Aither Water Markets Report: 2023-24 Review and 2024-25 Outlook

4.5. Groundwater markets

Groundwater markets continue to see limited activity.

Groundwater markets were quiet again in 2023-24 (Figure 18). Demand for groundwater has been restricted by consecutive years of low surface water prices, with pumping costs outweighing the cost of using surface water on-farm.

Only seven priced entitlement trades were recorded in major groundwater zones (Lower Lachlan, Lower Murrumbidgee, and Lower Murray), one less than last year and the lowest number of priced trades since 2012-13.

The volume traded or transferred (including $0 trades) was the fourth lowest on record at 2,712 ML, down 51% from the volume traded or transferred in 2022-23.

Between 2022-23 and 2023-24, annual VWAPs for:

• Lower Murrumbidgee Deep Groundwater increased by 11%, from $3,928 per ML to $4,062 per ML (although this is an aggregate of three zones).
• Lower Murray Groundwater decreased slightly by 4%, from $2,550 per ML to $2,456 per ML.
• Lower Lachlan Groundwater saw no trades or transfers in 2023-24. There has been no Lower Lachlan Groundwater entitlement trade since April 2022.

Figure 18. Individual water entitlement trades (priced trades only, $0 trades excluded) and volumes (bubble size), major groundwater entitlement markets, 2012-13 to 2023-24.

Source:  Aither, 2024. Based on New South Wales Water Register, 2024.

Note:  NSW Lower Murrumbidgee Deep Groundwater Source Aquifer is an aggregate of the three zones in   this aquifer. This reflects the way in which trades for these entitlements are recorded on the NSW Water Register. See Figure Notes.

4.6. Northern MDB markets

Northern Basin market activity improves.

Northern Basin market activity rose in 2023-24, with volume traded improving by 79% year-on-year to 10 GL. Due to limited connectivity and trades usually associated with land transfers, trade activity for northern Basin entitlements is generally lower than that seen in their southern Basin counterparts. Standalone entitlement trades in major northern MDB markets are shown in Figure 19.

Only 45 trades were processed in the major northern markets this year, making it difficult to gauge true market price through VWAPs alone. Some of the best performing northern Basin entitlements in 2023-24 were:

• NSW Lachlan GS increased 35% from $1,443 per ML to $1,952 per ML. 4.8 GL of trade occurred in the zone. Aither analysis has identified 1.6 GL of trade associated with Commonwealth water purchases.
• NSW Lower Namoi GS increased 120% from $4,414 per ML to $9,703 per ML, from a total volume traded of 1.4 GL. Aither analysis indicates that Commonwealth water purchases have inflated this price, due to 1.1 GL of trade recorded at $9,913 per ML.

Demand for northern Basin entitlements remains strong. Border Rivers GS entitlements (not in Figure 19) have led the charge, with significant buyer interest forcing prices up. There were 23 priced 71M Border Rivers GS entitlement trades in 2023-24. Entitlement values of up to $6,350 (GS-B) and $12,500 per ML (GS-A) were recorded in the zone.

Figure 19 Individual water entitlement trades (priced trades only, $0 trades excluded) and   volumes (bubble size) for active northern Murray-Darling Basin entitlement markets, 2010-11 to 2023-24.

Source:  Aither, 2024. Based on New South Wales Water Register, 2024.

Note:  Data based on 71Q licence-to-licence transfers, which tend to be unrelated to land transfers.

Note:  No priced trades were recorded on the NSW Water Register for: 1) NSW Lower Lachlan GS in 2021-22 and   2022-23; and 2) for NSW Gwydir GS in 2021-22, 2022-23, and 2023-24.

Note:  Six NSW Namoi GS entitlement trades were recorded in 2023-24 at $6,350 (39 ML), $9,913 (945 ML), $9,913 (43.5 ML), $8,500 (33 ML), $8,500 (68 ML) and $9,913 (213 ML) but due to axis constraints, are not   included.

5.0. Policy & Management

5.1. The year in water policy and management

2023-24 was a year of waiting for the anticipated large Commonwealth buyback to commence. July 2024 sees the beginning of the next phase of Basin Plan delivery.

The Commonwealth Government has continued to action their 2022 election commitment to “Future Proof Australia’s Water Resources” and implement the legislative changes made through the Restoring our Rivers Act (The Act), which was passed in December 2023.

The Act amended both the Water Act 2007 and the Basin Plan 2012 to enable the full delivery of the Basin Plan through additional time, funding, and options.

Legislative amendments to the Basin Plan have allowed for the extension of timeframes for delivery on the Plan, including:

• The deadline to complete Sustainable Diversion Limit Adjustment Mechanism (SDLAM) supply projects has been extended to 31 December 2026.
• Additional time for new SDLAM projects to be proposed by June 2025.
• The deadline for delivering the Basin Plan, including recovering the 450 GL additional water for the environment, is 31 December 2027.

