The Gulf’s immature water market is going to need a collaborative approach that addresses stakeholders’ needs if the recent announcement of the release of 92,500ML in the Flinders and Gilbert River systems is to materialise into a winner.
So says Herron Todd White valuer Roger Hill, who has evaluated other water markets and previous Gulf River allocation offers to work out what price per megalitre is going to “hit the nail on the head” for northern agricultural development at last.
“What development covenants or policies are going to complement the price so that collectively, government and industry can look back in ten years time and say, ‘we did get it right that time’,” Roger asked.
Noting that the price settled upon would have to be win-win for government, landholders, local communities and investment partners, he said the first round of allocations for the two catchments averaged $36/ML, with the result that industry was unhappy with the division of allocations, government was unhappy that none of the allocations were used, and local communities missed out on any economic benefit.
“The second round of allocations saw government implement more structure to the distribution via reaches.
“To force industry to use the allocations, the minimum bid of $46 per megalitre model was introduced. The result – limited successful tenders, lots of talk, no benefit to communities and no projects developed.”
There was also an opportunity in 2016 for graziers to purchase Great Artesian Basin allocations attached to their bore supply, but at a fixed price of $1430/ML, there was small demand.
These three examples demonstrate the importance of the price relationship to covenant, allocation and policy design, Roger said.
So, what broader market price parameters are relevant?
A quick survey of the Herron Todd White independent rural valuers around Queensland yielded the following:
- Current trading price range for high security water is $3000 to $4000 per megalitre. High priority (100pc reliability) water across the Border Rivers and Gwydir River systems in northern New South Wales where delivery infrastructure is in place and the water is used for irrigating intensive agricultural and orchard type crops.
- Majority of water trading in this area is medium priority or supplementary (water harvesting).
- Medium priority water has water delivery infrastructure in place (landowner owned). This includes pumps, supply channels and dams. Medium priority water is used for broad scale irrigation (eg cotton). This water is trading from $1750 to $2200 per megalitre and peaking around St George to $2500 per megalitre.
- The lowest priority water is from water harvesting. In New South Wales this is called supplementary, in Queensland this is called unsupplemented water. These allocations use the same farmer owned delivery infrastructure as medium priority allocations.
- In Queensland, the unsupplemented water (Condamine and Balonne Rivers) allocations form the highest volume of market trades. These allocations trade for about $1300 to $1700 per megalitre in Queensland and a slight discount in New South Wales.
Key points to consider here:
- Mature water trading market;
- Established high gross margin industries;
- Established knowledge capital on how to grow high gross margin crops;
- Development finance and capital not required as the scheme is established;
- Established financial relationships with experience with water and irrigation returns on investment risk parameters so that debt funding and equity instruments can be written;
- Infrastructure is developed and is working – there is no development risk;
- The free market scarcity (demand) has driven the water price to these ranges;
- The towns and communities have developed a workforce, service centre and infrastructure to support the surrounding industries.
- Medium priority sales are ranging from $1700 to $1900 per megalitre;
- High priority sales are few and far between and peaking at $2500 per megalitre. The above points regarding industry maturity, high gross margin crops, developed infrastructure and communities are relevant again.
North and Far North Queensland
- Atherton Tablelands water is trading at an all-time high of up to $3000 per megalitre due to the scarcity of water. This scarcity arises not just due to the drought, but also due to the cropping area expansions being such that crop demand is much higher than the allocated water.
- Burdekin. Limited trades. There is no scarcity. This is an immature trading market. The irrigated production areas are the same size as they were when the allocations were detached from the land titles so there is no increase in demand above the allocations that farmers already have. Value apportionments in sale contracts of farm, water, plant, crop are reported to range from $50 to $70 and sometimes $90 per megalitre. The previous points regarding industry maturity, high gross margin crops, developed infrastructure and communities are relevant again.
Further development considerations
“The initiative to develop a project must also provide adequate return to the investor, farmer or grazier developer and financier,” Roger said.
“In time, the broader goal is for high gross margin crops, however the first incubator irrigation sector is the fodder crops for hay and silage.
“You might recall that in 2012/13, hay was in short supply and was being trucked from southern districts.
“Hay farmers in north and north west Queensland that year experienced peak demand and high gross margins.
“As soon as it rained late last year and when cattle numbers reduced, the contrary situation existed.
“There was limited demand and of course, no gross margins (possibly even a loss).
“Gross margin volatility is an economic issue – not all is smooth sailing and this is a risk that the industry has been worried about.
“Bearing in mind the three local market instances of pricing mentioned earlier and the broader established market information, the question arises as to what price can be afforded for the water given the value of the land underneath the farm site, the investment in earthworks, water works and seed to create a crop.
“Investment decisions require prudent consideration of a profit/value return for the effort and risk taken to develop a project.
“Why would an investor (in this case, a grazier/farmer, banker/investor) inject capital in such a project if there was no capital value return?
“There is an opportunity cost and a rate of return required to make such a development decision to evolve the business model to incorporate the farming activity and potentially create employment within the wider community.”
Back of the envelope
Roger said a recent exercise with one of HTW’s trading type grazing clients identified that for the highest and best use of grazing land to be better when put to a farm project, the hurdle rate of return had to be greater than 15 per cent off tight Mitchell Grass Downs.
“From an urban development perspective, 15pc is likened to a basic subdivision project, not the development of a farming block harvesting water from the Flinders River or Gilbert River,” he said.
“You might choose to use a higher risk to represent that of the seasonality of water harvesting.”
He said there was sales evidence in the north and north west Queensland rural property market where the added value of fodder crop farming areas range from:
- $2500 per hectare (this was a mortgagee sale of a western block that was not in production, the soil required re-working; had an empty earth storage tank and was exposed to the seasonality of gulf river harvesting); to
- $8500 per hectare for an area under centre pivot on a larger cattle station (in use; established to Rhodes Grass farm; pumping from a year round reliable river source).
“If one of these projects were to be developed on a downs grazing block then perhaps the added value rate might be $5000 per hectare once established in this example.”
Further considerations in working out a price included:
- Planting cost - $300 per hectare;
- Development cost – removing the Mitchell grass, laser levelling, constructing bays, and laying pipelines from the bore - roughly $3000 per hectare.
- Grazing land sales suggests the underlying grazing land rate of $300 per hectare ($120 per acre).
A “back of the envelope” exercise applying these variables to provide industry with a calculation model to determine how much capital was available for the acquisition of water resulted in a value similar to that requested in the first and second rounds of allocation tenders.
It suggested to Roger that it was the covenants and policy that needed to be collaborative to make good use of the latest opportunity.
He put forward a number of suggestions:
Should co-investment by government in infrastructure be explored perhaps?
What about financial structure around the purchasing of the allocations?
Debt may not be available from existing channels to acquire the allocations and then to construct the farming project. Perhaps the financing of the allocations can be on a progressive payment basis. This has happened before in the form of freeholding leases.
Perhaps the ballot system, similar to that of the Brigalow Scheme would be worth revisiting.
Through collaboration with the investors/financiers, the structure of the allocation payment scheme may help to finance the project development.
Is there any reason why access to development funding cannot be sourced or co-secured by government?
It is noted that government sought to implement an initiative to force the use of allocations in the second round. Perhaps a requirement for the allocation funding agreement and structure would result in a time frame for development and use of the allocation.