Where does the price of Water end? By Grant Burns

This week has seen a lot of talk about sales water hitting $500 per ML. So where does this end? And what do I see for the medium-term outlook for sales water?

 

My focus is on Victoria, as I have very little water understanding in NSW.

 

 

Since 2000 we’ve seen a lot of changes in the water game. Earlier uncoupling of water to property and seeing water being traded has had the desired effect of sending water to it’s highest and best use. Government investment in environmental water has reduced the pool but also addressed overallocation that was in the system. So there is less water in the system to be traded, we all know that………….

 

If we look across the users of water and we see horticulture, cotton, rice and dairy as the main users then I like to focus on the fundamentals of each industry to determine what each of the industries are prepared, and can afford to pay.

 

Generally Rice, Dairy and Cotton are out of the market at these high sales water values (dairy cows culled, rice not planted, cotton plantings severely down), leaving the big horticulture to fight over the available water at a ‘race to the top’ to see who is prepared to outbid each other to keep permanent plantings alive…….. generally almonds, table grapes, stone fruit outcompete all other industries…….. dried fruit get’s pulled out of mothballed, and until recent recovery in wine grape prices, they stop watering wine grapes.

 

What I’m ‘stunned’ about during this surge in values, is that people think it’s the same as previous times…………. It is not…………. This is a unique water market. Victoria is close to 100% allocation, yet sales water has hit $500 per ML. This is a demand driven event that we have never seen, and we will likely hardly ever see again. It is driven by the livestock industry…………..

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Such a severe drought in NSW see’s the entire NSW beef and sheep industry needing to import 100% of the feed ration for their livestock to get through. Fodder markets are off the charts…… my hay blokes at Natte Yallock are freighting hay to Dubbo at $450 per ton landed.  Wheat is hitting dairy farms over $500 landed. So how does this affect water?? It comes down to fodder and mostly summer crops like corn. It’s common to be able to grow 30ton/ha of irrigated corn….. but it uses a lot of water. Let’s say a corn crop uses 10ML/ha. Then at $350/ML where the market opened (and hoping for 1-2MLha of summer rain), a corn grower allocates 10ML @ $350= $3500 per ha plus his seed and fertiliser of say $1000/ha and grows a 30ton/ha corn crop. So it’s cost him $4,500 per hectare and he’s grown 30 ton of corn= $150 per ton.   This is cheap enough feed to buy livestock, or grow enough feed to retain his flock/herd if the skies don’t open up in the Autumn. Now livestock markets are reflective of the cost of fodder. The livestock are devalued based on the cost of purchased in fodder to feed them. So the punters are growing corn and buying cheap stock………… the economics stack up and they will make a good earn out of it (or they should if they had the balance sheet to lock away enough water for the entire season).

 

Once fodder drops back to sub $200/ton with an Autumn rain, then the economics of growing corn (and other fodder) don’t stack up all of that demand drops out of the market.

 

So this is a demand driven water event, as opposed to previous times where it has been a supply driven event (lack of supply forces horticulturalists to fight over the allocation). Demand driven water surges shake out quicker than supply driven events. The dams still have good water, there is only three storages that matter for Vic. And they are Dartmouth, Hume and Eildon….. sitting at 70.1%, 34.3% and 51.03% and we are at the end of January (53-54%). The reality is the weir pools are full, and by the end of March they stop sending water down the river, and the snow melt is 10% alone, so we will hit 60-80% dam levels by the start of next irrigation season, and supply will be fine. What will change is that a return to average rainfall, will see a ‘drop off the cliff’ in the value of fodder, and a reduction in demand for water to grow fodder in the Spring/Summer of 2019/2020.

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** How can I be so sure?............ we once had 220 million merino sheep in Australia prior to the wool crash of 89. Now we are in the 70 million range. We are also at the bottom of the beef range of livestock numbers based on high prices and droughts leading to the kill chains operating at capacity and no retention of female cattle over the previous 5 years….. dairy numbers surprisingly haven’t dropped severely, but have dropped heavily in irrigation regions.   So any sort of rainfall this Autumn, will then create sufficient livestock fodder………. Anyone with feed will enter livestock markets grabbing opportunities. If we see large rainfall events so surface water dams fill, the result will be more pronounced, as it will open up more land for grazing……….. fodder prices fall, demand for water falls and with 100% allocation again next season we see a large drop in irrigation sales water values.

 

So we will be back to say $160-$240 per ML with a normal season in 2019/2020….. and if the worst happened and we had a double up drought in NSW, I doubt the market can bear a higher value for grain and hay than exists now. I think more and more livestock will go to slaughter, livestock markets will take an even more severe tumble, but I don’t see the fodder markets kicking much higher…… fundamentals just can’t support to cost of feeding a cow 15kg of fodder at $0.45 cents per kilogram. Costing $6.75 per day. To feed a cow through next winter is $675 at these rates, which is all the cows worth in a drought…………….. be mindful that this drought was a real big one……… 1:50 type event (2% chance of being as severe again)……….. even if we hit a 1:10 drought this year, generally means it’s not as widespread and there are pockets of regions that receive rain………………….. Statistically it is most likely that we receive rain and this market shales out very quickly.

 

Like all these things, whilst I believe my views above are ‘more likely’ to come true, there is also a possibility that we see a ‘double up’ of severe conditions. We have no crystal ball, and my views are based on reflecting on previous rainfall averages and projecting them forward. If the past doesn’t reflect the future, and the ‘global warming affect’ is true, then it’s possible that future rainfall is not reflective of past averages. So seek independent advice before acting on the above opinion, and the above doesn’t take into account you specific circumstances……….. so the above is to be used as an opinion only and is not be relied upon for you commercial farming/banking decisions.

Grant Burns
Director
Ag Advisory Pty Ltd