Inter Valley Trading Reform a Key Component for Water Systems

Article by: Hari Yellina

The current agricultural boom, with solid production, good water allocations, and high commodity prices, is fantastic for industry participants, but it is expected to result in higher demand for irrigation water than can be delivered, requiring reform of the water trading system, according to government agencies. The Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) Outlook conference earlier this month brought together a group of water specialists who argued that reform of inter valley water trade (IVT) laws in particular was important to a more fair water market.

The Australian Competition and Consumer Commission’s investigation into water trading in the Murray Darling Basin last year focused heavily on IVT restrictions, and the federal government’s water market reform main advisor Daryl Quinlivan is currently evaluating a number of its suggestions. A way to change current arrangements where the fastest on the button when trading is open can dominate transactions is under investigation. Senior economist Neal Hughes of ABARES believes that a system that does not favour people with better technology is essential. “It’s conceivable that there will be more demand for water than there is available,” Mr Hughes said. “We’ll need to ration that demand via pro rata access to trade, ballots, and auctions to ensure things are more equitable.”

Many of the challenges in the water market, he noted, were similar to those in the power industry. “There’s a gap between the market and the physical delivery,” says the author. “The issue is that trade demand will continue to outstrip supply for some time, and we must devise the best solutions to this.” “It’s reasonable to say we’ll never go back to trading as much water as you want; the best thing to do is put decision-making in the hands of someone who is responsible for both environmental and hydrologic demands, as well as market needs.”

According to Mihir Gupta, senior economists at ABARES, there are advantages to opening up IVTs. Many participants have benefited, both buyers and sellers, and it is now a critical instrument. However, structural developments have pushed the markets to their limits. Water right holders in the Goulburn system have been able to achieve a better price selling into the Murray system, but as the ACCC pointed out, the benefits are currently going to the fastest bidders, so switching to fixed-schedule trades should help.

Water from the Goulburn system has usually been sold for $20-30 per megalitre, or about 30% less than water from the Murray. Mr. Gupta stated that the irrigation industry as a whole will have to position itself to accomplish more with less water. He said the business was going through a difficult time because of growing demand, particularly from horticulture and tree crop growers, who have a fixed requirement for water each year, and decreasing availability due to climate change and regular droughts. Mr Gupta also mentioned that information should be improved. “There isn’t a lot of information available about demand levels.”

According to Joe Banks, interim director of the Victorian government’s water markets and grid, the state’s goal is to discover an ideal level of trading between the valleys. Irrigator Rachel Kelly said irrigated agriculture was looking for a more equitable system in terms of access to traded water.