 The extended drought in the Murray-Darling Basin (the Basin) continued into 2007-08, with Murray system inflows declining to record lows. The combination of low inflows and low storage levels resulted in a severe water shortage for irrigators in the southern Basin. Faced with unprecedented cuts to water allocations, irrigators have adopted a number of strategies to cope. Water trading has played a critical role, enabling irrigators to adjust to the change in water availability.
This report examines recent water trading experiences in New South Wales, Victoria and South Australia to capture insights on the nature of water transactions, including the volume and price of trades and the direction of these trades in the 2007-08 irrigation season.
The analysis shows the bulk of water movements occur via the sale of temporary water allocations. The number of permanent water trades remains relatively low.
Water markets, based on voluntary exchange, have allowed buyers to reduce the impact of drought on farm production through the purchase of additional water. These sales have allowed irrigators to sell water to earn an interim income during times of low allocations or to purchase additional water for crops. In a voluntary market, water would be expected to be traded toward the highest value uses. Within the Basin, the horticulture industry generally places the highest value on water as an input to production. During drought years, they are likely to purchase water. Analyses in this report confirm this expectation. In 2007-08 in the southern Basin, perennial horticulture farmers were the most common buyers, with broadacre farmers the most common sellers.
The volume of interstate trade increased from around 70 gigalitres in 2004-05 to 235 gigalitres in 2007-08, representing 18 per cent of the total traded volume. While this is a large increase, a number of irrigators identified delays in processing interstate water trades as a barrier to further desired trade.
South Australia was the major importing state, while New South Wales was the largest exporter of water in 2007-08. According to the estimates provided in this report, the net benefit of water trade into South Australia in 2007-08 was estimated to be $35 million, with South Australian irrigators benefitting by $31 million and upstream irrigators benefitting by $4 million.
The price of temporary water was highly variable in 2007-08, both within and between trading zones, ranging from around $200 to $1200 per megalitre. The current availability of irrigation water, irrigators’ expectations regarding future water allocation announcements and changes in the demand for water as a production input are key factors influencing price movements.
Irrigators’ experience with trading has highlighted the benefits of improving water productivity. The benefits of conserving water have increased because of the drought and the resulting increase in temporary water prices. Farm visits indicate that increasing on-farm water use efficiency has enabled many irrigators to avoid serious losses in severe drought conditions.
The study concludes that irrigators have demonstrated an ability and willingness to engage in trade as a means of achieving greater benefits from limited water supplies. In particular, the active market for water allocations provides irrigators with increased flexibility for coping with water scarcity. While there was a reduction in total water use for irrigation in the southern Basin during 2007-08, the ability to trade water has allowed water to be reallocated to its highest value uses, substantially mitigating the economic impact of low water allocations. |
