Water markets
Water markets provide irrigators with an important tool for managing long-term risks. Water markets allow water to flow to where it can be used most productively and provide greater options for irrigators. This is particularly valuable as different users have to manage the water demands of annual crops, permanent plantings and the environment. Markets have helped irrigators to manage their business risk and adjust their operations in response to prevailing conditions and opportunities as well as availability of water.
Improving confidence and information in water markets
Given the importance of water markets help to manage the transition to the Basin Plan, the states, irrigation networks and relevant Australian Government agencies have increased the amount and type of water market information available to the public. In addition, major water brokers continue to expand their provision of general and tailored price and allocation commentary to the water market. This supports informed decision making in the water market.
Improvements to access to water market information in 2015–16 included:
- improving the Barmah Choke balance information on the MDBA website
- improving information showing the available trade volume for the Murrumbidgee inter-valley trade accounts on the Water NSW website
- updating existing online links to trade information following advice from states and irrigation infrastructure operators.
The MDBA continues to work closely with all states on trade issues to improve compliance with the water trading rules, including through aspects of their water resource plans.
Water trading patterns differ across industries
The ABARES farm survey helps to illustrate some important developments in farm-level water trading over the long-term. Some of these developments are shaping the social and economic conditions in the Basin. For example, the survey shows that a higher proportion of dairy farmers have sold water entitlements than farmers in other industries, in both the pre- and post-Basin Plan periods, see Figure 11.
According to a recent report commissioned by the Goulburn-Murray Irrigation District (GMID) Water Leadership Forum, the sale of permanent water entitlements led dairy farmers to become increasingly reliant on sourcing water through the temporary trade market. The report indicates that the GMID dairy sector now normally uses 60% more water than its farmers own. The ABARES survey backs this up. The ABARES survey finds that water use in a season depends on a range of factors including temporary water allocations, the price of water on the temporary market, the price of fodder and feed grains, and weather conditions. ABARES attributes the increase in dairy farmers buying temporary water in 2012–13 and 2013–14 to their significant sales of permanent water access entitlement sales since 2007. This represented a significant change in the farmers' business models and risk management strategies.
Research by MDBA found that water trading provided farmers with access to capital which allowed them to expand or develop their enterprises. This strategy has been adopted by farmers across different sectors in addition to dairy, such as horticulture and rice, see Figure 11. Water trading offers farmers advantages but it also comes with risks.
Figure 11: Proportion of farms selling water entitlements, 2006–07 to 2014–15
*Notes: Water trading data for cotton farms are not available for 2011–12 and 2012–13
Source: ABARES Murray–Darling Basin Irrigation Survey
The expansion of water markets and Australian Government recovery of water entitlements under the Basin Plan has led to a very different supply-demand balance in water markets of the southern connected system compared with 5–10 years ago. Recently completed research suggests the recovery of water entitlements has increased the price of water in the allocation market by between $9 and $31 per megalitre (ML), depending on current water availability (Aither 2016). This is comparable to the results of ABARES' recent model of the southern Murray–Darling Basin water market, which estimated an increase in the average allocation price of around $25/ML between 2012–13 and 2013–14 (ABARES 2016). Given the temporary water price fluctuated by as much as $400/ML between 2004 and 2016 the effect of seasonal conditions, and not water recovery, appears to be the most significant driver of water prices.
Other demand and supply factors that affect the temporary water market include changing demand for agricultural production, such as the expansion of nut production, changes in state carryover policies, and seasonal water availability. This has meant that irrigators who rely on the temporary trade market for some of their irrigation water now face a very different risk profile for their business compared with 5–10 years ago.
Inter-regional trade in water also has important effects
Water markets provide opportunities for irrigators to respond to changes in industry developments, including changes in demand. One example is the expansion of perennial horticulture, particularly nut crops in the lower Murray region. For example, almonds have been delivering strong returns for growers in Australia for more than a decade. Many participants in this growing agricultural sector rely on temporary water markets to sustain new plantings. In the past three years, there has been a steady increase in net allocation trade into the lower Murray region, in line with the expansion of area under perennial horticulture in the region. Without access to efficient water markets, this expansion would not have been possible.
The investment required to establish orchards is positive for local communities. However, some people interviewed by the MDBA, including almond growers themselves, expressed concerns for those regions and sectors perceived to be 'losing' water through trading. Dairy farmers in the Goulburn Valley have also expressed their concerns about the flow-on effects to the local economy if large volumes of water are traded out of their area.
Additionally, the increasing demand for water in the lower Murray region may present a risk for system delivery. Water managers have identified that increased demand from the region during sustained periods of hot weather can lead to delivery shortfalls in the region, due to upstream capacity constraints. These risks to water availability may constrain further expansion of horticulture in the region.
The MDBA is carrying out ongoing work in the New South Wales and Victorian lower Murray region to study the impact of the perennial horticulture expansion in more detail.
Water prices across 2015–16
Figure 12: Comparing the January temporary water price to allocation level in the Murrumbidgee
Water allocation prices are influenced by both supply and demand factors. A range of external and government analysis has shown that while no single factor determines allocation price, seasonal water availability conditions are clearly the biggest determinant. Figure 12 shows the relationship between seasonal water availability and allocation price.
Factors affecting supply include allocations, rainfall, trade barriers, state water planning rules — such as carryover policies — and environmental entitlement purchases. Factors affecting demand include the risk management strategies adopted by irrigators and crop changes such as the expansion of the cotton and nut industry in the southern Basin, which increase demand and allocation prices when water availability is low. These other non-seasonal drivers are important to understand how the market may change through time. Analysis undertaken by ABARES of the southern Murray–Darling Basin water allocation market — Lessons from the water market: The southern Murray–Darling Basin water allocation market 2000–01 to 2015–16 captures the importance of seasonal conditions in driving prices in water markets over the 2015–16 period.
The 2015–16 water year is an example of how true this is. Allocation prices across the southern Basin during 2015–16 were the highest since the end of the millennium drought during 2009–10, rising from between 71%–94% across the Basin between 2014–15 and 2015–16. This largely reflected dry conditions and lower allocations. From July–November 2016, the price for water allocations in the southern Basin dropped to below $100/ML. Again, this was in response to significantly higher allocations following the widespread rains during the August to November period. The response of the market to changing water availability shows the market is operating efficiently to deliver water in response to changing conditions.