Lessons from the water market: The southern Murray-Darling Basin water allocation market 2000-01 to 2015-16

ABARES Lessons from the water market report analyses trends in water allocation prices in the southern Murray-Darling Basin (sMDB), between 2000-01 and 2015-16. This report analyses the major demand and supply side drivers of water allocation prices in the sMDB, drawing on historical data for 2000-01 to 2015-16. The study disentangles the effects of climate variability (rainfall, water storage and allocation volumes) from the key policy changes (including Commonwealth purchase of entitlements for the environment) and irrigation sector changes that have occurred during the period.

Key Issues • The main driver of change in water prices over this period has been variation in rainfall, storages and allocations. During the peak of the drought water prices jumped to more than $1 000 per ML, before dropping to near zero during the flood years (2010-11 and 2011-12). Between 2011-12 and 2015-16, storage volumes steadily decreased and prices steadily increased. • However, ABARES finds that even after controlling for these dry conditions, market prices during 2014-15 and 2015-16 were higher than expected from past experience. The report finds that these higher prices can be explained by a combination of demand and supply factors including: Commonwealth entitlement purchases, state carryover rule changes, interregional trade restrictions and commodity price fluctuations and irrigation land-use changes. • While Commonwealth entitlement purchases reduce the supply of water and have an upward effect on prices, these are offset to some extent by Commonwealth investments in water saving infrastructure. Further, even if water savings are ignored, Commonwealth entitlement purchases offer only a partial explanation for the increase in water prices. • Another important factor has been changes to carryover rules particularly in Victoria, which have led to large increases in carryover volumes since 2007-08. This increase carryover since 2007-08 has contributed to higher allocation prices in the market. Despite this, carryover remains a positive development that will benefit irrigators in the long run by keeping prices lower in drought years.