Additional changes to the Basin Plan outline the development of a Constraints Relaxation Implementation Roadmap. This will be delivered by the end of 2024, along with legislative powers for the Minister of Water, and updates to accounting formulas due to the updates to the Basin Plan.

Legislative amendments to the Water Act removed the 1,500 GL purchase cap on water recovery, allowing additional water purchases. Similarly, changes to and extension of the Water for the Environment Special Account (WESA) enabled funds to be used for water purchases. From the original $1.77 billion, in FY25, the account will have approximately $1.35 billion, with the May budget drawing down $613.4 million from this amount.

Amendments to the Water Act implemented the legislative powers necessary to conduct the actions recommended in the ACCC Water Markets Inquiry and the DEECCW Roadmap. These include the necessary legislative powers to enable the ACCC, BoM, and Inspector General of Water Compliance (IGWC) to enact new functions and powers to increase market accountability and transparency.

The Framework for Delivering the Basin Plan In Full was released on 4 July 2024 as an update to the Draft Framework released in January. This provides further insights into the Commonwealth’s strategy to implement the Act. It includes outlining the three key programs enabling the Basin Plan to be delivered in full. It outlines the core principles of enhanced environmental outcomes, minimising socio-economic impacts, and achieving value for money. These programs will be rolled out in an integrated approach from 1 July 2024.

Voluntary Water Purchase Program commences July 2024.

The Commonwealth Government announced in June 2024 that it would commence voluntary water purchases from 15 July 2024 until 11 September 2024, with tenders evaluated between 12 September and November. Their announcement included the release of the Restoring Our Rivers Trading Strategy and the final framework to deliver the Basin Plan in full.

As of June 2024, the Commonwealth had recovered and / or contracted 27.5 GL of water towards the 450 GL target, with an additional 422.5 GL remaining.

The first phase of the program will concentrate on the Southern Connected Basin (SCB) to recover an initial 70 GL/y in targeted catchments, including:

• Murrumbidgee
• NSW Murray
• Vic Murray
• Ovens
• SA Murray

The program has outlined several purchasing approaches available to the Government to allow for the full volume to be recovered. This includes:

• Open and competitive tender.
• Alternative strategies: leasing; purchase via auctions; use of water market intermediaries; market-led approaches via limited tender and donations of water.
• Two expressions of interest (EOI) processes for the 2025 purchasing considerations will commence in August / September 2024 to reflect on the success of the 2024 strategy, consider the willingness of entitlement holders to sell, potential future locations for recovery, and ensure considerations are being made for the future. The EOIs will consider the purchase of leased water rights (encumbered), with further information to be published in the EOI.

The first EOI will target the remaining southern MDB catchments, seeking water rights from areas excluded in the 2024 tender process. Purchasing for this will not occur before mid-2025. The tender documents note that this round will not be seeking to acquire any water rights that are currently leased or form part of a current or future leasing agreement.

The second EOI will target large water portfolios of 20 GL and above from single legal entities. Purchasing for this will not occur until the first quarter of 2025.

Sustainable Communities Package.

The Sustainable Communities package was announced as part of the Commonwealth’s framework for delivering the Basin Plan in full whilst mitigating the socio-economic impacts of water recovery.

In June, the Commonwealth committed $300 million to the program to support delivery costs and regional engagement to identify and develop community initiatives. It will also leverage local and regional development plans, initiatives and investments for delivery.

This will be administered by Basin state governments, with the funding arrangements under negotiation as of July 2024, to be executed and made public within the financial year 2024-25. The program will run for four years from 1 July 2024.

The key outcomes of the program include:

• Help regional communities diversify and build resilience.
• Support communities to build capacity for a different future.
• Respond to local challenges, opportunities and priorities.
• Assist early to manage impacts proactively.

Basin state governments will outline specific guidelines for program activities.

Resilient Rivers Program.

As part of the commitment to recover the full 450 GL of additional water for the environment, the Commonwealth extended the date for water delivery through supply and constraint measures to 31 December 2026. It has provided $520 million in funding, including $494 million made available to Basin states to progress applications for the Resilient Rivers Program, and $27 million available to eligible efficiency projects with the Commonwealth Government.

The program aims to increase investment opportunities in water delivery infrastructure, increase water efficiencies, and achieve savings towards the 450 GL target. It will replace the Off-Farm Efficiency Program.

There are four key streams:

Stream A: Irrigation Infrastructure Operators Modernisation (IIOM).

• Projects to deliver more efficient water delivery networks, including extensions of existing Off-Farm Efficiency Programs.

Stream B: Water Use Efficiency (WUE).

• Project to improve water management infrastructure and enhance efficiencies.

Stream C: Targeted Efficiency.

