Water investment companies score bumper year as farmers hit by drought

https://www.theguardian.com/australia-news/2019/may/29/water-investment-companies-score-bumper-year-as-farmers-hit-by-drought

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As drought grips the country, the investment companies that have moved into the water market are looking at a bumper year, even as farmers prepare for the worst.

Companies such as Duxton Water, which holds 75GL of water in the Murray-Darling basin, and the ill-fated Blue Sky Investments, are now major players in the water-trading market. Unlike some of the big irrigators which also have large holdings, they do not have significant farming enterprises on which to use their water and will be banking on thirsty crops to drive up prices.

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The presence of these large players in the market – particularly in the Southern Basin of the Murray-Darling, which accounts for 93% of water trading – has led to growing concerns about the water market and how it’s operating.

The unfolding drought is already pushing up prices. High-security water prices in the Murray have topped $7,000ML while low-security water is regularly trading at over $550ML, up from $100ML three years ago.

But irrigators are asking whether lack of transparency and speculation by the big players is adding to the price hikes.

The water minister, David Littleproud, is expected to announce that the Australian Competition and Consumer Commission will take a thorough look at the market later this week.

“I think there are speculators in the market,” the Victorian Farmers Federation water council chairman, Richard Anderson, said. “There’s players who don’t own any land; they hold water entitlements and under the water trading rules there’s nothing we can do about that.”

Among the concerns are that large players use their market power to prop up prices in thin markets ahead of periods of high demand and that trades occur without sufficient transparency because water brokers execute trades between their clients without making details public.

One of the big concerns is that is that the state-run water entitlements registers are not transparent and so it is difficult to see who is trading water and who owns it.

“I should be able to pick up the daily paper and see how much permanent and temporary water is being traded each day and at what price,” Anderson said. “But you just don’t know what’s happening behind the scenes.”

He has called for rules similar to the ASX, where holders would need to disclose when they reached a threshold of 10% of a particular type of entitlement.

Colliers International described the returns being made by water investment companies in 2018 as “eye-watering ” when it released its 2019 agribusiness forecast in April.

Duxton Water produced a 40% return for its shareholders, while the Blue Sky water fund produced an annual return of 34.4%, it said.

Blue Sky Alternative Investments went into administration last week after its lender Oaktree moved against it, but its water holdings are one of its stronger assets.

Duxton Water has defended its role in the water market.

“Duxton is in the business of working and partnering with farmers to support their agricultural production. The water supply products that we provide enable them to better risk manage the volatile climatic conditions that are inherent in the Australian environment,” spokesman Alister Walsh said.

“Duxton Water has a long term investment horizon and does not benefit from an artificially inflated or manipulated market, as this would undermine the long term viability and sustainability of agricultural production in Australia,” the company said.

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It said the 40% return to investors was primarily due to increases in value of the underlying entitlements, driven by the long-term supply and demand factors.

Irrigators, as entitlement holders, had also benefited.

Littleproud said this week that 14% of trades were now done by corporate entities that do not own land and it was prudent for the ACCC to review “the purity of the market.”

The ACCC already has a role in the water market in overseeing the state-owned water infrastructure companies that deliver water to farmers and the prices they charge. It also has a broader role of monitoring competition in the water market.

The practice of brokers holding water on their own accounts mean it was almost impossible to trace who purchased the water and for what price – and could lead to some unscrupulous intermediary speculating.