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Annual allocation (usable water) prices
can be volatile and fluctuate considerably
over the course of a single year due to the
nature of the farming cycle and short-term
weather trends. Annual allocation prices
can be impacted by long-term weather
trends (wet-year vs dry-year).

This shift towards higher margin annual
crops, and growing inelastic demand from
new permanent plantings, has led to an
increase in competition for the available
resource. Duxton Water believes this
structural shift in demand will result in a
new ‘average’ allocation price, and renewed
interest in longer-term water supply
solutions.

Water entitlement prices tend to be less volatile than allocation prices, however entitlement prices have continued to steadily increase following Government entitlement buy-backs. Given the expectance of a further decline in entitlements on offer due to Government buy backs, a short term shift toward higher margin annual crops and a long term shift towards increased permanent plantings, it is expected that water entitlement prices will continue to rise.

From a demand side, structural shifts have been observed in the market in terms of both annual and permanent plantings. Broadly there is a trend towards higher margin annual crops, like cotton. While annual growers do tend to scale up and down depending on the available resource, these higher margin annual crops enable growers to be more price competitive, and are now disrupting other industries as they compete for the water resource.
The water market is built to be efficient and as such, demand and supply factors largely determine the price for water, which results in the resource moving to its highest and best use.

More recently, there has been a resurgence in the viticulture and citrus industries and significant growth in new nut plantings. These permanent growers have a set trajectory of demand for the water resource as their plantings mature. For example, almonds require only ~2ML/ha when planted, but 14ML/ha at maturity, 7 years later. This means, in 7-10 years there is expected to be a significant increase in the inelastic demand in the market.

In the past, irrigators received a permit to access water based on their plantings; permanent crops like vines or nut trees needed a higher security of supply than annual growers who could scale their production up or down each year dependent on the available resource. In the 1990s, it was realised that further issue of water permits was not sustainable, so a cap was placed on the further issuance. To allow water-users to continue to develop, grow and change their production, the Government developed a trade capability, by recognising the permit as a perpetual right to the resource, and by separating this asset from the land. So, one can own water without land and land without water.

Today these rights are called water entitlements; these are a perpetual right to a particular volume of water. Each year, the entitlement holder receives an allocation based on their entitlement and its particular characteristics. In some years it may be a full allocation (i.e. they receive 100% of their entitlement) and in other years it may be as low as 0% for some entitlements. Exchange platforms and brokers were introduced to facilitate trade of these two assets; entitlements, and the annual usable volume of water (allocation).