• Programs for water efficiencies outside of IIOM and WUE streams, including urban, industrial and mining.

Stream D: Water Recovery Projects Start-Ups.

• Seed funding for projects to deliver a range of efficiency activities.

Applications for Streams A, B, and C close on 28 March 2025, and Stream D closes on 30 August 2024.

Alternative water recovery opportunities for the program include the use of:

• Land and water partnerships.
• Changes to water management rules, to be considered case-by-case by the Commonwealth.
• Commercial mechanisms, including leasing water for short-term outcomes.

The first project under the Resilient Rivers Program was confirmed on 8 July 2024, with the government providing $63.5 million to the Murrumbidgee Irrigation Urban Channel Pipelines Proposal. The project will return water to the environment across Griffith and Leeton, with an estimated 2.5 GL to be recovered via the project.

The programs will be run concurrently to maximise the time available to deliver the plan before the 31 December 2026 deadline.

Figure 20. Timeline of Murray-Darling Basin water policy events 2023-24.

Source: Aither, 2024.

5.2. Summary of key water policy events

On 14 May 2024, the Commonwealth Government delivered its 2024-25 Budget, outlining the priorities, policies, and fiscal narrative for the year ahead. The budget was the third handed down by the Government since it was elected in 2022.

Contextually, the budget was drafted ahead of an election year in 2025, which reflects the fiscal narrative outlined in its policies.

The budget provided additional funding for programs within the Murray-Darling Basin to help deliver the Basin Plan (Table 7). However, no additional water recovery funding was provided beyond what was previously provisioned which has not been published due to commercial sensitivities. Much of the new funding allocated to Murray-Darling Basin measures was for implementing the Restoring Our Rivers Act.

This included expanding the availability of funds in the Water for the Environment Special Account (WESA) beyond its original scope, which included recovery of the 450 GL through efficiency measures and easing constraints measures. The account holds approximately $1.35 billion from the $1.77 billion originally provisioned. The budget has seen this balance draw down by $613.4 million , likely to be used to implement measures in the Framework to Deliver the Basin Plan. Additionally, the Sustainable Rural Water Use and Infrastructure Program (SRWUIP) fund has available funding for delivery of the Basin Plan, including water recovery.

Implications for water market participants: The 2024-25 Budget provided the means for implementing policies. Many of these policies are scheduled to start in 2024 or have already commenced; most critical for water market participants is additional Basin Plan water recovery.

Table 7.  Breakdown of key funding announcements for water market participants in the 2024-25 Budget.

Barmah Choke updated application protocol.

The Victorian Department of Energy, Environment and Climate Action (DEECA) and WaterNSW have jointly developed a new protocol for managing and processing trade applications for the Barmah Choke opening, to be implemented from 1 July 2024.

The change will improve equity for participants by reducing the impact of differences in each state’s processing approach and systems.

The new protocol sees trade application operations commencing before 10:00am AEST 1 July, with each state maintaining separate application submission processes and queues. An alternative approval processing queue of applications will occur, in which each state will process all applications in the order they are received. If an application is refused, the next queued application from the same state will be assessed until one is approved. This will occur until the IVT limit is reached or one state exhausts their queue.

In a procedure overseen by the MDBA, Victoria was randomly selected to be the first to start processing applications on 1 July 2024. This means NSW will start first in 2025, alternating each year thereafter.

The 2024 opening saw a larger volume transferred via NSW applications (34 GL) than Victoria (22 GL). However, Victoria processed a larger number of applications (31) compared to NSW (29).

Implications for water market participants: Increased transparency in the trade process between Victoria and NSW provides increased equity between water market participants in each state.

In June, the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) released their report on the impacts of further water recovery in the southern MDB.

The report focuses on the effects of further water recovery on irrigated agriculture.  It uses three scenarios compared to a baseline scenario to simulate the outputs for allocation prices, water use and gross value of irrigated agriculture production with the given recovery volume inputs. The three modelled volumes include:

• 125 GL
• 225 GL
• 325 GL

The report’s key findings are focused on the mid-point scenario (225 GL), with the low and high-range models following a linear path. The findings for the 225 GL model scenario suggest 3 key outcomes:

1.Water allocation prices will increase—A reduced supply of available water will increase allocation prices by an estimated $45 per ML; however, this will vary between regions.

2.Water use will decrease – Average annual water use across the southern MDB will decrease by 4% (surface and groundwater).

3.Production value will decrease – Average annual value of irrigated production is estimated to decrease across the southern MDB by $111 million, or 2%, per year.

Implications for water market participants: The ABARES model is useful for understanding how further water recovery may affect the southern MDB and the possible implications for irrigated agriculture.

