ABARES report examines drivers of water prices in the southern Murray-Darling
2 December 2016
The Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) today released the report Lessons from the water market: The southern Murray-Darling Basin water allocation market 2000-01 to 2015-16.
Acting ABARES Executive Director, Peter Gooday, said that the weather and its effect on storage and allocation volumes remained the main driver of water market prices.
“During 2015–16 storages and allocations reached their lowest point since 2009–10 and prices increased up to $280 a ML,” Mr Gooday said.
“Since July this year we’ve had some heavy rainfall which has increased dam levels and seen prices fall to below $100 a ML in some regions.
“In addition to climate variability, the water market has also been affected by policy changes and structural shifts within the irrigation sector which have occurred since 2000.
“After controlling for seasonal conditions, our study finds evidence that prices have been higher than expected in recent years, particularly during 2015-16.
“These higher prices could be explained by a combination of factors, including Commonwealth entitlement purchases, changes in state carryover rules, restrictions on interregional water trade, and structural changes in the irrigation sector.
“Purchases of water entitlements for environmental flows since 2008 have reduced the volume of allocations available for consumptive users. However, these reductions have been offset to some extent by water savings generated from on and off farm infrastructure upgrades.”
Mr Gooday said that the introduction of carryover rights in Victoria and South Australia had seen a large increase in carryover volumes in the southern MDB, which has had a significant effect on the water market.
“The introduction of carryover rights is a positive development and is likely to reduce prices in the long run. However, in the period 2007-08 to 2015-16 carryover has generally increased prices as water users seek to accumulate storage reserves to protect against future droughts,” Mr Gooday said.
Mr Gooday also noted that interregional trade restrictions have had an increasing effect on the allocation markets in recent seasons.
“Already during 2016-17 we have seen the Barmah choke and the Murrumbidgee IVT, and the NSW to Victoria trade limits all restricting trade and leading to differences in prices between zones,” Mr Gooday said.
Mr Gooday said that the irrigation sector has also experienced some important structural changes over the period since 2000 in response to changes in commodity prices.
“Since 2000 we have seen a contraction in wine grape areas, and an expansion in other horticultural crops such as nuts. These changes all have implications for water demand and will be a key factor affecting market prices in future years,” Mr Gooday said.To read the full report, visit ABARES Publications.