VFF water workshops Victorian Farmers Federation Chris Olszak | - - PowerPoint PPT Presentation

VFF water workshops

Victorian Farmers Federation

Chris Olszak | July 2019

Introduction

Victorian Farmers Federation

T

• day’s Purpose

Chris Olszak

The sessions will provide information and knowledge regarding:

• the status of water markets and outlook for 2019/20 and beyond
• understanding the drivers of water prices
• various water purchasing and portfolio management options
• insights to assist with short term and long-term business planning

But, we will not tell you how to run your business

• We are not providing certified financial advice
• We encourage you to get information from as many sources as

possible

• Our aim is to help you plan and make good decisions

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Our team works closely with investors, agricultural corporations and governments Offices in Adelaide, Melbourne, Sydney, Canberra and Brisbane Aither provides its water market clients with:

• Monthly market updates
• Transaction and investment due diligence
• Water portfolio strategy
• Water valuation services
• Water price modelling
• Regulatory and policy advice

We are pleased to be working with VFF to deliver water market information sessions during extremely challenging times for northern Victorian irrigators

Who is Aither?

Independent advisors on water markets, policy and infrastructure

Disclaimer

Aither makes no warranties or guarantees, expressed or implied, in relation to any information provided in this presentation and

• workshop. This presentation does not purport to represent

investment, commercial, financial or legal advice, and should not be relied upon as such. T

• the full extent permitted by law, Aither excludes all liability for

any loss or damage howsoever arising suffered by the recipient or any third party, whether as a result of the recipient or third party's reliance on the accuracy of this information or otherwise arising in connection with this information.

Current status

Water availability and markets

• Where are water markets

today?

• What is driving the market?
• What does this mean for

allocation prices in the year ahead?

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Current status

Storages levels have declined substantially but look to have bottomed out for this year

Source: Aither, 2019.

Southern Murray–Darling Basin major headwater storages, to 30 June 2019

36.1% 0% 25% 50% 75% 100% Jun 13 Jun 14 Jun 15 Jun 16 Jun 17 Jun 18 Jun 19

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Inflows have been very low but there is still time for decent winter and spring rains

Current status of inflows

Inflows have been very low but there is still time for decent winter and spring rains

10 20 30 40 50 60 Jul 2018 Aug 2018 Sep 2018 Oct 2018 Nov 2018 Dec 2018 Jan 2019 Feb 2019 Mar 2019 Apr 2019 May 2019 Jun 2019 Jul 2019 Inflows (GL/day) Long-term average 2018-19 inflows 2019-20 inflows

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Current status of the BOM outlook

The outlook isn’t great but is uncertain

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Allocation prices have responded to reduced inflows and high demand

Current status of allocation prices

Allocation prices have responded to reduced inflows and high demand

$- $100 $200 $300 $400 $500 $600 $700 May 2017 Aug 2017 Nov 2017 Feb 2018 May 2018 Aug 2018 Nov 2018 Feb 2019 May 2019 Combined Murray Murrumbidgee Goulburn

Source: Aither, 2019. Based on state water registers.

Major southern Murray–Darling Basin allocation market prices, July 2017 to June 2019

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Entitlement prices continue to rise

Current status

Entitlement prices continue to rise

Source: Aither, 2019. Based on state water registers. .

Major southern Murray–Darling Basin entitlement market prices

$0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000 5 10 15 20 25 30 35 40 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Volume weighted average price ($/ML) Volume transferred (GL) Volume transferred SA Murray HS Vic 1A Greater Goulburn HRWS Vic 7 Murray (Barmah to SA) HRWS Vic 6 Murray (Dart to Barmah) HRWS NSW Murrumbidgee HS NSW Murray HS

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Victorian allocation outlook and NSW and SA allocation summary

Current status

Victorian allocation outlook and NSW and SA allocation summary

Victorian 2019-20 mid-February allocation forecasts, announced 15 July 2019 NSW 2019-20 allocations, announced 15 July 2019 Entitlement Wet Average Dry Extreme Dry Victorian Murray HRWS 100% 100% 55% 29% Goulburn HRWS 100% 100% 43% 20% Campaspe HRWS 100% 100% 44% 31% Loddon HRWS 100% 100% 43% 20% Broken HRWS 100% 100% 0% 0% Bullarook HRWS 100% 100% 100% 100% Entitlement Current Allocation NSW Murray GS 0% NSW Murray HS 97% Murrumbidgee GS 0% Murrumbidgee HS 95% Lachlan GS 0% Lachlan HS 100% 15 July 2019 (minimum assured) 1 September 2019 1 November 2019 1 January 2020 1 April 2020 Exceptionally dry

(99% likelihood allocation will be at least)

38% 43% 48% 55% 60% Extreme dry

(95% likelihood allocation will be at least)

