Storage levels play a major role in the price of temporary water, according to the director of a water consultancy and advisory firm.
Aither director Chris Olszak spoke to about 25 farmers on topics such as water purchasing options, portfolio management options, the state of the water market and drivers of water prices at a workshop run by the VFF at Numurkah last week.
Mr Olszak said the reason for temporary water prices climbing was due to supply and demand, with storage levels playing a major part.
‘‘In 2016, we had a really big wet winter and spring and it filled up the storages,’’ he said.
‘‘Over the last three years, they’ve gradually declined and we’re back to just about where we were in 2015.
‘‘The water allocation price, the temp price, is directly driven by where these storage levels are at.
‘‘In terms of long-term drivers of the water market ... it really comes down to reduced supply and increased demand and pretty rapid and significant changes on both sides that have led to the prices increasing above what we thought would happen.
‘‘And it’s taken everyone by surprise.’’
Mr Olszak explained the different options farmers have at their disposal if they find themselves short of water, many of which were not available five years ago.
‘‘There are a bunch of options, that back in the millennium drought weren’t available, to help you secure your supplies and manage the risk of allocation prices going to where they did in the millennium drought,’’ he said.
‘‘If you worked out how much water you need for this year ... the obvious main option (for more water) is to go into the temp market to buy that water to top yourself up.
‘‘There are other options — you can buy entitlements from Victoria or you can buy interstate water entitlements, you can think about for the year after this and you can buy forwards for one or more years, you can lease entitlements rather than buy them and there are options around carryover.’’
While having options is one thing, Mr Olszak warned farmers of some of the issues with them.
‘‘For many of these options, there’s a whole bunch of different trade-offs,’’ he said.
‘‘There’s always a risk if you go into the temporary market and buy water at a particular price and then the price comes down.
‘‘There’s cost risk involved with getting things right and wrong and there’s also counterparty risk.
‘‘So, if you are thinking of leases or forwards, who are you doing the trade with and can you rely on them?’’
VFF Water Council chair Richard Anderson said the workshop shone a light on the issues caused by the increase in demand for water and lack of supply.
‘‘I think what it (the workshop) really showed, besides market predictions, was it showed the competing demands for a limited resource in that space now,’’ Mr Anderson said.
‘‘It highlighted the potential issues in the market and let the farmers make their own minds up.’’