Water market outlook – March 2021

The development of La Niña conditions coupled with a negative IOD has resulted in substantial improvements in water supply in all major catchments. Large rainfall events occurred across the southern basin towards the end of 2019–20, which led to substantial improvements in storage volumes in response to higher inflows (Figure 1 and Figure 3 ).

As a result, allocation levels have been above average for all major catchments and securities (Figure 2 ). NSW Murrumbidgee general security allocations have reached 100% for the first time in at least 20 years, driven by the spilling of water accounts that have hit their account limit (DPIE 2021c). NSW Murray general securities are currently 50% allocated, significantly above the 3% recorded in 2019–20. All Victorian high security entitlements have reached 100% allocations.

Water supply in 2020-21 has been further improved by high volumes of water carried over from 2019–20. This is reflected in water allocation prices, which are currently well below historical averages for all regions in the sMDB. The current YTD average weighted price for the sMDB is $154 per ML, down from $587 per ML in 2019–20 and below the 5 year average of $275 per ML.

Binding IVT limits were observed throughout 2020–21, which has caused price gaps to emerge between catchments. The YTD average price is highest in catchments below the choke ($211 per ML in the Vic. Murray) where the demand for water is greater. In comparison, the YTD average price in the NSW Murrumbidgee is $110 per ML, significantly lower than most other catchments.

IVT limits remain a watchpoint, due to their impact on water prices as well the implications for water deliverability. The Victorian Government has indicated their intention to cap deliveries from the Goulburn to the Murray to a maximum of 40 GL per month for the 2020–21 summer-autumn period (Victoria State Government 2020). The announcement also stipulated that the implementation of new trade rules would be delayed until 2021–22, with interim measures from 2019 to be extended. These announcements were made with a view to provide irrigators with more time to implement long-term changes considering the unprecedented impacts of COVID. While it is still unclear what the new trade rules will mean for the volume of water that can be traded, the effects of the interim measures are already being observed in the market. ABARES estimates around 24GL of water was traded from the Goulburn to the Murray for irrigation use in 2020-21 (well below the 3 year average of 108GL of net exports). The binding Goulburn export limit also led to price gaps between the Goulburn (YTD average price of $146 per ML) and the Murray (YTD average price of $211 per ML, in the Vic. Murray below the Barmah choke) (Figure 3).

Water used for irrigation in 2020-21 has been significantly higher than 2019–20, particularly in opportunistic irrigation sectors such as grazing pastures, rice and cotton, that rely on lower water prices.

Seasonal outlook

The BOM seasonal outlook for the April 2021 to June 2021 is indicating a return to neutral conditions (ABARES 2021), as the current La Niña event continues to decay (BOM 2021b). The negative IOD which helped contribute to higher rainfall in 2021, has shifted back to neutral, signalling a return to drier conditions (BOM 2021a).

ABARES developed four scenarios for water availability in 2021–22 that draw upon the latest allocation outlooks from state water agencies as at 15 March 2021. ABARES uses these allocation forecasts and estimates carryover (excluding environmental water) to determine the volume of water available for irrigation in the sMDB under each scenario for 2021–22 (Figure 6).

The scenarios provide an indication of possible water availability levels under representative ‘extreme dry’, ‘dry’, ‘average’ and ‘wet’ conditions. Allocation levels in each scenario are determined by state water agencies based on the likelihood of inflows to storages above historical levels and estimates of rainfall (see Appendix A for more details). While methodologies vary across states, ABARES has broadly aligned the scenarios such that inflows to storages are greater in:

• 99 years out of 100 in the extreme dry scenario
• 90 years out of 100 in the dry scenario
• 50 years out of 100 in the average scenario
• 10 years out of 100 in the wet scenario

The scenarios are indicative only, and conditions could be better or worse than forecast, which would in turn affect prices. Readers should make their own judgements about the probabilities of each scenario. All four outlook scenarios are discussed in each edition of the Water Market Outlook, to provide consistent information on the effects of different seasonal conditions and related on-farm decisions such as carryover and irrigation water use.

