Murray Darling Basin: Aqua Ceres’ Australian Water Fund’s bid for water market

An offshore fund is urging investors to pour millions into the Murray Darling Basin’s water markets, pushing entitlement prices up by 53 per cent.

Investors are piling into water markets to exploit future demand from growing demand from maturing almond plantings like these near the Hattah Lakes. Picture: Dannika Bonser

An offshore investment fund is urging high-end US and Australian investors to gamble $193 million on climate change and horticultural demand driving up Murray Darling Basin water entitlement prices by 53 per cent within six years to be worth $295m.

Aqua Ceres’ Australian Water Fund investment teaser states buying the Basin’s water entitlements is “a natural hedge against global warming as water demand continues to increase”.

But the fund’s document states it intends to buy most of the entitlement it needs within two years, which would cause massive market disruption, given $193m would buy about 25,000 megalitres of high-reliability entitlement, currently worth about $7600 a megalitre.

The fund’s directors state the investment not only offers capital growth, but a steady income stream from leasing its water entitlements to irrigators at a rate 5.7 per cent of their worth, equivalent to about $440 a megalitre initially, rising to about $650 to $700 after six years.

Yet irrigators can currently buy seasonal allocations of water made against entitlement for $80-$100 a megalitre.

The Delaware Incorporated fund’s investment team includes Australian Wealthcheck director Sam Mitchell, Wagga Wagga water broker Tom Wilks and US executive officer Rod Parsley, who have set up what they refer to as a “Cayman mini master structure”, which allows both “non US and US tax exempt investors” to direct their funds through a Cayman Islands’ feeder fund.

The Aqua Ceres team appears to have first issued its offer in February this year and then republished an updated version in June. But how successful the offer has been remains a mystery, given Mr Mitchell has refused to respond to repeated calls and texts over the past fortnight.

Aqua Ceres is relying on horticulture’s thirst for water soaring over the next few years to drive up prices, as plantings of nut crops such as almonds mature.

The firm’s offer document states: “at planting stage, (almond) trees require only 3ML/ha, and increase(s) to 14ML/ha at maturity (5+ years) …, this equates to a total industry demand of 550,000ML of water for 2018 and projected 800,000ML by 2023 (+45 per cent).

“Almond producers will continue to pay more for water to protect the capital value of their crop.”

Paul Thompson, the managing director of Australia’s largest almond producer Select Harvests, said he struggled to understand how Aqua Ceres could pour such a vast sum into buying such a large volume of high-security water entitlements in less than two years.

He said the total volume of Victorian entitlement trade last year was just 29,000ML, with another 11,000ML of South Australian trade and less than 3000ML in NSW’s Murray and Murrumbidgee systems.

As for Aqua Ceres’ forecast of 8 per cent annual capital growth and leasing rates of 5.7 per cent Mr Thompson said “these numbers are at the maximum end” of the scale.

“That means commodity price would have to go up 8 per cent per annum,” he said. “That’s not happened in the history of the industry.

“Theoretically it (Aqua Ceres’ offer) sounds very logical, but there’s a point where you have to walk away. There’s almond orchards that we’re redeveloping (where) it would be questionable if we would do it at these sort of prices.”

Select Harvest’s Paul Thompson. Picture :Angie Basdekis

Australian Almond Board chief executive Tim Jackson said “the Australian Water Fund offer is a direct result of the current conditions under which the Murray Darling Basin water market operates”.

“If it gets off the ground, it has the potential to further inflate the price of permanent high security water,” Mr Jackson said.

“There seems to be increasing off-shore investor interest exploiting the looming supply-demand imbalance of Australian irrigation water. The Australian Water Fund proposal is not the first and it won’t be the last.”

Mr Jackson said almond growers and others with permanent plantings in the southern Murray Darling Basin would “face significant financial hardships when prolonged dry years push leased water prices to levels far beyond the cost of production.

“However, as we are seeing in the Californian almond industry during their current drought, the assumption that growers will continue to pay higher and higher lease prices for water has a use by date.”

H2OX water market platform chief executive Lex Batters said leasing water was becoming more challenging, “particularly if it’s not guaranteeing allocation”.

He said irrigators would question paying 5.7 per cent or more to lease water, when they could borrow the money at a much lower rate and just buy the entitlement.

But Aqua Ceres is not the only major player seeking to buy large volumes of entitlement, with Kilter Rural working with a US firm to invest $50m in the market, while the Riparian Group has also established a similar water fund.

However Kilter water general manager Matthew Bryant said the unnamed US organisation they were working with was yet to deploy any funds and was wanting to secure water ahead of investing in irrigation properties.