices in 2019 dollar terms. Storages before 2013 compiled by ABARES from state water agencies. After 2013, storage volumes sourced from the BOM.
For most of 2019–20 the Murrumbidgee IVT limit has been binding, limiting the amount of water that can be exported out of the region and causing periods of lower prices in the Murrumbidgee relative to the Murray. Prices in the Murrumbidgee have averaged $653 per ML compared to $702 per ML in the Murray up to February 2020.
There remains some potential for prices to increase in the last quarter of 2019–20. With initial allocation forecasts for 2020–21 from state water agencies relatively low, demand for carryover water into 2020–21 may push prices higher towards the end of 2019–20 – particularly if dry conditions eventuate during March to June.
Seasonal climate outlook
The current BOM climate outlook for the remainder of 2019–20 suggests almost equal chances of rainfall above or below median levels. Major climate drivers are forecast to remain neutral (El Niño–Southern Oscillation, Indian Ocean Dipole and the Southern Annular Mode) through until the end of May 2020. While this outlook is a significant improvement in weather conditions relative to those projected for the previous water outlook in August 2019, several months of above average rainfall would be required to replenish water storages (BOM outlook).
2020–21 water market scenarios
Water supply in 2020-21
ABARES developed 4 scenarios for water availability in 2020–21 (Figure 3 ) that draw on allocation outlooks from state water agencies as at the 16th of March 2020. ABARES uses allocation forecasts and estimated carryover (excluding water allocated to the environment) to determine the volume of water available for irrigation in the sMDB under each scenario for 2020–21 (Figure 4).
The scenarios provide an indication of possible water availability levels under representative ‘extreme dry’, ‘dry’, ‘average’ and ‘wet’ conditions (see Appendix A: ABARES outlook scenarios for more details). The scenarios are indicative only, and conditions could be better or worse than forecast, which would affect prices.
Source: NVRM, NSW DPIE, ABARES
Note: Historical average calculated from 2001–02 to 2019–20
Note: a ‘Water available for irrigation use’ is calculated as the sum of allocations, water carried over from the previous year and any water classified as uncontrolled flows, minus water allocated for the environment and water forfeited during the year. s ABARES estimate. f ABARES forecast.
Water demand in 2020–21
Recent ABARES research suggests the demand for water increased substantially between 2006 and 2019 (Goesch et. al. 2020). In particular, water demand from the cotton and almond industries has increased significantly in the southern basin. ABARES modelling suggests water demand from the almond sector will increase further in the future, as existing almond plantations reach maturity. In contrast, demand from the rice and dairy industries has decreased.
The willingness to pay for water varies substantially across irrigation industries. The quantity of water demanded from the rice and dairy sectors is particularly sensitive to water prices, and is expected to decrease substantially in 2020-21 under the dry and extreme dry scenarios. In contrast, demand for water from horticulture plantings, such as almonds and fruits, is expected to remain strong under all scenarios.
Most horticultural production is located in regions below the Barmah choke. These regions are expected to import significant volumes of water under all scenarios. As the volumes of available water decrease in these regions under drier scenarios, the volume of water imported increases to meet demand. The largest exporting region is expected to be the Murrumbidgee, where there is significant use of water for producing rice and grazing pastures.
The increase in water demand, possible decrease in water supply (under the dry and extreme dry scenarios) and changes to the Goulburn-Murray IVT, will likely lead to a number of binding trade limits under all scenarios in 2020–21. While limited information is available regarding the changes and how they might impact inter-regional trade, ABARES has assumed the volume of trade out of the Goulburn will be halved in 2020–21.
Additional sensitivity testing suggests the Goulburn IVT will continue to be binding if the volume for trade decreases by 30% or 10% instead. As the export limit increases and additional trade occurs, prices in the Goulburn-Broken increase, while prices in the regions below the Barmah choke decrease.