Water supply in 2021–22

In the wet and average scenarios, allocations are likely to be higher in 2021–22 compared to the historical average (Figure 5 ). Victorian High security allocations are forecast to receive full allocations in the wet and average scenarios (NVRM 2021). In NSW, General security entitlements are forecast to receive above average allocations in the wet scenario, but below average in all other scenarios. However the current NSW allocation outlooks only go out as far as November 2021, and high volumes of carryover into 2021-22 are likely to support relatively favourable water supply conditions in the average and wet scenarios (DPIE 2021d, DPIE 2021b).

Total water supply across the southern basin in 2021–22 is forecast to increase in the wet and average scenarios, from 2020–21 (Figure 6 ). In the dry and extreme dry scenarios, water availability is expected to decrease compared to 2020-21, but will remain above 2019–20 levels. The relatively small difference in water availability in the dry scenario (4,335 GL) compared to the extreme dry scenario (4,108 GL) is due to the large volume of water likely to be carried forward into 2021-22.

Water allocation prices in 2021–22

Average annual allocation prices, annual trade flows and the volume of carryover into the following year are simulated for each region under extreme dry, dry, average and wet scenarios for 2021–22 using the ABARES Water Trade Model (Hughes, et al. 2021). Price forecasts for 2021−22 are presented in Table 1.

Table 1: ABARES water allocation price scenarios for 2021–22

Region	2020–21 Average	Extreme Dry	Dry	Average	Wet
	($/ML)	($/ML)	($/ML)	($/ML)	($/ML)
NSW Murrumbidgee	110	347	308	99	61
VIC Goulburn-Broken	146	277	238	105	56
NSW Murray Above	154	347	308	132	53
VIC Murray Below	211	347	308	132	61
SA Murray	226	347	308	132	61
Weighted sMDB average	154	323	284	114	57

Source: BOM water register, ABARES, Waterflow.
Note: 2020–21 is year to date average, up to March 2021

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 7 ). ABARES has produced a dashboard visualisation to accompany this report, which allows for exploration of price forecasts for each region in 2021–22.

In the wet and average scenario, prices are forecast to decrease for all regions from 2020–21 prices. The weighted sMDB average price in the wet scenario is forecast to fall to $57 per ML, from $154 per ML in 2020–21, which if realised, would be the lowest average annual price since 2013–14. A more moderate decrease is forecast in the average scenario, with prices falling to $114 per ML.

The weighted average sMDB price is expected to increase in the dry ($284 per ML) and extreme dry ($323 per ML) scenarios but remain well below the average annual price observed in 2019-20 ($587 per ML).

Inter-regional trade and inter-valley trade limits in 2021-22

In all scenarios, the catchments below the Barmah Choke are expected to be net importers, reflecting the greater demand for water in this region (primarily from the horticultural sector). However, as water supply conditions are likely to remain favourable next year, the reliance on inter-regional trade will remain low (Figure 8 ), reducing the pressures on inter-valley trade limits. As a result, the Murrumbidgee IVT and Barmah Choke IVT are likely to remain open in most scenarios (although it is important to note that the ABARES model only simulates annual inter-regional trade flows and within year trade closures remain a possibility).

With the changes to the Goulburn IVT (discussed in the previous chapter), the export limit is likely to remain binding in all scenarios, limiting the volume of water exported from the Goulburn to the Murray. As a result, prices are forecast to be lower in the northern Victorian catchments.

Production and GVIAP in 2021–22

Production of irrigated crops, particularly rice cotton and pastures, bounced back in 2020-21, in response to favourable weather conditions, additional water availability, and lower prices relative to 2019-20 (SunRice 2021, ABC 2021a, ABARES 2021). The Australian almond industry is also expecting a record harvest in 2020–21, as almond plantings reach maturity (ABC 2021d).