38% 47% 66% 75% 79% Very dry

(90% likelihood allocation will be at least)

38% 50% 71% 93% 97% Dry

(75% likelihood allocation will be at least)

38% 60% 84% 100% 100% Average

(50% likelihood allocation will be at least)

38% 69% 100% 100% 100% Wet

(25% likelihood allocation will be at least)

38% 86% 100% 100% 100% South Australia 2019-20 allocation forecasts, announced 15 July 2019

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Estimate of consumptive water in storage, 2019-20 (based on 1 July 2019)

Current status of consumptive water in storage

Estimate of consumptive water in storage, 2019-20 (based on 15 July 2019) Entitlement

Current allocation percentages (as of 15 July) Consumptive allocation (as of 15 July 2019) (GL) Estimated consumptive carryover (GL)

Vic Murray HRWS 6% 64 190 Goulburn HRWS 8% 62 173 NSW Murray HS 97% 174

• NSW Murray GS

0% 256 (estimated) Murrumbidgee HS 95% 338

• Murrumbidgee GS

0% 114 SA Murray 38% 171 102 Total

809 835

Questions?

Drivers of water markets

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Drivers of water markets

Water markets in the southern MDB are changing rapidly with profound implications for irrigators and policy makers

Reduced supply Increased demand

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$- $100 $200 $300 $400 $500 $600 1000 2000 3000 4000 5000 6000 7000 8000 2007–08 2009–10 2011–12 2013-14 2015-16 2017-18

sMDB annual allocation price ($/ML) Volume of water allocated (GL)

Volume allocated for consumptive use Volume allocated to Cwlth water purchases Allocation price ($/ML)

Supply side – how has it played out?

Example of the impacts of water entitlement purchases and impacts on dairy and rice growers

Drought years increased debt and then commodity prices collapsed Warning signs evident in 15/16 but rain granted a short-term reprieve Significant adjustment (exit) now occurring Many irrigators sold entitlement but kept irrigating due to cheap allocation

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Large shifts in irrigated agricultural demand have occurred

Demand side

Large shifts in irrigated agricultural demand have occurred

Tree crops Large increases in the planted area of almonds (and citrus) in the lower Murray and the Murrumbidgee Cotton Large scale introduction of cotton into the sMDB with ~70k ha and 800k bales in Murrumbidgee and Murray for 2017-18 season Grapes Strong export conditions have driven recent investments in new table and dried grape developments

Recent Aither report

https://waterregister.vic.gov.au/images/Water-Supply-and-Demand-Report_Aither_FINAL.pdf

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Water demand from permanent horticulture in the Lower Murray has increased

Demand

Water demand from permanent horticulture in the Lower Murray has increased

Source: Aither 2018 based on ABS 2018 and other industry sources.

Comparison of water demand from permanent horticulture, connected Murray, 2015-16 ABS estimate and Aither 2018-19 baseline estimates

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Water allocated in extremely dry years may exceed horticultural demand (excluding carryover)

Balancing supply and demand

Water allocated in extremely dry years may exceed horticultural demand (excluding carryover)

Source: Aither 2018

Water availability scenarios and projected permanent horticulture water demand (at full maturity), connected Murray region

Outlook for 2019/20 and beyond

Allocation price is strongly related to total water availability

1000 2000 3000 4000 5000 6000 7000 8000 2008–09 2009–10 2010–11 2011–12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20

Water allocated (GL)

Total water alocated for consumptive use Water allocated to Commonwealth environmental water Extreme Dry Dry Average Wet 200 400 600 800 1000 1200 Jul 2008 Jul 2009 Jul 2010 Jul 2011 Jul 2012 Jul 2013 Jul 2014 Jul 2015 Jul 2016 Jul 2017 Jul 2018 Jul 2019 Wet Average Dry Extreme dry Allocation price

Questions?

Your water market

• ptions

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• What options do I have to

secure any shortfall in FY20?

• What costs and risks are

involved?

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Main options

• Allocation market

Other options

• Buy Vic entitlements
• Buy interstate entitlements
• Forwards
• Multi-year forwards
• Entitlement leases
• Parking/carryover
• (Call options)

There are more water market options available

Consider these for this year and beyond

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• Cost risk
• Counterparty risk
• Diversification
• Trade restrictions
• Product availability
• Up-front capital costs
• Time frames
• Predictability
• Administration costs
• Liquidity / lock in

Consider the costs, benefits and risks involved

There’s no universal best option – it’s all about what’s right for your business at this point in time.