The Barmah choke trade constraint is expected to be binding under all scenarios, while the Murrumbidgee IVT is modelled to restrict exports in the extreme dry, average and wet scenarios. In the wet and average scenarios, it is likely the volume of water demanded will be less than the available supply of water, leading to exports of water to catchments below the choke. In the extreme dry scenario, water supply is low in all catchments in the southern basin, and the demand for water is greater downstream of the choke, leading to exports from the Murrumbidgee.
Modelled water allocation prices in 2020–21
Average annual allocation prices and annual trade flows are simulated for each region under extreme dry, dry, average and wet scenarios for 2020–21 using the ABARES Water Trade Model (Gupta, et al. 2018). Price forecasts for 2020−21 are presented in Table 1.
|Region||2019–20 Average||Extreme Dry||Dry||Average||Wet|
|NSW Murray Above||624||639||576||416||272|
|VIC Murray Below||784||916||742||459||377|
|NSW Lower Darling||100||517||426||219||46|
|Weighted sMDB average||673||776||735||435||293|
Source: ABARES estimate
Note: 2019–20 average calculated up to February 2020
It is important to note that these are estimates of the average annual price. In practice, prices are likely to fluctuate throughout the year around the modelled annual average price (Figure 5 ). ABARES has produced a dashboard visualisation to accompany this report, which allows for exploration of price forecasts for each region in 2020–21.
Prices in the average and wet scenarios are expected to fall in 2020–21, reflecting an improvement in seasonal conditions relative to 2019–20. However, prices are likely to remain elevated compared to historical averages in both scenarios, as storage volumes will take time to recover from recent dry conditions.
Under the dry and extreme dry scenarios, water availability is modelled to decrease in 2020–21, based on lower allocations against entitlements compared to 2019–20. As a result, average prices across the sMDB are expected to increase in 2020–21 to $735 per ML in the dry scenario, and $776 per ML in the extreme dry scenario.
Average prices across the sMDB in 2007–08 were $717 per ML, which is lower than forecast for 2019–20 under the dry and extreme dry scenarios. This is largely driven by less water available for supply under these scenarios, with the water available under an extreme dry scenario lower than that during the Millennium Drought. Binding trade limits, increased demand for water in regions below the Barmah choke and where the water is located in 2019–20 are all driving prices higher.
Due to binding trade limits across all major IVT's, the market is not expected to reach a common price across the southern basin in any scenario. Prices in regions that import water will be higher compared to prices in regions exporting water. For example, in the average scenario, prices in regions below the Barmah choke are $459 per ML compared to $187 per ML in the Vic. Goulburn-Broken regions, driven by the new IVT limit.
Appendix A: ABARES outlook scenarios
ABARES outlook scenarios
ABARES designed four outlook scenarios for 2020–21 (Table A1). The outlook scenarios defined by various state water agencies as at 17 February 2020, are also included in Table A1. It is important to note that outlook scenarios released by the states remain indicative only. Actual water allocations will depend on realised seasonal conditions. Outlook scenarios are also subject to updates throughout the year.
As shown in Table A1, the definition of outlook scenarios and the level of information provided can vary by state water agency. The ABARES outlook scenarios are largely based on those used by the Northern Victoria Resource Manager (NVRM). Outlook scenarios from other states are matched against the ABARES scenario definitions.
|ABARES scenario||NVRM scenario||SA DEW scenario||NSW DPIE scenario|
In 99 years out of 100, inflows to storages exceed those experienced in this scenario. Rainfall is in the 1st percentile of historical levels.
Inflow volumes to storages that are greater in 99 years out of 100.
99% likelihood that actual allocations will exceed allocation forecast
99 chances in 100 of exceeding the allocation forecast
In 90 years out of 100, inflows to storages exceed those experienced in this scenario. Rainfall is in the 10th percentile of historical levels.
Inflow volumes to storages that are greater in 90 years out of 100.
90% likelihood that actual allocations will exceed allocation forecast
9 chances in 10 of exceeding the allocation forecast
In 50 years out of 100, inflows to storages exceed those experienced in this scenario. Rainfall is in the 50th percentile of historical levels.