Looking ahead, in the wet and average scenarios for 2021-22, production of irrigated crops in the sMDB is modelled to further increase (Table 2 ), while in the dry and extreme dry scenarios, production is modelled to decrease compared to 2020-21. These results are consistent with the forecasts of allocation prices discussed in the previous section (Table 1).

Opportunistic crops (particularly rice, and to a lesser extent cotton) that are typically more sensitive to water prices, are forecast to increase production substantially in the wet and average scenarios in response to lower prices. Dairy production is forecast to remain relatively stable across all scenarios, with a marginal increase in the average and wet scenarios. Almond production increases in all scenarios and is primarily a function of the age profile of almond trees (which is assumed to be the same across all scenarios).

Table 2: ABARES selected commodities production scenarios for 2021–22

Industry	Units	2020–21 modelled	Extreme Dry	Dry	Average	Wet
Almonds	tonnes	91,209	99,341	99,341	99,341	99,341
Cotton	tonnes	127,291	96,616	102,367	135,904	142,727
Grapevines	tonnes	1,226,357	1,184,305	1,199,678	1,291,772	1,281,058
Rice	tonnes	479,317	283,851	327,994	727,726	1,015,351

Source: ABARES, SunRice

The total Gross value of Irrigated Agricultural Production (GVIAP) in the southern basin is expected to increase in the average and wet scenarios compared to 2020–21 and decrease in the extreme dry and dry scenarios.

Table 3: ABARES GVIAP scenarios for 2021–22

Industry	2020–21 modelled	Extreme Dry	Dry	Average	Wet
Almonds	722	768	768	768	768
Cotton	310	239	253	336	353
Dairy	813	771	779	810	821
Pastures for grazing and for hay	644	576	590	672	660
Horticulture (incl. fruit & vegetables)	1874	1967	1958	1925	1876
Grapevines	655	636	645	694	688
Rice	207	123	142	315	440
Other cereals and broadacre	265	227	233	279	240
Total	5490	5308	5368	5799	5847

Source: ABARES
Note: GVIAP estimates do not include nursery production and are therefore not comparable to ABS estimates.

ABARES outlook scenarios

ABARES designed four outlook scenarios for 2021–22 (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.

Table A1 ABARES outlook scenarios matched against state outlook scenarios

ABARES scenario	NVRM scenario	SA DEW scenario	NSW DPIE scenario
Extreme dry In 99 years out of 100, inflows to storages exceed those experienced in this scenario. Rainfall is in the 1st percentile of historical levels.	Extreme dry Inflow volumes to storages that are greater in 99 years out of 100.	Exceptionally dry 99% likelihood that actual allocations will exceed allocation forecast	Extreme 99 chances in 100 of exceeding the allocation forecast
Dry In 90 years out of 100, inflows to storages exceed those experienced in this scenario. Rainfall is in the 10th percentile of historical levels.	Dry Inflow volumes to storages that are greater in 90 years out of 100.	Very Dry 90% likelihood that actual allocations will exceed allocation forecast	Very Dry 9 chances in 10 of exceeding the allocation forecast
Average In 50 years out of 100, inflows to storages exceed those experienced in this scenario. Rainfall is in the 50th percentile of historical levels.	Average Inflow volumes to storages that are greater in 50 years out of 100.	Average 50% likelihood that actual allocations will exceed allocation forecast	Average 1 chance in 2 of exceeding the allocation forecast
Wet In 10 years out of 100, inflows to storages exceed those experienced in this scenario. Rainfall is in the 90th percentile of historical levels.	Wet Inflow volumes to storages that are greater in 10 years out of 100.	Wet 25% likelihood that actual allocations will exceed allocation forecast	Wet 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 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 2021–22. In each scenario, the aggregate demand for irrigation water is assumed to be the same (i.e. at 2020–21 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.