The Victorian Department of Energy, Environment, and Climate Action (DEECA) and the Victorian Water Register (VWR) released their latest Goulburn to Murray Post Trade Opportunity Opening Report in July 2024, after their last report in December 2023. The report outlines the key statistics of the trade opening and the trade application process summary.

The Goulburn to Murray trade rule came into effect on 1 July 2022 to sustainably manage trade opportunities for the delivery of water into the lower Goulburn River. The long-term rule works within the operating rules to keep flows lower and more variable over summer and autumn.

Trade announcements occur each year on three key dates:

• 1 July – about 85 GL
• 15 October – up to 30 GL
• 15 December – up to 30 GL

The trade rule applies to allocation trade from the Goulburn, Loddon, Campaspe, and Broken systems to the Victorian Murray and interstate. Under average market conditions, this allows for around 150 GL of trade opportunity.

Further trade opportunities may be created between 15 December and 30 June when back trade occurs from the Murray to the Goulburn.

On 1 July 2024 the opening balance trade opportunity was 84,862 ML. The key trade statistics for the 2024 opening include:

• 99 submitted applications for a total of 235,254 ML.
• 23 applications approved for a total of 84,835 ML.
  • Of this, 19 unique seller and 18 unique buyer allocation accounts were used.
• 76 refused applications, 8 due to insufficient allocations in accounts, 68 due to the application volumes exceeding available trade   opportunities.
• 83 applications were from the broker portal, with total volume equating to 95% of applications received by Victoria.
• 16 applications made through the MyWater online trading platform.

Of the total 84,835 ML of water in approved applications, only 79 ML was made through online trading platforms, with the remaining 84,756 ML made through the broker portal.

Implications for water market participants: The trade report ensures transparency and accountability of the application process and provides market participants with available data to understand future opportunities. Data from the trade review suggests that applications made through the broker portal are significantly more successful than those made through the online trading platform.

Aboriginal Water Entitlements Program.

In 2018 the Commonwealth Government committed $40 million to help First Nations communities in the Murray-Darling Basin invest in water for cultural and economic purposes. In 2023 the Government increased the program’s funding to $100 million as part of the Restoring Our Rivers Act 2023.

The program will look to purchase entitlements that align with its objectives, including:

• Acquiring surface water entitlements to benefit MDB First Nations.
• Purchases ensure connectivity underpinned by wealth generation.
• Promoting geographical equitable access.
• Connectivity and usability to allow for cultural and economic outcomes on Country.
• Achieving value for money.

The program will provide greater recognition of First Nations values and uses of water, address historic water access inequity, and support cultural, social, economic, spiritual, and environmental well-being.

In June 2024 Minister Plibersek announced the interim governance body and strategic purchasing framework for the purchase of entitlements starting in 2024.

The program has outlined several purchasing strategies to be utilised, including:

• The use of market intermediaries.
• Expression of Interests – open and limited tender options.
• Market – led proposals.
• Gifting opportunities.
• Mixed procurement methods – to maximise effectiveness and efficiency of acquisitions.

The interim governance body, consisting of an Advisory Group and Directorate, has been appointed for 12 months until the water purchased can be transferred to an enduring water-holding model.

Implications for water market participants: AWEP program will commence water purchases in 2024, meaning it will run concurrently with the Commonwealth’s water recovery purchases to deliver the Basin Plan.

MDBA early insights – Basin Plan Review.

In June 2024, the MDBA released its Basin Plan Review Early Insights Paper, detailing its approach to addressing the Basin’s challenges and the major issues identified.

The paper emphasises the importance of stakeholder engagement, data-backed decisions, and scientific inputs to evaluate the Basin Plan’s performance over the past twelve years. This approach is to improve First Nations rights and interests in the Basin, recalculate SDL and prepare for the impacts of climate change.

The paper nominates five key areas of challenge:

1. Assessing the Basin Plan environmental outcomes – The MDBA will rely on updated river modelling, condition reporting, hydro climatology, and First Nations peoples’ science and knowledge to understand the past twelve years of environmental outcomes under the Basin Plan.
2. Preparing for a range of plausible climate futures – Uncertainty around future climate scenarios will require the review to manage certain at-risk parts of the Basin Plan, which may need to be updated to respond to climate change.
3. Managing the northern Basin—Improving the Basin Plan’s ability to manage the unique environmental, regulatory, and infrastructure challenges of the northern Basin.
4. Building on and simplifying the Basin Plan—The MDBA has acknowledged the need to focus on simplifying and improving aspects of the Basin Plan, such as WRP development and accreditation, to support Basin management outcomes.
5. Moving beyond ‘just add water’ – Acknowledging that environmental water management is important in ensuring environmental outcomes from the Basin Plan.

The Basin Plan Review is scheduled to be completed by 2026.

Implications for water market participants:  The Basin Plan Review will outline the next decade of water market reform and allow for updated practices to respond to the current climate.