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Additional local entitlement Other High Security / Reliability products

• NSW, SA 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 GS mainly yields water in average/wet seasons

Buying more entitlement

Entitlements are expensive but provide long term rights to water

Southern Murray–Darling Basin

Trade restrictions

VIC – NSW restriction

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Typical cost

• 5-6% of entitlement cost (was $320 - $380/ML for Vic 7 High and SA Murray at the end of last year)
• 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

• T

erm / extension options, revaluation clauses, access to carryover rights, payment terms

• Mainly sourced from major water investors
• Availability

Leasing entitlement

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Typical cost

• Premium on current allocation price (reflecting cost to carryover water)

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

• T

erm – 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

Could look for within season forwards

Forwards for allocation

More of an option to consider at the end of this year for 2020-21

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• 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 this year (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
• Think about for future years

Purchasing carryover space

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Spectrum of water portfolio options to balance risk and return

Questions?

Short- and long-term farm business planning

• What is my breakeven cost of water

for FY20?

• How much profit / loss will I incur in

FY20 if additional water purchases are required?

• What are my key decision points?
• At what point do I sell or buy

allocation? (price and timing)

• Do I need to make a longer term

change or an exit decision?

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• Know your numbers and work out what you are going to do under different scenarios (ahead of time)
• Consider the alternatives:
• Run your worst-case scenario
• Run your expected scenario
• Run your best-case scenario
• Identify critical times for crucial decisions
• Be realistic not hopeful
• Adopt a risk management mindset
• Set a direction — be aware and flexible
• Don’t judge yourself with the benefit of hindsight

Water decisions should start with business-wide planning

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Water needs

How much water do I need?

Simply:

Hectares planted x water per hectare = water need

ha x ML/ha = ML Annually, water per hectare:

• Dependent on crop type and variety
• Dependent on irrigation method
• Dependent on soil type
• Dependent on local climate
• Farm management style

For many of you the decision will be about how many hectares to irrigate, but crop selection may also be important

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• Own 500 ML VIC 7 HRWS
• Dry = 40%
• Wet = 100%

So will get

• Dry = 200 ML
• Wet = 500 ML
• If dry and want to use 500ML, need to buy 300ML. If dry and price stays at $600/ML = $180,

0,00 000

• This OK? If not, what else can you do?

A worked example

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• Is your production system flexible enough to avoid an operating loss?
• Key points in the year – e.g. planting decisions
• When are you “all in”?
• If not, how much access to equity and debt do you have? Will you be able to manage with an
• perating loss in FY20? Conversely will you be able to manage if you don’t produce?
• If you are below your break even point, speak to your accountant, financial advisor, bank
• r seek other expert advice early.

How much profit / loss will I incur in FY20 if additional water purchases are required?

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Thinking about the timing of water supply to your entitlements to stay ahead of the curve

Timing of allocation announcements is also important

Source: Aither, 2019.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1-Jul 1-Oct 1-Jan 1-Apr 1-Jul

Wet Average Dry Extreme dry Indicative water use

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It’s very hard to predict the weather

Is there an optimal time to buy or sell allocation?

200 400 600 800 1000 1200 Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun 2006-07 2007-08 2008-09 2009-10 2018-19

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Where is the new normal?

Where might long-term prices sit?

100 200 300 400 500 600 700 800 900 1000 Jul 2008 Jul 2010 Jul 2012 Jul 2014 Jul 2016 Jul 2018 Wet Average Dry Extreme dry Allocation price

?

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• Your short-term plan for next year should fit into your long-term plan. Your long-term plan is

not rolling out your short-term plan many times.

• The price of allocation and entitlement has moved up
• If we don’t get good rain this year, then next year will be worse
• What is your long-term break even cost of water? What is your long-term response to higher

priced water? Do you need to change the way you source water?

• Do you need to change your farming system?
• Do you have a pragmatic long-term plan?

Planning for the longer-term is essential for planning the shorter-term

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Be proactive

It’s your business. Get advice. T ake control. Act. Don’t look backwards.

“If you are not across the water market, then you might as well be playing golf”

Sunraysia wine grape grower – 2010

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You will have

• Hopefully benefited from the information and discussion
• Slides from the workshop will be available
• Additional resources and links are available

Could you please

• Fill out the feedback form to help us tailor future sessions

Wrap up

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• Aither Water Markets Report
• Twitter: @aithernews
• H2OX / Ruralco weekly newsletters (and other broker information)
• Victorian Water Register
• Goulburn Murray Water
• Lower Murray Water
• Northern Victorian Resource Manager
• MDBA
• Victorian Farmers Federation
• Rural Financial Counselling Service
• Other irrigators

Other resources available

Your reflections

Consultation on water market transparency Naomi Douglas / Mark Mitchell, DELWP

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How can market transparency be improved? What information should remain confidential? market.transparency@delwp.vic.gov.au

DELWP Consultation questions – Mark Mitchell / Naomi Douglas

Water market transparency project

Phone Email Website

Thank you

www.aither.com.au

Phone Email Website

Thank you

0425 707 170 chris.olszak@aither.com.au Chris Olszak Director