Transcription of The Stock Network Interview with Rivco Australia (ASX:RIV), Executive Manager, Corporate Lachlan Campbell
Lel Smits: Rivco Australia is the only ASX listed company giving investors direct access to Australian water entitlements with 61 gigalitres across the southern Murray-Darling Basin. Since bringing management in-house last November, the company has lifted the share of its portfolio lease to farmers from around 50 to 80 percent. Ahead of presenting at TIPS conference, Rivco Executive Manager Corporate Lachlan Campbell joins me to discuss the shrinking supply of water in the Murray and the road ahead for the company.
Lachlan, welcome to the Stock Network.
Lachlan Campbell: Thanks, Lel, it’s great to be here.
Lel Smits: Now, Rivco holds most of its water in the lower Murray below the Barmanarrows as government buybacks remove water from farming.
Why is supply tied us there? And also, Lachlan, can you explain how that supports Rivco’s lease income?
Lachlan Campbell: Yeah, sure. So just for context, the Barmanarrows is physically the narrowest part of the Murray River. So what that means is there’s actually a physical constraint as to how much water can flow through this particular part of the river in any given day.
Now, what we see in Australia is that a lot of the permanent crops that are in the ground, so things like almond trees, pistachios, or all sort of tree nut varieties, there is a large concentration of these permanent crop types that have an inelastic demand for water located below this choke point. So what that means in practice is when we go to, say, we go into summer and we enter the peak irrigation season, you’ve got all of these thirsty crops all trying to extract water at the same time, but there’s only so much water that can get through the river up in Barma, which is the area known as the Barmanarrows. So we strategically have a large part of our entitlement portfolio located in this area.
We recently updated our investment thesis, which looked at all of the long-term demand supply mechanics in the Southern Basin, but we really focused on this area. And the findings of this thesis really indicate that there is quite a large imbalance between demand and supply. So if you look at the total amount of water entitlements on issue in this area versus the total amount of water that is used to irrigate the crops in this area, the results are pretty interesting.
But we then overlay that with some scenario analysis, which looks at, okay, what happens in a wet year, an average year, and a dry year? Because there’s different volumes of water in the system available for farming. But really what it shows is that if we go back to a really dry part of the climatic cycle, there’s only enough water in this area below the Barmanarrows to essentially irrigate 40% of those permanent crops. So there is such a large imbalance.
This is where the scarcity dynamic is playing out the strongest in the Murray-Darling Basin, and this is where we have a large percentage of our portfolio concentrated. Then if we turn to leasing income, so again, most of what we do, if we go back one step, our business is we buy water entitlements, we lease the primary business objective for us is to lease these entitlements to farmers. We collect rent, we then pay a dividend to our shareholders with the rent, and then because we hold the asset long term, we get capital growth.
But if we’re talking about that lease percentage or that leasing arm of the business for a second, a large percentage of our customers are in this area, and we do do a lot of business with all the almond growers, for example, in Australia. But this is where we see the most demand coming from those long-term leasing products. So we think we’ll continue to focus on this area, but like in all sort of good investment portfolios, diversification is really important.
So we don’t just own entitlements in this area, we also own them in other regions and other valleys and other river systems. So we do get the benefits of diversification. Yes, and in terms of signing up Australia’s largest irrigators as long-term tenants, you aim to have 10 of Australia’s largest irrigators leasing its water.
What are the key steps though to getting there in the year ahead? Yeah, it’s a good question. So we have a long-term goal of being what we call the water partner of choice for Australian irrigators, full stop. But certainly if we do have a portfolio at scale, we think we’re very well placed to continue serving as well as the small family farming groups, which always continue to support, but also the larger institutional farmers in Australia.
We do have a number of these large groups in our lease book already. There’s a couple of transactions we’ve announced over the years, which has provided more clarity there, but we really want to continue to grow a portfolio in a sustainable way. And in the end of the day, we want to continue to provide, and I think not just providing leases, but we want to build products and develop a leasing product for a customer that is fit for purpose.
So it’s not just vanilla, it’s actually, we’ve sat down with the customer and said, what are your water requirements over the coming years? Is your demand increasing? How do you want to look at your water strategy? And then how do we as a business innovate and develop a product that is fit for purpose for that specific customer on that specific farm, for example? So I think that’s the key message here is we want to continue to innovate and develop products that are tailored and specialised towards our customers’ needs.
Lel Smits: Yes. And Lachlan, finally, water challenges.
They’re well documented globally, but in California in particular, with respect to challenges with water. What are your views on the situation in California?
Lachlan Campbell: Yeah, that’s a really good question. And funnily enough, I’m getting asked this quite a lot of late.
As I mentioned in our investment thesis earlier on, a part of that task is we actually did a deep dive into California to really understand what’s going on on the ground, because it’s very, it is related to what’s happening here in Australia and what we expect to happen here in Australia. So to summarise, there was a piece of legislation introduced into California in 2014. Essentially, it said by the year 2040 onwards, you know, whatever water goes into the aquifers in California can be extracted in that given year, but no more.
So what that means is they’re stopping years and years and years of over-extraction. And I won’t go into too much detail now, but the net summary of this is that there are some areas in California where if you want to keep, say, growing almonds longer term, you have to pull out eight hectares to keep one. So that is such a large structural change to the global supply side of almonds, because 80% of almonds are grown in California.
And again, these changes are playing out from, you know, up to the next 15 years. What we’re expecting is a lower global almond supply long term. Now, as California, as I said, they grow 80% of the world’s almonds, so that’s likely to have a significant impact on pricing, and we’re already seeing that.
In the last four years alone, California has pulled out 1.5 times the total almond footprint in Australia. And keep in mind, almonds are the thirstiest crop type out there. And the knock-on effect of that has been the global almond price has reached a 10-year high just last month.
So when you have a global almond price now that’s back at a 10-year high, the economics for further almond development, in particular in Australia, become really strong. So that’s why we’re now seeing in Australia continued expansion in almonds and people continuing to plant more crop types, which we think will ultimately, you know, in Australia, we’ve got lots of land. The one thing we don’t have a lot of is water.
So I think we, as this dynamic plays out, we think that that’ll really have a, you know, a positive impact on our investment thesis over the next sort of 20 years plus.
Lel Smits: Yes, thank you so much for the update from Rivco and look forward to hearing more at TIPS conference.
Lachlan Campbell: Fantastic. Thanks, Lel. Likewise.
Ends