Productivity Commission National Water Reform 2024 Inquiry Report.

In July 2024, the Productivity Commission (PC) released its National Water Reform 2024 Inquiry Report. The report sets out the PC’s findings and recommendations for renewing the 2004 National Water Initiative (NWI) and assessing jurisdictions’ progress towards achieving its objectives and outcomes.

The PC found that NWI has served Australia well as a foundation for water management, but there is an urgent need for a renewed and updated NWI in light of pressing water security challenges. It recommended that a renewed NWI should:

• Improve and expand on the existing agreement while retaining its foundations.
• Include modernised objectives, agreement structure, enhanced elements, and improved governance arrangements.
• Include a greater focus on planning for water security in a variable and changing climate.
• Provide an enhanced commitment to the participation of First Nations peoples in water management.

In its assessment of jurisdictions’ progress towards achieving the objectives and outcomes of the NWI, the PC found that many of the actions under the NWI are complete, and most jurisdictions continue to progress in implementing their remaining and ongoing commitments.

Implications for water market participants: The Productivity Commission’s renewal advice will directly inform a future National Water Agreement, expected later in 2024 or 2025.

6.0. Outlook

6.1. Climate and rainfall outlook

Neutral to above-average rainfall conditions forecast for the start of 2024-25.

Rainfall outlooks for 2024-25 indicate that neutral to wetter conditions are expected throughout the MDB through to the end of 2024. International meteorological agencies are conflicting as to whether the Pacific Ocean will move into La Nińa conditions. The Bureau of Meteorology (BoM) is the least aggressive, predicting neutral conditions, whereas US agencies suggest a relatively strong La Nińa.

With 2024-25 now underway, rainfall has been below-average so far in the southern Basin (Figure 21). The current three-month rainfall outlook indicates at least a 50% chance of rainfall exceeding the median across most of the MDB (Figure 22).

BoM models also suggest a 50% chance of a La Niña event forming later in the year. However, this is based on early signs that likely have limited reliability. La Niña typically increases winter-spring rainfall in eastern Australia.

BoM models also indicate that an increased chance of a negative Indian Ocean Dipole (IOD) in spring. The outlook beyond this period remains uncertain. A negative IOD usually drives above average rainfall in southern Australia.

Figure 21. One-month rainfall deciles, Murray-Darling Basin, July 2024 (issued 31 July 2024).

Source: Aither, 2024. Based on Bureau of Meteorology, 2024.

Figure 22. Three-month rainfall outlook (issued 25 July 2024).

Source: Aither, 2024. Based on Bureau of Meteorology, 2024.

6.2. Allocation market outlook

High opening allocations for 2024-25 but lower than last year.

Despite varied rainfall conditions, near full storages meant most entitlements in the southern MDB had high opening allocations, but lower than their 2023-24 opening allocations:

• Opening allocations were 69% for Vic Goulburn HRWS and 63% for Vic Murray HRWS. While lower than last year, these were still the second and third highest opening allocations since 2015-16 respectively.
• Similarly, opening allocations were 35% for NSW Murray GS (third highest) and 28% for NSW Murrumbidgee GS (fourth highest) since 2015-16.
• SA Murray HS opened at 100% for the fourth consecutive year.

This means that opening water availability decreased from 2023-24, with an estimated 2,729 GL of water available on 1 July 2024 (2023-24 estimated 3,450 GL).

Carryover volumes on 1 July were similar to 2023-24. Aither’s estimates approximately 2,125 GL of water was carried over into the new water year (down 3%). While Victorian storage capacity is near full, the risk of spill has decreased in recent months.

Total water available on major southern MDB entitlements is approximately 4,900 GL, lower than 2022-23 and 2023-24 but higher than the previous two years.

Figure 23. Opening allocations made to major southern Murray-Darling Basin entitlements, 2021-22, 2022-23, 2023-24 and 2024-25.

Source: Aither, 2024. New South Wales Department of Planning, Industry and Environment, 2024; Northern Victoria Resource Manager, 2024; South Australian Department for Environment and Water, 2024.

Note: In-text estimates of the volume of water allocated and carryover volumes include zones Vic 1A Greater Goulburn, Vic 6 Murray, Vic 7 Murray, NSW Murray and NSW Murrumbidgee. See Notes and Figure Notes sections for further details.

Allocations to entitlements are likely to be high, meaning lower allocation prices.

In early 2024-25, allocation prices in the lower Murray are around $135, $125 in the Murrumbidgee, $85 in the Goulburn, and $90 in the upper Murray.

Another year of high early season allocations, combined with high carryover volumes similar to previous years means irrigators can continue to have confidence in water availability. If at least average flows eventuate, consumptive water availability could reach around 6,655 GL by the start of the peak irrigation season (Table 7).

