A significant majority of Australia’s grape and wine producers rely on the health of the River Murray to ensure sustainable water supply for irrigation. The Murray Darling Basin accounts for about 75% of irrigated grape production in Australia. With southern allocation prices having peaked at their highest level since the millennium drought and average prices in 18-19 at their highest level on record, the impact of water pricing on winegrape production and availability of supply is likely to be substantial. Modelling by leading water consultancy firm Aither predicts 19-20 average annual southern Murray Darling Basin prices in a dry or extreme dry scenario to be between $425 and $590/ML. Many irrigators would be aware that a number of high security water markets are currently trading well above this level. The Aither Water Markets Report released last week states that storage levels have fallen from 63% in July 2018 to 42% in July 2019. According to the Bureau of Meteorology, rainfall for the remainder of 2019 is likely to be below average across much of Australia.
Water policy in Australia provides irrigators with a high degree of flexibility as to how they manage their irrigation requirements as well as their appetite for risk. The various water products are also designed to meet the differing needs of perennial and annual crops in terms of water security. ABS figures from 2015, suggest that around 5% of grape growers elected to sell part or all of their permanent water access entitlements each year between 07-08 and 14-15. Purchases of seasonal allocations in the same period amounted to around 8% of total cash costs but during the millennium drought cost of water purchases were significantly higher at 21% of total costs. In recent times there has been a significant structural change in the transfer of water demand across the basin from annual crops to permanent crops such as almonds and citrus that, like grapes, require water every year. Demand for water is likely to continue to grow if agribusiness investments continue to capitalise on high prices for these crops and as new plantings mature over the next few years.
The impact of increasing demand for water coincides with a growing level of concern about low levels of transparency in the water market. Inconsistency between states, a high degree of complexity, as well as perception that investment by non-irrigators is affecting the market has fueled these concerns. This is compounded by a risk that delivery infrastructure is incapable of guaranteeing supply of water in the Southern basin during periods of peak demand, in particular beyond points of flow constraint such as the Barmah Choke. The ACCC recently announced an inquiry into markets for tradeable water rights which will cover aspect such as transparency of market information, regulation, competitiveness and efficiency. We encourage winegrape producers who have a view to share these with Australian Grape & Wine or to engage with the ACCC. It is also an important time to consider the cost (or opportunity cost) of water for irrigating low value, water intensive grape varieties and how this might impact on long term business planning.
Australian Grape & Wine has been advocating for an inquiry into the water trading system. The Government has responded swiftly and the Minister for Water Resources released a press release on 9 September announcing he has written to the ACCC asking reports of alleged ‘unconscionable conduct’ in the water market be investigated.