Inflow volumes to storages that are greater in 50 years out of 100.
50% likelihood that actual allocations will exceed allocation forecast
1 chance in 2 of exceeding the allocation forecast
In 10 years out of 100, inflows to storages exceed those experienced in this scenario. Rainfall is in the 90th percentile of historical levels.
Inflow volumes to storages that are greater in 10 years out of 100.
25% likelihood that actual allocations will exceed allocation forecast
NSW has not released a forecast for this scenario. ABARES assumption.
Source: ABARES, NVRM, SA DEW and NSW DPIE
Note: Allocation forecasts made by NVRM are created using a model of historical inflow volumes, and the chance that actual inflows will be higher than those presented. The wet scenario defined by SA DEW uses a higher likelihood measure, meaning this is a drier scenario than the wet scenario used by ABARES and defined by NVRM.
For each of these scenarios, ABARES has estimated allocations made against each entitlement type, annual rainfall by catchment, the volume of water carried over into 2020–21, and the volume of water carried over into 2021–22.
The scenarios describe four potential outcomes for the volume of water available for irrigation use in the southern basin in 2020–21. In each scenario, the aggregate demand for irrigation water is assumed to be the same (i.e. at 2019–20 levels). Therefore, prices in each scenario are primarily influenced by seasonal conditions, the volume of water available (which is affected by allocation and carryover forecasts), rainfall (which affects crop water requirements) and trade limits that restrict the flow of water between catchments.
Table A2 shows the assumed annual rainfall in 2020–21 by catchment for each outlook scenario. This is calculated as a percentile of historical annual rainfall between 2000-01 and 2019–20. Rainfall for 2019–20 takes current rainfall data to February 2020, combined with the average rainfall level for each of the remaining months calculated from 1960 to 2019.
|Region||2019–20||2020–21 Extreme Dry||2020–21
|NSW Lower Darling||153.3||154.6||166.8||223.4||317.9|
|NSW Murray Above||292.9||251.1||271.3||328.8||486.5|
|NSW Murray Below||256.5||212.1||222.1||297.8||430.7|
|VIC Murray Above||451.1||343.1||431.7||557.7||711.3|
|VIC Murray Below||222.5||189.0||208.5||260.5||389.0|
Note: 2019–20 values are ABARES estimates. 2020–21 scenario values are ABARES forecasts
Table A3 shows the allocation forecasts by entitlement type for 2020–21. While these predominantly reflect the outlook scenarios released by the state water agencies, ABARES has also made some additional assumptions.
- In Victoria, ABARES has assumed no allocations are made against low reliability entitlements in 2020–21.
- South Australian Class 3a entitlements are assumed to be comparable to high reliability entitlements in Victoria and NSW.
- For New South Wales catchments, a number of assumptions were made. In cases where an allocation forecast was not provided for a particular scenario by New South Wales, ABARES assumed that the dry scenario forecast was equal to the extreme dry. Allocations under a wet scenario were assumed to be 25% higher than the average scenario, up to a maximum of 100%.
Allocation forecasts for South Australia were not available at the time of publication. ABARES has assumed allocations which reach 100% under all scenarios except the extreme dry, where allocations are assumed to reach 70%.
|NSW Lower Darling||General||0||10||35||60|
|NSW Lower Darling||High||97||97||100||100|
Source: NSW DPIE, NVRM, ABARES
Table A4 shows ABARES values for the volume of water carried over into 2020–21 and 2021–22. Carryover is modelled taking into account forecasts for rainfall, entitlements on issue and allocations, along with state-based carryover rules. Overall the results suggest lower levels of carryover into 2021–22 compared to 2020-21, in the extreme dry and dry scenarios.
Source: 2020–21 values are ABARES estimates. Scenario values are ABARES forecast.
Murray-Darling Basin water market dataset
This visualisation for the Water Markets Outlook – March 2020 report includes data up to 26 March 2020. The Tableau dashboard may not meet accessibility requirements. For information about the contents of these dashboards contact ABARES.
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