Aither’s view is that allocation prices in the next few months will be mainly driven by the climatic outlook and rainfall conditions. Noting BOM’s current climatic outlook at the time of writing (July 2024) is neutral, wetter conditions could see southern MDB allocation prices between $50 – $90 per ML. Whilst drier conditions would result in higher prices during the water year, the outlook for 2025-26 will be more influential on allocation prices from April to June.

6.3. Entitlement market outlook

The outlook is very favourable for entitlement prices for those that participate in the Commonwealth water recovery program. The buyback started with a 70 GL program targeting catchments in the Murrumbidgee and Murray systems, starting mid-July 2024. Separately, the Commonwealth also launched the Aboriginal Water Entitlements Program in the Murray-Darling Basin, with $100 million allocated to acquire water entitlements for MDB First Nations. These developments are likely to underpin entitlement prices, adding upward price pressure.

However, Aither observed significant reductions in entitlement prices in 2023-24 driven by poor economic conditions in the form of higher interest rates and low commodity prices. There is the potential for a two-tiered entitlement market with the Commonwealth buying entitlements at above-market prices, while other market participants continue trading entitlements at reduced prices. The big question is what happens when the Commonwealth stops purchasing.

High reliability and high security entitlement markets

In the last 12 months, irrigators, especially wine grape producers in the lower Murray, have been selling entitlements to support wider business operations. Despite easing trade restrictions with China in recent months, challenging economic conditions are expected to persist in the winegrape sector. Lower almond prices will likely continue in the coming months, putting pressure on producers and slowing down new investment. Recently, entitlement buyers have been very selective with their purchasing, tending to be opportunistic and seeking entitlements at a discount to previously high prices.

Simultaneously, the current 70 GL Commonwealth buyback targeting southern MDB entitlements also puts upward pressure on entitlements. Trade and transfer volumes for major southern MDB entitlements in 2023-24 are also at their lowest level since 2009-10. This points to a reduced supply of such entitlements on the market, with potential sellers waiting for the Commonwealth to enter.

Overall, these differing signals point to softening entitlement prices in the short-term from current weak economic conditions. However, as the Commonwealth begins progressing its buyback of 422.5 GL to meet the 450 GL target (as of June 2024), this can put upward pressure on prices. The high reliability of these entitlements and their ability to deliver water to the environment, combined with the opportunity to buy at a potential discount from under-pressure irrigators, can be an attractive proposition to the Commonwealth in meeting their environmental targets via water purchases.

Low reliability and general security entitlement markets.

Compared to high-security entitlements, prices for general security entitlements are unlikely to soften despite economic headwinds. The lower price of these entitlements while still being allocated water can make these entitlements of interest to the Commonwealth as part of a buyback compared to high security and high reliability entitlements.

General security entitlements are less likely to be held by distressed winegrapes producers who usually hold high security entitlements due to their reliability. This means there is less downward pressure on these entitlements from economic difficulties.

Prices for low reliability entitlements are unlikely to soften, given they are usually valued for the ability to carryover water between water years. At the time of writing (mid-August 2023), forecast neutral conditions and lower opening allocations on 1 July than in previous years continue driving demand for carryover space. This shows how carryover remains an important risk management tool for market participants during a dry period. However, the Commonwealth is likely less interested in these entitlements for an environmental buyback as they are usually not allocated water compared to general security entitlements.

Three years of strong allocations to general security entitlements have resulted in continued demand for these entitlements. With cotton prices still strong, good opening allocations and a healthy outlook for 2024-25, demand for general security entitlements is likely to remain high for the foreseeable future.

6.4. Policy and regulatory influences

Basin Plan water recovery through buyback will be a major market influence over the next 2-3 years.

The Commonwealth Government will likely be very active in water markets over the next three years to meet the revised deadline for full delivery of the Basin Plan by December 2027.

Commonwealth efforts have commenced with the opening of programs to deliver the Basin Plan, starting with applications for the Resilient Rivers Program on 30 January and the first tender for water purchases on 15 July.

Applications for the Resilient Rivers Program are being run via four streams and must be submitted by the end of March 2025. The program will allow for the delivery of additional water through water-saving and efficiency measures.

The first round of tenders for water recovery through Voluntary Water Purchases will be open between 15 July and 11 September 2024. The required 12-month validity on offers may reduce the volumes offered in the spot market through 2024/25. This requirement may also reduce the number of vendors willing to offer or the volume offered.

The two additional EOIs will open in August/September, and the expected start time for their subsequent tenders is in 2025, one in the first quarter and the second in mid-2025.

The Restoring Our Rivers Act extended delivery of SDLAM projects to 31 December 2026, allowing new SDLAM projects to be notified to 30 June 2025. The last annual SDLAM assurance report was released on 25 July 2023. This report advised the Government that delivery of the Basin Plan by the original 30 June 2024 deadline was not possible and anticipated a shortfall on the higher end of the forecasted 190 GL to 315 GL.

