Despite the recent floods, Australia is still the driest continent on earth. If a long term investment is what you’re looking for, it might be worth taking a closer look at water. Business21C Weekly’s Gabby Greyem spoke to Richard Lourey, Tom Wilks and Andrew Gregson about the risks and opportunities in the world’s most advanced water market.
While retail reticulation (or city water use) is government owned in Australia, the 2007 Water Act triggered a watershed of investment in water assets in the Murray-Darling Basin.
Introduced by the Howard Government, the Water Act came with a financial commitment of $3.1 billion to buy back permanent water licenses from agricultural holders, to secure environmental flows and flush out the 1.5 million tonnes of salt the Basin exports every year.
The Act allows for the commercial trade of water licenses in the Murray-Darling Basin, effectively transforming agricultural water allocations into tradeable shares, where any investor can own and speculate on the value of water. But how do you set a fair price for water rights? And should we treat a non-renewable environmental resource as a market commodity?
The Murray-Darling Basin crosses three states and covers approximately 14 per cent of Australia. Its agricultural output is worth $9 billion a year to the Australian economy, employing 40 per cent of Australia’s farmers, directly affecting 3 million people and feeding 20 million.
According to Richard Lourey, Managing Director of Causeway Water Limited, the conservative value of water entitlements in the Murray-Darling Basin is $A20 billion, making it one of the most significant water trading markets in the world. But it’s a market that, until now, Australian interests have been slower to invest in.
“Themes of food security and soft commodity price inflation are influencing offshore investors more than they currently influence Australian investors.” While landholders, agricultural companies and the Government are still the largest owners of water in the Basin, international interests are investing sizeable sums, far outweighing investment from Australian funds.
In September 2010, the Sydney Morning Herald reported that Olam International, Guinness Peat Group and Summit Water Holdings together hold just under $200 million in permanent water rights in the Murray-Darling Basin. While this might seem a lot, it’s a very small fraction of the total, and for Lourey, the more participants in the market, the better it will operate.
Richard Lourey said the Murray-Darling Basin’s water trading scheme has seen 15 per cent compound annual growth in the last ten years. The price of water jumped dramatically after the introduction of the government buy-back scheme, from around $900 a megalitre for permanent water, to over $1,200 a megalitre.
This has been great for the vendors of water licenses, like Twynam Cotton, which sold 240 gigalitres of permanent water licenses to the Federal Government in 2009, for $303 million.
But recent rain and flood events, combined with the drying up of Government buy-back reserves, have seen returns on water reduced to a tenth of their value just two years ago.
Tom Wilks has been a water broker for over ten years. He said changing rules and a lack of clarity around how allocations are worked out leaves a lot of uncertainty in the market.
“They can change rules with the stroke of a pen … things are too uncertain for anyone to invest with any degree of confidence.”
And according to Richard Lourey, to create true price discovery for water, more investors are needed. “International investment in Australian water will increase the liquidity of the market.”
The investors he works with have styled their entire business around the water theme and see the Australian water market as a long-term opportunity.
“Australia is a dry continent, with an expanding population, [and] it has a very important role to play in terms of food security in the Asian region.
“The assumption we’re making is that we can generate a solid cash flow yield out of the investment on an annual basis; that there will be increasing demand for water, against supply, [and that] the static price of water will go up.” He said.
Chair of the NSW Irrigators’ Council, Andrew Gregson said one of the key aims of the Council was to establish water as a recognised property right.
“While this has mostly been achieved, the Council has some concerns about the potential for the water market to be cornered by single large players.”
Gregson said the Council supports a free water market with a range of market participants, but “we are asking for the Foreign Investment Review Board to be given the same powers over water as a property right, as they do over land.”
Lourey said FIRB guidelines requiring the Australian Government to consider acquisitions in excess of $231 million are appropriate and he sees no need for changes to the protocols as they relate to the water market.
“Whether that capital is coming from offshore or from onshore is not the issue.” What is more important is that the market is allowed to function properly. When water is undervalued, there can be negative consequences – overuse being one of them. But when prices are set by supply and demand, and there are enough participants in the market, both the environment and investors benefit.
Lourey said that while food security and soft commodity price inflation don’t get a lot of attention in Australia, they “get an enormous amount of attention offshore.
“I think it’s important for Australians, both institutional investors and down to the man in the street to understand that water is one way of playing those themes.”