2019 river murray water information sessions...allocation prices have responded to reduced inflows...
TRANSCRIPT
2019 River Murray Water Information SessionsCurrent conditions and options for 2019-20
Chris Olszak | Director | Aither | March2019
SA Murray information sessions
• Independent advisors on water markets, policy and infrastructure
• Our team works closely with investors, agricultural corporations and governments
• Offices in Melbourne, Sydney, Canberra, Brisbane, Adelaide
• Aither provides its water market clients with:
– Ongoing advisory retainers
– Transaction and investment due diligence
– Water portfolio strategy
– Water valuation services
– Water price modelling
– Regulatory and policy advice
Who is Aither?
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The dryland drought conditions have been serious and have
greatly reduced inflows into storages
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1 March 2018 – 28 February 2019
Allocation prices have responded to reduced inflows and high
demand
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Source: Aither, 2019. Based on state water registers.
Major southern Murray–Darling Basin allocation market prices
$-
$100
$200
$300
$400
$500
$600
Feb 2017 May 2017 Aug 2017 Nov 2017 Feb 2018 May 2018 Aug 2018 Nov 2018 Feb 2019
Combined Murray Murrumbidgee Goulburn SA Murray
Entitlements prices continue to rise
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Source: Aither, 2019. Based on state water registers.
Aither Entitlement Index (AEI)
217.6
0
50
100
150
200
250
Jul 2008 Jul 2010 Jul 2012 Jul 2014 Jul 2016 Jul 2018
Ind
ex
Large shifts in irrigated agricultural demand have occurred
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Tree cropsLarge increases in the
planted area of almonds
(and citrus) in the lower
Murray and the
Murrumbidgee
CottonLarge scale introduction of
cotton into the sMDB with
~70k ha and 800k bales in
Murrumbidgee and Murray
for 2017-18 season
GrapesStrong export conditions
have driven recent
investments in new table
and dried grape
developments
The forecasts for next season are concerning
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Victorian 2019-20 mid-February allocation forecasts, announced 15 February 2019
NSW 2019-20 opening allocation forecasts, announced 15 February 2019
Entitlement Wet Average Dry Extreme Dry
Victorian Murray HRWS 100% 100% 58% 20%
Goulburn HRWS 100% 100% 47% 18%
Campaspe HRWS 100% 100% 32% 16%
Loddon HRWS 100% 100% 37% 0%
Broken HRWS 100% 100% 7% 0%
Bullarook HRWS 100% 100% 39% 0%
Entitlement Opening Allocation
NSW Murray GS 0%
NSW Murray HS 97%
Murrumbidgee GS 7%
Murrumbidgee HS 95%
Lachlan GS 0%
Lachlan HS 100%
Water allocated in dry years compared to horticultural demand
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https://waterregister.vic.gov.au/images/documents/Water_availability_fact_sheet.pdf
So what does all this mean and how can you manage risk?
• What’s your plan for the short term?
– What happens if doesn’t rain?
• Have you considered all your options?
– e.g. leases, carryover, forwards
• What’s your longer-term business
strategy?
– Long-term average cost of water
• How will you monitor and execute?
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The good news: there are more options than ever before
In addition to local allocation and entitlement markets, you can source water
from:
• Interstate entitlements
• Forwards
• Multi-year forwards
• Entitlement leases
• Parking/carryover
• (Call options)
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Consider the costs, benefits and risks involved
• Cost risk
• Counterparty risk
• Diversification
• Trade restrictions
• Product availability
• Up-front capital costs
• Time frames
• Predictability
• Administration costs
• Liquidity / lock in
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There’s no universal best
option – it’s all about what’s
right for your business at this
point in time.
Buying more entitlement
• Additional SA River Murray entitlement
• Other High Security / Reliability products
– NSW and Victoria – potential diversification benefits versus risk of trade constraints
– Major capital expenditure in a sellers markets at the moment
• NSW General Security and Victorian LRWS
– Lower cost
– Carryover potential
– But mainly yields water in average/wet seasons
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Leasing entitlement
• Typical cost – 5-6% of entitlement cost (currently around $300 - $370/ML for Vic 7 High and SA Murray)
– Lease cost has increased significantly in the last 12 months
• Consider as a financing product – Opex not capex
• But you still bear the allocation risk
• Other features to consider– Term / extension options, revaluation clauses, access to carryover rights, payment terms
– Mainly sourced from major water investors
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Forwards for allocation
• Typical cost
– Premium on current allocation price (reflecting cost to carryover water)
– Currently around $580/ML for next season
• The only product which guarantees delivery of volume of water on a set date
– Counterparty risk is more the issue here
• Other features to consider
– Term – hard to get more than 2 year forwards
– Payment terms and delivery dates
– Mainly sourced from major water investors
– Locking in at a high price – regret is your biggest concern
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Purchasing carryover space
• Draws on carryover rights of others who are not using them
– Mainly in NSW and Victoria
• Move your allocation at end of year, then move it back again in new year
• Prices vary based on demand for carryover and the system
– Generally fairly cheap (circa $20-$35/ML of space but this varies and check conditions)
• An alternative to purchasing Vic LRWS and NSW GS entitlement to get
access to carryover
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Spectrum of water portfolio options to balance risk and return
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Owned
entitlements
Allocation
spot market
Allocation exposedOPEX intensive
Leases
Allocation
spot market
Light hedge
LeasesOwned
entitlements
Allocation
spot market
Conservative CAPEX intensive
Owned
entitlements
More hedge
Source: Aither, 2019.
Carryover or
forwards
Carryover or
forwards
Leases
Carryover or
forwards
Be proactive
• Sunraysia wine
grape grower – 2010
“If you are not across
the water market, then
you might as well be
playing golf”
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How Aither can assist
• Monthly updates for retainer clients
• Transaction and investment due diligence
• Water portfolio strategy
• Water valuation services
• Water price modelling
• Regulatory and policy advice
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www.aither.com.au
© copyright Aither 2018
Chris Olszak
Director
+61 425 707 170
© 2018 Aither Pty Ltd. All rights reserved.
This document has been prepared on the basis of information available to Aither Pty Ltd at the date of publication. Aither Pty Ltd makes no
warranties, expressed or implied, in relation to any information contained in this document. This document does not purport to represent
investment, commercial, financial or legal advice, and should not be relied upon as such. Aither Pty Ltd does not accept responsibility or
liability for any loss, damage, cost or expense incurred or arising by reason of any party using or relying on information provided in this
document. Any party that uses information contained in this document for any purpose does so at its own risk.
The information contained in this document must not be reproduced or used, in whole or in part, for any purpose without the express written
permission of Aither Pty Ltd.
Images courtesy of the Earth Science and Remote Sensing Unit, NASA Johnson Space Center (http://eol.jsc.nasa.gov).
Quick overview of southern MDB markets
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Total entitlement market value (February 2019):
$23.4 billion
Aither Entitlement Index (AEI) (February 2019):
217.57 points (up 38 per cent over
twelve months)
Annual value of total entitlement transfers (2017-
18):
$347 million Estimated annual value of commercial allocation
trade (2017-18): $189 million
(approximately)
Entitlement market turnover (2017-18):
2 per cent
Allocation prices (week of 4 March 2019):
$450 to $455 per ML