University of South Australia1, Univeristy of South Australia2
Authors: Sarah Wheeler, Peter Rossini and Henning Bjornlund University of South Australia
Introduction
Water: is it the new 'blue gold'? In the past five years, water-related investments are outperforming gold, oil and the wider stock market, and it is believed that due to expected future water scarcity (e.g. UNDP 2006), this trend in investments will continue (Dyson 2014). Current water related investments include indexes such as the S&P Global Water index, which measures the performance of 50 global companies in water related activities (e.g. water utilities, infrastructure, materials and equipment). However, although there has been an upsurge in assessment and measurement of such water indexes of companies, there has been comparatively little research undertaken on investing in pure water itself.
Talking about the buying and selling of water raises enormous debate around the world. Many regard water as special and a public good. For instance, historically water around the world had been treated as a 'social' good and governments have intervened to provide it free of charge, or below cost, to consumers. However, increasing scarcity, over-allocation and climate change has led to a change of influence towards water demand management. Water demand management is more about managing demand for water, rather than increasing the supply of it through infrastructure projects. Demand management includes choices such as pricing, water markets and rationing. However, treating water as a marketable good raises intense passions. Many argue that water is a common heritage of humanity and a public good, and that it must never be bought, hoarded, sold or traded as a commodity on the open market (Barlow and Clarke 2005).
Needless to say, such a stance ignores reality, especially in regions where water is extremely scarce. Australia represents such a country, being one of the driest countries in the world. It also has the largest water market trade in the world, most of which is situation in the Murray-Darling Basin (MDB) (Grafton et al. 2011). However, there is currently a lack of information about the returns in the water market, as compared to other investments, in Australia.
In the MDB there are two main water markets, namely: i) the entitlement market (otherwise known as permanent water), and ii) the allocation market (otherwise known as seasonal or temporary water). In the entitlement market the long-term rights to receive water allocations are traded, and in the water allocation market the allocations are traded; water allocations define the immediate right to access and use water subject to a water use right. This paper investigates the return from a) holding water entitlements and b) selling the seasonal water associated with the entitlement over an investment period.
Methodology and Data
In this paper prices paid in the markets for water entitlements and water allocations over a 22-year period are analysed, including: * Initial yields were calculated on a monthly and annualised basis. The monthly calculation estimates the yield from investing in water, at the monthly entitlement price and then assuming that they sell the water allocation yielded by the entitlements at the mean monthly market price for that month, in perpetuity. The annualised calculation estimates the yield from a water entitlement investment based at the median price for that year and assumes that the annual allocation is sold at each year's median price. In each instance the expected allocation income is the market price adjusted for the allocation level less variable and transaction costs; * Time-series analyses to estimate the annual growth rate of allocation prices and entitlements as well as seasonal indices and price cycles. * Discounted cash flow analysis calculating the return from investing in water entitlements; and selling the seasonal allocations over a 5-year investment period under various scenarios.
Results/Discussion
We first considered a simple ratio-to-moving average approach to describe the data in terms of long-term trend, seasonality and cycles (Figure One below).
Over the period from 1993-2014 there has been a strong upward trend in water entitlement prices (with an average annual compound growth of 11.8%). Prices have little or no seasonal component but very significant cycles that follow rainfall patterns.
A significant proportion of the returns from a 5-year hold in a water entitlement is from capital returns. This is similar to the situation with most equities such as property or shares. Figure 2 shows the break-down of the total return from a 5-year hold of a water entitlement s showing the split between capital growth and annual return and also providing a comparison to a 5-year hold in the share market based on the S&P/ASX 200 accumulation index.
A breakdown of the water investment returns shows that the capital growth has been the major source of income until 2008 when the growth stabilised and then declined. The result is that 5-years hold purchased after 2007 showed largely negative capital gain and hence overall losses with the return from allocations not offsetting the losses. Returns in a 5-year hold in the share market began to dip in 2007 with the GFC and reach their lowest point with investments that ended in mid 2012. The share market and water market are to some extent counter-cyclical which can be useful in a portfolio situation.
Conclusions
This paper analyses market activity and actual prices paid and accepted for water allocations and water entitlements in a water market in the Goulburn-Murray Irrigation District, Australia's largest irrigation area. It found that there has been strong growth in the capital value of water since the 1980s, although the time period post 2012 has seen a reversal. The analysis indicates that water markets are maturing, that volumes traded and the participation rate is increasing to levels which should constitute mature and liquid markets with a high number of buyers and sellers. The emergence of a number of water exchanges and private water brokers provides ongoing information flow about supply and demand and price formation. Barlow M. & Clarke T. (2005) Blue Gold: The Fight to Stop the Corporate Theft of the World's Water, Paperback, The New Press, New York. Dyson R. (2014) ‘Forget gold – invest in water’, The Telegraph, 8th September: http://www.telegraph.co.uk/finance/personalfinance/investing/11081169/Forget-gold-investing-in-water-could-generate-far-greater-returns-over-time.html Grafton RQ, et al. (2011) An integrated assessment of water markets: a cross-country comparison. Rev Environ Econ Policy 5(2):219-239 UNDP (2006), Human Development Report 2006. Beyond scarcity: Power, poverty and the global water crisis. UNDP, New York.