Asset manager Blue Sky Alternative Investments’ water trading fund has generated returns of 32 percent plus in fiscal 2015 amid severe drought conditions in the region that are only getting worse, according to Australia’s FarmOnline. The private equity firm has benefitted from a trend of farmers moving to less expensive land and selecting more profitable crops, mainly cotton, near Blue Sky’s water assets.

 

“When you look at the cost of land and water values in an area such as Moree and compare them with the Murrumbidgee it is quite compelling,” according to Blue Sky Water Fund Managing Director Kim Morison cited in FarmOnline.

 

When cotton farmers can get access to water, their harvests are highly profitable as cotton prices in the country are currently strong. The region seems to have prepared for this, evidenced by a trio of large cotton milling gins that were built in the southern Murray Darling Basin in recent years coupled with farmers and investors transforming other crops into cotton production, which carries high margins.

 

Australia has been suffering from drought and conditions have been worsening in the Murray Darling Basin. Blue Sky fund managers in a note to unitholders said they expected the Southern Murray Darling Basin to experience “further appreciation” due to El Nino and the amount of investment that has poured into the region’s crops such as cotton, almonds, walnuts, dairy ad citrus.

 

“While we have long held the view that Water Entitlements in the southern Murray Darling Basin were fundamentally undervalued, these gains occurred more quickly than we anticipated,” according to an unnamed Blue Sky fund manager.

 

The current drought will likely inspire changes in the way farmers’ planting programs for this year and next, particularly as it relates to cotton and rice crops.

 

Meanwhile, Blue Sky is poised to continue to benefit. “Our portfolio is well positioned for this dry scenario as we’ve aggregated a high proportion of high-reliability water entitlements,” noted the portfolio manager.

 

Blue Sky entered Australia’s $30 billion water entitlement market in fiscal 2013 with its water fund and has generated returns for investors including major institutions in every year of its existence.