Deciding whether or not to use carryover

What is Carryover?

Carryover can be used as a good risk management tool. Irrigators should make informed business decisions about carryover when the outlook for allocations against high-reliability water shares in the following season – (under dry to extremely dry conditions) indicates that allocations may be less than 100 per cent.

Carryover is a bit like insurance. It involves swapping one risk for another. In the case of insurance, the decision to swap risks are relatively straightforward – the insured person swaps a certain small loss each year (the premium) to avoid an uncertain, but relatively very large, loss if the worst case occurs.

In the case of carryover, the decision to swap risks is less straightforward. The immediate risk is there may not be enough allocations available in the next season to get the crop off to a good start – or even to finish part or all of the crop for the season. The balancing risk is, if the weather turns wet, the water carried over may end up being spilled without the irrigator ever being able to use it.

Decisions about carryover rest on whether to swap the risk of water-stressed crops for the risk of a spill.

Irrigators must make their own decisions about whether or not to swap those risks. No one can make it for you, because everything depends on your appetite for risk. The key is to make informed decisions, and informed decisions depend on using the information available. And there is a lot of information available.

The first thing is to seek the best available information about the risk of water-stressed crops – in other words, what is the risk of low allocations. The Resource Manager for Northern Victorian publishes the current outlook regularly online at https://nvrm.net.au/outlooks/current-outlook. It is important to understand, like many other things to do with farming, because we are dealing with the weather, there is no certainty about these outlooks.

The lower the outlook for allocations, the more important it is to consider the use of carryover.

How Carryover works

Talking to other irrigators, especially those who have used carryover in the past, is a good starting point. The Victorian Water Register also provides online fact sheets about carryover  here.

It is important to understand that carryover is against your Water Shares, not your ABA.  To carry over water in your ABA you must have a Water Share attached to it– either by owning it or on a Limited Term Transfer (a type of lease for a Water Share).

The Water Share can be either High Reliability or Low Reliability, but carryover water is recorded against Low-Reliability Water Shares first.  The maximum volume of water your can carryover is the volume of Water Shares attached to your ABA – any water in excess of this will be written off at the end of the current season.

There are a couple of key things to understand about the risk of a spill. The greater the volume you carryover as a percentage of your water share volume, the more exposed you are to the risk of a spill. Also, water carried over against high-reliability water shares is more exposed to the risk of the spill than water carried over against low-reliability water shares.

Once allocations begin to be made in the new season the maximum volume of water which can be allocated to your ABA, either as carryover or allocations, is the total volume of your Water Shares.  Any allocations which exceed this volume instead go into your Spillable Account.  For example, if you hold a 100 ML Water Share and 50 ML of carryover on the 1st of July any allocations up to 50 % would go to your ABA, but once allocations reached 50 % any remaining allocations would go to your Spillable Account instead.  If you only had 20 ML of carryover on the 1st of July, allocations would not go to your Spillable Account until they reached 80 %.

The picture above shows an example of the Carryover Calculator tool.  In this case, the grower has a 100 ML Water Share and had 50 ML of carryover on the 1st of July.  A 75% allocation was then made which gave the water holder 50 ML of carryover plus 100 x 75% = 75 ML of allocation which is a total of 125 ML.  This exceeds their Water Share volume of 100 ML, so the remaining 25 ML has been placed in their Spillable Account until a Low Risk of Spill declaration is made.  While in the Spillable Account some or all of this water may be lost due to spill.

Having an understanding of the risk of low allocations, and an understanding of the way carryover works, the next thing to understand is the risk of a spill. One way to deal with this is to use the carryover calculator available at the Water Register’s website.

The Carryover Calculator is designed to help you understand how carryover rules currently work in northern Victoria. It allows you to explore how carryover and allocations affect the amount of water available under your entitlements in different scenarios. A user guide is available at the Water Register’s website

Carryover involves swapping one risk for another. The trade-offs involved in making carryover decisions are explored in some detail online at the Water Register’s website

Weighing up the pros and cons of using carryover is not straightforward, but it is important. There is a lot at stake when the outlook for allocations are low. And while the risks associated with making the wrong decision are significant, in the long run, the risks of failing to make any decision are likely to be even greater.

Irrigators must make their own decisions about carryover, but there are many resources available to help make informed decisions.

If you have any questions on carryover you can contact your Water Broker or Lower Murray Water on (03) 5051 3400.  Your Water Broker may also be able to advise you on alternatives to carryover such as “parking” (carrying water over on another user’s Low-Reliability Water Share) or forward contracts which may be better suited to your situation.