In 2026, the MDBA will commence reconciling SDLAM projects using the method prescribed under the Basin Plan or an alternative method agreed upon by the Basin Officials Committee and the MDBA. If the reconciliation results in a shortfall, the Commonwealth Government may initiate another round of water purchases to compensate for the shortfall.

Water market reforms.

In October 2022, the Commonwealth Government released the Water Market Reform: Final Roadmap. The Restoring Our Rivers Act 2023 made the necessary legislative changes to the Water Act 2007 to deliver the conduct, integrity, and transparency recommendations for water reform. This includes the legislative powers to enable enforcement, the appointment of regulatory bodies including permitting functions and powers, outlining penalties for non-compliance with the legislation, statutory frameworks, information reporting, and user requirements.

This will enable progress to be made on recommendations for changes to:

• Water Markets Intermediaries Code
• Water Markets Decisions and Insider Trading
• Market Manipulation
• Data Systems and Measures
• Water Markets Information
• Water Markets Data Standards
• Market-sensitive announcements

Implementation has started, with improvements to data accuracy on trade forms implemented from 1 July 2024. These changes see new obligations for the provision of information and the removal of exemptions to grandfathered tags on water entitlements.

Future changes to watch out for from 1 July 2026 include:

• Reforms to water market decisions and announcements and new record-keeping requirements.
• New and strengthened insider trading prohibitions relating to water announcement information.
• New general insider trading prohibitions.
• New market manipulation prohibitions.
• Data and systems reforms, including new data reporting requirements for market information.

Consultation for these reforms will be rolled out from 1 July 2024 through DCCEEW.

References

 Aither (2023) Water supply and demand in the southern Murray-Darling Basin (2022 update): An assessment of future water availability and permanent horticulture irrigation water demand. Available at <https://www.waterregister.vic.gov.au/about/news/411-water-supply-and-horticulture-demand-in-the-southern-basin-2022-update>.

Grain Central (2024). NSW cotton regroups after fitful start to season. Available at <https://www.graincentral.com/cropping/nsw-cotton-crop-update>.

Government of South Australia, Primary Industries and Regions SA (2024). SA crop and pasture report 2024-25: Seeding intentions. Available at <https://pir.sa.gov.au/__data/assets/pdf_file/0011/466724/sa-crop-pasture-report-2024-25-seeding-intentions.pdf>.

MDBA (Murray-Darling Basin Authority) (2024). End of day Barmah Choke transactions data. Available at <https://www.mdba.gov.au/managing-water/water-markets-trade/interstate-water-trade/barmah-choke-trade-balance>.

Murray Irrigation Limited (2024). Daily sales data. Available at (current water year only) < https://www.murrayirrigation.com.au/live-daily-sales> [Accessed 28/6/2024].

Northern Victoria Resource Manager (NVRM) (2024). Outlook for the 2024/25 season. Available at <https://nvrm.net.au/outlooks/current-outlook > [Accessed 17/07/2024].

Victorian Water Register (2024). Trade opportunities each year between zones. Available at < https://www.waterregister.vic.gov.au/water-trading/market-insights/trade-opportunities>.

NSW Government (2024), Usage dashboard. Available at <https://water.dpie.nsw.gov.au/our-work/allocations-availability/water-accounting/usage-dashboard> [Accessed 15 July 2024].

About Australia's Water Markets

Background

In Australia, there are two distinct but related water markets: entitlement markets and allocation markets.

Entitlement markets enable the trading of water entitlements. Water entitlements are ongoing rights to receive an annual share of available water resources in a consumptive pool (e.g., a river system or catchment). They are analogous to a land property right, are generally secure and mortgageable in the same way, and have substantial value. Each catchment typically has a small number of entitlement ‘classes’, and generally all entitlements within a given class are homogenous.

Allocation markets enable the buying and selling of water allocations. Water allocations are the volumes of water allocated to water entitlement holders during the water year (1 July to 30 June). They are a physical good analogous to a commodity and are extracted from water courses and applied as inputs to production or the environment. Based on the water availability and demand at a given time, the value of water allocations per unit varies (usually expressed in $ per megalitre (ML)).

There is no single national Australian water market. Rather, there are many individual markets determined by the hydrological characteristics of physical water systems. Where hydrological connectivity exists, such as in the southern Murray-Darling Basin, trade between markets or zones is possible.

ENTITLEMENT MARKETS

Purpose, use and operation

An entitlement specifies an annual volumetric share of available water resources in a specified catchment or system. Entitlement holders receive their share of the available water resources as water allocations. Allocations vary from year-to-year based on rainfall, inflows, water held in storage and other factors. The entitlement market enables trade in the ongoing right to receive these water allocations. Entitlements can be held by virtually any party in any location.

