The complicated case of water rights
In 2004, when NSW separated water rights from the ownership of land, many in the state’s irrigation hinterlands feared the rise of a new class of water baron.
That hasn’t happened so far, says Mark Procajlo, partner with Sydney law firm Kemp Strang. The reason, he says, is that a right to a certain amount of water is not a guarantee that you will actually receive that amount of water.
Procajlo specialises in giving advice to property owners and water rights holders under NSW legislation. He says the post-2004 regime in NSW requires irrigators to think more strategically about the water side of their business than previously and contains pitfalls for the unaware.
For those new to water rights, says Procajlo, the fact that their right is to a share of total annual water allocation, rather than to the megalitres spelled out by their water entitlement, is the most misunderstood fact in a complex area of law. But there are many other wrinkles in the irrigation landscape, all calling for serious consideration by stakeholders.
A quick briefing on terminology: the correct name for a water right is an entitlement. In NSW, for example, an entitlement for 1,000 units represents a maximum of 1,000 megalitres. (Remember that an actual annual allocation is often for less than 100 per cent of an entitlement.)
An entitlement can be subdivided to facilitate trading of only part of the entitlement. Commonly used synonyms for water entitlement include ‘water right’ or ‘water licence’. Water allocation refers to the percentage of an entitlement that a holder is eligible to receive in a given year.
Reliability quotient is the key
“Water rights function substantially the same way as property rights in terms of security of ownership, but there’s nothing that gives you reliability of water,” Procajlo observes.
This distinction makes a big difference to the value of an entitlement and therefore to the strategy employed by the purchaser of an irrigation property.
There are two main kinds of water licence. The most common is called a general-security licence. The other, called a high-security licence, will always get a higher percentage of water than a general security licence.
“The difference could be quite large,” Procajlo notes. “In a bad year, someone with a general security licence might only get 10 per cent of their allocation, whereas a high security licence might get 90 per cent.”
Prices generally vary from valley to valley depending upon the reliability of the water source. Currently, in some valleys general security water rights are trading at about $2,000 per unit and high security at about $3,500 per unit, says Procajlo.
The decision for farmers: do you fork out for a high-security licence or settle for a general-security licence?
The reason for the difference goes back to the origins of water rights: permanent plantings such as grapevines were traditionally regarded as having a higher need for reliability than other crops. Therefore operators of vineyards acquired high-security licences.
“They may have been obtained well before 2004,” says Procajlo, “but now those licences maintain their priority status even when they’re traded and applied to other forms of agriculture.”
NSW carefully monitors the volume of water flowing through the system each year. Procajlo comments that there is both a finite supply of water for irrigation and a finite supply of licences for crop irrigation. Unsurprisingly, pressure to increase agricultural output is putting pressure on the price of water, and in NSW, the overall price trend is up.
Use it or lose it
In NSW there is another form of water rights called contractual rights. Contractual rights are rights granted by an irrigation infrastructure operator (IIO) such as Murray Irrigation Ltd.
Such rights originally made irrigation available for those whose properties did not have a river frontage, but contractual rights can now be transformed into statutory rights, and vice versa.
Contractual rights come in general and high security versions, and will have the same allocation as statutory rights in the same area. However, they generally sell at a slight discount to the price of a statutory licence because they require approval from the IIO before they can be traded.
For all irrigators, no matter what kind of licence they hold, the NSW legislation has brought opportunities and challenges.
Yet another consideration: If one year’s water allocation is surplus to requirements, a farmer can store the water for future use, or even sell it. But that would require investment in storage facilities. Is it worth it?
In addition, grants are available from the federal government to fund approved water-saving projects, in return for the permanent transfer of a portion of water rights. Should the farmer trade the long-term security of a full water right for the financial benefits of applying for a grant to save water?
It seems that the creation of water rights as a tradable commodity has added considerable financial know-how and strategy to the long list of skills already required by Australian farmers.
Find out more about water entitlements:
Words: Dana Worth
Reproduced from the Summer 2017 edition of Westpac’s Agribusiness publication "Produce"
The articles represent the views of the authors and not necessarily that of the Bank. You should seek independent professional advice before acting on any matters set out in the articles.