Government proposal may trigger new peak in Darling Downs rural property: HTW

The Federal Government’s proposed buy back of underground water within the Upper Condamine Alluviums may now result in the creation of a new peak in the cycle of the market, according to the latest Herron Todd White (HTW) rural report. 

Owners of groundwater now have the opportunity to sell part of their entitlements back to the Government under the “Restoring the Balance in the Murray-Darling basin” program. This is ground water that they have not historically been able to access and are unlikely to ever be able to access going forward. The end result will be a win for the farmers and this will create three options for them:

• Payback Debt;

• Further develop existing on farm infrastructure; or

• Further capital acquisitions.

The Government Proposal

Under the “Restoring the Balance in the Murray- Darling Basin Purchasing Program”, the Australian Government has committed $3.1 billion to purchase water for environmental purposes. This program is part of the Sustainable Rural Water Use and Infrastructure Program. On 2 June 2014, the Australian Government released the Water Recovery Strategy for the Murray-Darling Basin. The strategy outlines the Government’s approach to recovering water for the environment in the Murray-Darling Basin, whilst maximising positive outcomes for farmers and communities. This includes prioritising water recovery through infrastructure investment over water purchasing which is limited to 1,500Gl.

It is quite obvious that to date the Government’s approach was not working and a new way had to be tried as less than 8% of the target SDL has been achieved with the majority of this coming from the Central Condamine Alluvium.

Further Initiations

On 19 April 2018, the Federal Government subsequently opened a new tender round to voluntarily acquire groundwater back from farmers within the Upper Condamine Alluviums. They subsequently undertook a new approach by announcing the maximum price at which they are prepared to acquire water. This differs from previous tenders whereby no such price announcements were made.

If we look at the Central Condamine Alluvium (CCA) which involves the bulk of the water buy back volumes (currently 86,066Ml of Nominal Entitlement which will be reduced to a maximum of 37,409Ml or 43.5% of the current nominal volume), we understand that all licence holders will be initially geared down to the equivalent of 50% of their Nominal Allocations with that then reduced by a further 13% in order to achieve the target of 37,409Ml.

Within the CCA, there are multiple sub areas and currently the long term average Announced Allocations of the respective Nominal Allocations are included here.

This will ultimately mean therefore that all holders of groundwater licences within the CCA (apart from those within Sub Area 2 (3) and Transitional Zone 3 (3) which are already on 50% restrictions) will potentially lose a further 20% of their allocations over time so as to allow the government to meet its target.

Variation to Previous Tenders

However this tender now appears to differ from previous tenders or individual private sales of groundwater in that the Federal Government will effectively buy the unusable portion of a right.

For example, if we assume that a groundwater licence holder within Sub Area 2 (3) had a nominal allocation of 1,000Ml, historically they have only been able to access 50% of this right. If they decided to sell a 50% share, they would be left with 500Ml, but would still only be able to access 50% of that remaining right or 250Ml going forward.

Now, subsequent to the announcement of this tender, it appears the farmer will be able to utilise the full 100% of the remaining 500Ml and will receive a maximum price of $1,950 per Ml for the 500Ml they sell to the Federal Government. Their position going forward will remain unchanged in that they will continue to gain access to 500Ml of groundwater per annum but will potentially have a one off windfall of $975,000 (500Ml @ $1,950/Ml).

In relation to the other sub areas however, where announced allocations are higher than 50%, the position will be slightly different. For example, within Sub Area 2 with an announced allocation of 70%, a farmer with a nominal allocation of 1,000Ml has historically been able to access 700Ml only. Previously if they sold 50% of that right, they would only continue to be able to access up to 70% of the remaining 500Ml or 350Ml.

Now if they sold 50% of their right, they will be paid $2,000Ml for the 500Ml, but the net effect of the sale will see their water right reduce from 700Ml to 500Ml, a loss of 200Ml which they can no longer access going forward. They will still have a one off windfall, but not to the same extent.

The end result will be that over the next period as this voluntary tender progresses, many farmers will receive a one off cash injection if they decide to sell part of their rights to the Federal Government. This will provide a cash injection into the market which could see the market continue on its upward projection somewhat longer than it may have otherwise done.

Peak of the Market

In summary, we have seen exceptional growth in the value of quality farming country over the past two years or so on both the Bongeen and Jimbour Plains. Now whilst there is a level of discussion within the market place broadly that we may be approaching the peak of this market cycle, it is perhaps too early to call this within this location. Given the nature of the underlying lands, the fact that “they just don’t make this country anymore” and the potential for the Federal Government to inject a one off financial boost into the local market through the buyback of groundwater, there still may be further potential for growth to occur within this particular market sector, notwithstanding the current dry conditions and the poor winter crop outlook.

A recent sale is a Rosenthal Heights lifestyle block which was traded for $960,000 (pictured below).

Located just 7.5 kilometres from Warwick's CBD, 184 Warner Street is elevated slopping land with views.

The home features four bedrooms, lounge, dining and family room, kitchen and plenty of storage space. 

It is operating piggery with a contract at $5,543 plus GST per month.

Another example is a Clifton property, Avonlea, which was sold for $650,000 (pictured below).

It was formerly a horse stud and spelling farm on the doorstep of the renowned Pilton Valley.

Located at 4843 Clifton Gatton Road, it comprises of 100 acres of well established thriving natural pastures and 30 acres under cultivation. 

Other features include three bay hay sheds, machinery shed, large day yards, and water supply to all paddocks except cultivation.