The entitlement market is largely used by irrigated agricultural producers, but is increasingly being used by investors, water utilities (including urban suppliers) and environmental water holders. These water market participants use the market to modify their long-term arrangements for facilitating production, or meeting environmental requirements, or urban demand.

State government agencies govern the operation of entitlement markets, including rules and regulations regarding how and where trade can occur. Depending on the jurisdiction, other agencies (such as land titles or property registration agencies) will be involved. Third parties (such as exchanges, brokers, and conveyancers) often play a role in facilitating entitlement trade.

Key drivers of market outcomes

The value of water entitlements is largely determined by their reliability characteristics. Reliability characteristics differ across entitlement classes. Higher reliability entitlements provide larger volumes of water allocations over the long term, and more consistently provide water allocations each year than lower reliability entitlements.

Trade in entitlements is related to longer-term production decisions and the characteristics of different irrigated agricultural enterprises, including their tolerance for risk. Producers who may be expanding or contracting production drive market activity, as do market participants who hold large portfolios of entitlements such as investors or large agricultural enterprises. Purchases of water on behalf of the environment have also driven market activity in the past.

Allocation markets

Purpose, use and operation

The allocation market provides the ability to trade physical water between parties for use, further trade, or carryover. Allocation trade can generally only occur between parties who are in trading zones that are hydrologically connected such that water can be delivered (or substituted by other water from a shared storage).

The water allocation market is mainly used by irrigated agricultural producers (including rice, dairy, horticulture, cotton, and others), and environmental water managers. Irrigators use the market to sell water excess to requirements or buy additional water for use during dry periods or when temporarily expanding production. Environmental water holders may similarly buy or sell when they have short-term surpluses or deficits.

Similar to entitlement markets, state government regulators determine annual allocations based on entitlement characteristics (that determine priority and how much water is allocated to individuals), and market rules to manage issues such as connectivity between systems and transmission losses. State governments, either directly or via their water utilities, play a key role in facilitating allocation trade, including ensuring compliance with rules and regulations, and by approving and processing trades. Parties seeking to trade allocations may utilise intermediaries such as water exchanges and brokers.

Key drivers of market outcomes

The volume of water allocated to entitlement holders each year is a key driver of allocation market outcomes (including prices and volumes traded) because it strongly influences the total volume of water available for use or trade. When allocations are low, water is scarce, and prices are high. The opposite is true when allocations are high. Allocation levels reflect broader water availability, including rainfall and inflows in relevant catchments, and volumes held in storages. Other key drivers in allocation markets include conditions in markets for irrigated agricultural products, and conditions in substitute input markets.

Notes

Data sources

Aither relies on data obtained from multiple third-party sources. Consequently, any information presented in this report shall be subject to the accuracy and limitations of data obtained from third-party sources on the date of extraction.

State water register trade data and volume weighted average prices

Water trade data were sourced from:

• New South Wales Register (2024). Available at <https://waterregister.waternsw.com.au/water-register-frame> [Accessed 3/07/2024].
• South Australian Water Register (2024). Available at <https://access.mywater.sa.gov.au/aca/customization/dew/datamart.html> [Accessed 3/07/2024].
• Victorian Water Register (2024). Available at <https://waterregister.vic.gov.au/> [Accessed 3/07/2024].

Volume weighted average prices generated from state water register data may not reflect market prices for several reasons. In the case of entitlement prices, there is often a delay of some significance between market transactions and water register recording, also some transactions may be recorded with a wet price. A wet price includes the price paid for the entitlement and any allocation that may have been included in the transaction. If wet prices are reported, this will inflate volume weighted average prices in dry years when allocation prices are high.

Data cleaning method

There were limitations associated with water trade information reported in the statebased registers, specifically the timeliness and accuracy of reported prices. To filter out outlier prices and generate robust statistics about market activity, Aither uses a proprietary and tested data cleaning method. Aither uses its data cleaning programs to analyse
Aither’s southern Murray-Darling Basin water trade database that includes over 500,000 individual allocation and entitlement trade records.

State governments are continually improving the data recorded on state water registers. Recent improvements include provision of date information that is closer to when trades were agreed and the purpose of allocation trades. When possible, Aither uses the best available data to support the accuracy of its analyses.

Aither also notes a new South Australian Water Register was released in May 2024, with the previous register being offline in the prior months in the lead up the release date. This meant no trades were recorded in March 2024, with many of these trades likely being recorded in the following months. Aither’s data and commentary reflects this.

Irrigation corporation trade data

A significant volume of water trade occurs within irrigation corporations, for which detailed data – especially in relation to prices of trades – is generally not publicly available in a timely manner. Due to these data availability and transparency issues, Aither has excluded trades within irrigation corporations from all analysis within this report unless specifically noted.