18 November 2019
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Come hell or high water

Tim Boreham
21 September 2018

The dry conditions in many of the key farming regions highlight the importance of water security for our listed agricultural plays. When it comes to water rights, some are in a better position than others

With the parched conditions lingering in some key farming regions, it’s becoming a case of the water “haves and have-nots” for the key listed agriculture plays. 

The cost of temporary water rights on the spot market has more than tripled in the last 12 months and, not surprisingly, they’re keeping a keen weather eye on weather spring rains to eventuate to alleviate what could become a crisis for many growers.

“The market is very concerned at the moment,” says water expert Richard Lourey of Sauber and Co, who notes record low rainfall in central and north-west NSW.

“Everyone is worried about how dry it is and everyone is concerned about whether they will be able to get their allocation.”

Some contend that financial (non-grower) buyers have been pushing up the price of rights, creating resentment in low-return sectors such as dairying. Others argue that as these rights holders lease the rights temporarily to growers, the water is still available.

What’s for certain is that in the ‘real’ world, demand for water is unprecedented because of the rollout of water intensive nut and fruit orchards and cotton growers buoyed by the high prices for the commodities.

So how are the listed agri plays likely to fare?

For the time being, Duxton Water (D20) is on the right side of the equation because it has a book of almost 44,000 megalitres of rights, mainly permanent and predominantly in the ‘high security’ category, which means they are more likely to receive their full annual allocation.

Currently about half these rights are leased to growers but the fund expects this portion to rise to 70-80% “due to the expected increase demand for water supply solutions.”

In its June half commentary, Duxton says that with the January to June period one of the driest on record, many irrigators drew down on their carry over reserves from last year, forcing them to wade back into the market (in some cases, this action was needed to avoid fines for overuse).

In the meantime, many farmers haven’t covered their requirements for the 2018-19 growing season, with many of them forced to bring forward irrigation to September or October. “This is likely to increase demand in the allocation market through summer and autumn as irrigators finish summer crops and support their permanent plantings towards harvest,” Duxton says.

The Chris Corrigan –chaired Webster (WBA) is the biggest private owner of water rights – 200,000 megalitres — but is also a prolific grower of walnuts, almonds and cotton.

So Webster may have plenty of water, but it also has plenty of orchards and crops to quench. The company recently sold a cotton property called Bengerang for $132.7m, thus reducing its irrigated land from 24,500 ha to 15,000 ha. Development work at two properties will increase this coverage back to 20,000 ha in the current financial year.

“The company remains well positioned to grow its operations, further supported by our investment in water which continues to underpin our business,” Corrigan declares.

For Select Harvests (SHV), the country’s biggest listed almond grower, it’s a case of being alert and not alarmed. One again, Select has sizeable water rights worth $51m, but needs to slake the thirst of three million trees across three properties in southern NSW, northern Victoria and SA.

Select is not yet wading into the heated spot market in the hope that its springs and aquifers will suffice for the key growing period between November and May.

“Water is our biggest macro concern,’’ says CEO Paul Thompson. “But we don’t know the impact of entitlement allocations or where the market will settle.”

Select is also using field technology to reduce usage. For instance, it measures sap moisture rather than soil wetness for a more reliable gauge of watering requirements.

Select has held off watering until the evening to save water (and energy) costs  - a tip that any inner urban gardener could have imparted.

Then there’s Select’s landlord Rural Funds Management (RFF), the biggest ASX-listed landowner with 44 properties valued at close to $800m.

In theory Select’s tenants (which also include Treasury Wine Estate, Baiada Poultry and Olam) bear the climate risk. Still, with 93,000 megalitres of water rights valued at close to $50m, Rural Funds can ensure there’s enough water to support the cropping activities.

In a major non-irrigated diversification, Rural Funds recently bought five feedlots in NSW and Queensland from cattle giant JBS Australia for $149m.

While the evidence points to water rights surging further, there are a number of unknowns apart from the likelihood of precipitation and whether snow in the highlands melts under the sun or is washed downwards by rain (the latter produces more water).

On the demand side, intensive water users, such as rice and cotton growers, may do the sums and decide it’s not worth planting a crop this year. If that’s the case, they may sell their entitlements and cause the water price to tumble (as has happened before). 

This luxury of not growing doesn’t apply to orchards, which need to be kept alive, come hail or shine. Some pundits reckon that because of the proliferation of such permanent crops, farmers will struggle to secure temporary seasonal allocations in coming years.

Not surprisingly, Duxton Water shares have risen 18% since mid June. While its water rights are on the books at $95m – 40% higher than a year ago – the fund cites a fair market value of $120m.

The company has net tangible assets of $1.27 a share, which means the stock is trading at a slight premium to this intrinsic worth.

While Duxton shines, the weather concerns have pushed Webster shares down 13% since hitting a record high of $2.02 in mid June, despite a walnut crop that looks like being the second best on record.

Webster’s water rights are in its books at $222m but valued at $360m (directors view even this number as conservative).

Select Harvest shares have declined 30% from last June’s two-year high of $7.45 a share.  Select should benefit from a bigger crop – an expected harvest of 15,700 tonnes compared with a poor 14,100t previously (bearing in mind the harvest has only just begun).

Pricing is also improving because of persistent drought in California, which supplies 90% of the world’s almonds.

For investors punting on the big dry continuing, Duxton is the obvious play, as the bourse’s only pure play water rights play. However the troubled Blue Sky Alternative Investments (BLA) holds $258m of water rights in its Blue Sky Water Fund.

On a cautionary note, the water rights market is notoriously complex, often illiquid (ironically), poorly regulated and thus open to manipulation.

If the heavens open in the right locations, water again will become a buyers’ market.

Currently, the Southern Oscillation Index, the guide to likely El Nino dryness or La Nina wetness – is at a neutral setting. So in theory it could go either way.

Tim Boreham authors The New Criterion


Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.

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