Target 10 Communicator
April 2011 Edition
Should I Buy Low Reliable Water Share?
Over the last number of years many farmers have made changes to their water product mix, particularly in terms of buying and selling permanent water products and temporary water. These decisions to buy and sell have been largely influenced by a number of factors including debt, low water allocations and changing water policies.
Last irrigation season carryover water rules changed on the Murray, Goulburn and Campaspe systems and as part of these changes Spillable Water Accounts were introduced (See the “Better securing your business in the future” article in the December 2010 edition of the Communicator.). This policy change impacts on decisions to buy and sell permanent water and some irrigators are currently examining the merits of increasing their Low Reliability Water Share (LRWS) to improve access to their carryover water.
Will the purchase of more LRWS improve access to my carryover water in spring?
Depending on the situation and the season, more LRWS could improve your access to carryover water in early spring. If you have a considerable water entitlement relative to your water use in spring, then you are unlikely to benefit from improved access to carryover through the purchase of more LRWS. However if permanent water has been sold from your property then there is more likely to be benefits.
To understand the potential benefits it is necessary to be familiar with some of the rules and processes related to carryover water. When carryover plus allocation exceeds 100 per cent of entitlement, water is transferred to the Spillable Water Account (see diagram below), where it cannot be accessed for irrigation purposes or trade, until Goulburn-Murray Water (G-MW) makes a declaration there is a low chance of a spill occurring. G-MW endeavours to make this declaration as early as possible after July 1, depending on storage levels and seasonal conditions. However, in some years the declaration may not be made until the peak inflow period has finished in November, or perhaps even later on the Murray system. G-MW has indicated that due to higher water storage levels it is unlikely the 2011-12 declaration will be made as early as it was this season (July, 2010).
The Spillable Water Account
- When carryover plus allocation exceeds 100% of entitlement volume, water is transferred from an individual’s ABA to the Spillable Water Account.
- Water is transferred back from the Spillable Water Account to an individual’s ABA after G-MW makes the declaration there is a low chance of spill.
- Water in an individual’s Spillable Water Account is lost pro-rata if the lake spills.
It is the water in the available balance of an individual’s Allocation Bank Account (ABA) that can be used for irrigation or trade early in the season before the declaration is made. Businesses that have only a small amount of permanent water in their ABA relative to the area of pasture or crop that needs to be irrigated in spring, are more at risk of needing more water for irrigation than what is available in their ABA before the declaration is made, whilst also not being able to access their carryover in the Spillable Water Account. It is possible to purchase temporary water from the market after 30 June to top up an ABA and use that water for irrigating early in the season. However, the need for this course of action potentially exposes the business to high temporary water prices, particularly if a dry season eventuates.
For a business in this position, the purchase of permanent water could provide more business certainty by either increasing the amount of allocation in the purchaser’s ABA early in the season, or by reducing the amount of carryover water that is locked up in the Spillable Water Account. Purchasing extra LRWS can be an effective means of reducing the amount of carryover that is locked up.
At the time of writing this article (March 2011), LRWS was trading at $150/ML. This means if you only have a small amount of permanent water relative to your water use in spring, for an investment of $150 you may save yourself from having to purchase a megalitre of water from the temporary market early in future irrigation seasons at currently unknown prices.
Will the purchase of more LRWS reduce carryover losses in the event of a spill?
Unless there is a large volume of carryover water in the lake, then a spill will only occur after 100 per cent HRWS and 100 per cent LRWS have been allocated. In this case purchasing more LRWS (or HRWS) will not reduce losses of carryover water, but there will be a gain through the allocation of water against the purchased water share. Carryover losses are not reduced if a spill occurs at 100 per cent LRWS because all carryover water will have been transferred to the Spillable Water Account and will be lost pro-rata depending on the size of the spill.
Having said this, with the current exceptionally wet season and very low water use by irrigators, there is likely to be large volumes of carryover remaining in the major storages at the end of the season. In the last outlook on 15 February, G-MW was expecting 1,800 GL to 2,000 GL of unused allocation at the end of the 2010-11 season across the Goulburn and Murray systems. In the outlook G-MW expected Victoria’s share of Dartmouth dam to be above 60 per cent of capacity; Lake Eildon not to fall below 70 per cent; and the volume in Lake Eppalock to remain close to capacity at the end of this season. Based on storage levels and expected operating conditions for the rest of the 2010-11 season, G-MW indicated, in their 15 February outlook, a low probability of a spill on the Murray system (Dartmouth dam) in 2011-12, but there is a possibility Lake Eildon will spill and a high likelihood Lake Eppalock will spill. Changing weather conditions will affect the spill probabilities. G-MW will make its first formal comment on the likelihood of a spill in the opening allocation announcement on July 1, 2011.
What are the pros and cons of increasing LRWS?
Pros:
- If you have a small amount of permanent water relative to your water use volume in spring, then having more LRWS is likely to increase your access to carryover water early in the season.
- An allocation is given on LRWS in wetter years.
- A potential reduction in the fees associated with water that is transferred back from the Spillable Water Account into the available balance of your ABA ($3/ML to $9/ML).
- A potential increase in the capital value of LRWS.
Cons:
- The upfront capital cost of LRWS.
- An annual water storage fee for LRWS ($3/ML to $9/ML).
- A potential loss in the capital value of LRWS (hopefully not!).
Summary
For most people, the main game with carryover water is to use it to provide more business certainty by reducing the risks associated with any future dry years and associated higher temporary water and feed prices. Like an insurance policy, there is a cost to have it and one of the costs is the loss of carryover in years that the lake spills. In these (possibly infrequent) years, water will be plentiful and it is highly likely temporary water will be able to be purchased at a relatively modest cost to replace any lost carryover if need be.
