Let Your Funds Flow – Farmers' Water Entitlements
Sick of shares? Bored by bonds? Thirsty for an asset class not at all correlated to the European train wreck or the US fiscal cliff?
The farmers of the Murray-Darling Basin present to you their water entitlements.
The entitlements system was created in the 1950s by state and federal governments concerned about too much water being diverted from the two mighty rivers for use in agriculture.
Today there are entitlements covering 18,500 gigalitres of water outstanding in the Murray Darling basin, worth about $30 billion.
However, the entitlements system has become a tradeable market only in the past few years as more farmers lease unused portions of their entitlements to a growing number of non-agricultural users, mostly coal miners but also cities – Adelaide and Canberra already buy some drinking water from the Murray –Darling and with Melbourne not having built a new dam since the 1980s, it’s foreseeable that it may exploit its physical connection to the basin, too.
Another factor is the rising demand for food and commodities globally. Two of the largest owners of water entitlements are Olam International, a Singaporean food company, and Hassad Foods, the agricultural investment arm of the sovereign wealth fund of Qatar.
A third factor getting the traders of entitlements excited is the federal government’s promise to keep buying back entitlements to increase flows down the river and improve its health.
The government is also taking steps to make water rights as irrefutable as property rights. It recently announced legislation to treat water the same way as wheat under the Corporations Act, so water will be recognised as a tangible asset for the first time.
“What the farmers have known for decades – that to won water entitlement is to own security to produce capacity – is now filtering into mainstream thinking,” the head of real assets at Tyndall Investment Management, Richard Lourey, says.
Tyndall, along with Blue Sky, are funds managers trying to get investors interested in funds of water entitlements. Lourey says there’s a 4-5 per cent running yield to be had from leasing the entitlements, plus 8-10 per cent annualised capital growth as water demand grows.
Ironically, water funds don’t heave great liquidity. However, investors in Blue Sky’s retail-focused fund can apply for monthly redemptions.
Source: BRW Novembers 22-28 2012, p. 43