Rainfall

Table A2 shows the estimated level rainfall for 2020–21 and 2021-22. For 2020-21 historic year to date observed rainfall has been combined with the BOM median forecast for the remainder of the year.  For 2021–22 by catchment for each outlook scenario. This is calculated as a percentile of historical annual rainfall between 2000–01 and 2019–20.

Table A2 Rainfall

Region	2020–21	2021–22 Extreme Dry (mm)	2021–22 Dry (mm)	2021–22 Average (mm)	2021–22 Wet (mm)
NSW Lower Darling	240.6	124.0	125.6	178.7	288.3
NSW Murray Above	303.9	190.5	217.9	297.2	437.2
NSW Murray Below	255.3	160.2	171.4	246.1	379.5
NSW Murrumbidgee	372.0	190.0	215.4	292.3	430.1
SA Murray	213.0	145.3	156.9	203.3	312.4
VIC Goulburn-Broken	359.3	238.6	258.5	349.3	512.7
VIC Loddon-Campaspe	370.6	229.8	261.5	319.3	495.9
VIC Murray Above	492.1	260.5	315.1	455.7	590.0
VIC Murray Below	233.2	142.4	154.3	205.0	349.5

Source: BOM

Note: 2020–21 scenario values are ABARES estimate
2021–22 scenario values are ABARES forecasts

Allocations

Table A3 shows the allocation forecasts by entitlement type for 2021–22. 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 2021–22.
• South Australian Class 3a entitlements are assumed to be comparable to high reliability entitlements in Victoria and NSW.
• For New South Wales catchments, a wet scenario forecast was not provided, and as such, ABARES assumes that under a wet scenario allocations forecasts will increase by 25% relative to the average scenario.
• Allocations for Vic. Murray above and below (the Barmah choke) are assumed to receive the same allocation percentage as each other. The same assumption is made for NSW Murray above and below regions.
• ABARES has assumed that South Australian entitlements will receive full allocations under all scenarios, based on historical trends.

Table A3 Allocation forecasts for 2021–22, as at 15 March 2021

Region	Security	Extreme Dry (%)	Dry (%)	Average (%)	Wet (%)
NSW Murray	General	0	0	23	48
NSW Murray	High	97	97	97	97
NSW Lower Darling	General	0	0	25	50
NSW Lower Darling	High	100	100	100	100
NSW Murrumbidgee	General	10	22	63	88
NSW Murrumbidgee	High	95	95	95	95
VIC Murray	High	19	56	100	100
VIC Goulburn	High	33	59	100	100
VIC Campaspe	High	4	22	100	100
VIC Loddon	High	33	59	100	100
VIC Broken	High	0	41	100	100
SA Murray	High	100	100	100	100

Source: NSW DPIE, NVRM, ABARES

Carryover

Table A4 shows the volume of water carried over into 2021–22 and ABARES forecast for carryover into 2022–23. Carryover is modelled taking into account forecasts for rainfall, entitlements on issue and allocations, along with state-based carryover rules. Included in ABARES forecasts are modelled irrigator expectations around climate in 2022–23 (See Hughes et al. 2021, for more details). Overall the results suggest lower levels of carryover into 2022–23 compared to 2021–22, under all scenarios, as irrigators draw down their reserves.

Table A4 Carryover volumes

Region	2021–22 (ml)	2022–23 Extreme dry (ml)	2022–23 Dry (ml)	2022–23 Average (ml)	2022–23 Wet (ml)
NSW Murrumbidgee	752,886	233,418	392,760	567,599	567,599
NSW Murray	941,453	508,453	714,078	836,049	355,775
VIC Murray	970,045	0	140,489	355,697	1,322,215
VIC Goulburn-Broken	949,273	345,424	452,325	832,361	1,101,682
VIC Loddon-Campaspe	54,966	9,851	72,110	0	0
Total	3,668,622	1,097,147	1,771,762	2,591,705	3,347,270

Note: Scenario values are ABARES forecast.

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