The seismic shift in irrigation regulation in the Murray Darling Basin southern connected system has not flooded the water market with higher prices.
That’s according to ABARES analyst David Galeano, who spoke at the Outlook conference in Canberra last week.
ABARES has developed a model of water trading in the southern connected system which allows it to compare the contemporary market under the Basin Plan with historical conditions.
“The conclusion we draw is prices would be about the same if there was a return of the Millennium drought,” Mr Galeano said.
Applying current conditions, using today’s water demand, trading restrictions and Basin Plan water recovery, ABARES concluded that at the peak of the drought in 2007 allocation trade would have been $50 a megalitre higher, peaking at $700/ML.
“In general, prices are higher throughout the historical period…. this is a surprise because some people would have you believe that at the peak of the drought prices would be much much higher than historically,” Mr Galeano said.
However, it is important to note that while there is less water available now, prices have stabilised through a reduction in the area planted - with the rise in cotton and permanent plantings coinciding with a significant drop-off in dairying in northern Victoria as well as rice.
“We have concluded that the change in water demand profile has had a tempering effect on demand, which is limiting prices,” Mr Galeano said.
Carry on trading
Rules which encourage increasing use of carryover, and irrigators’ growing enthusiasm to use it, is another factor which has taken heat out of the market.
“Since 2007 there are much higher levels of carryover, which has had smoothing effect on prices, as irrigators can now be more flexible with their water use,” Mr Galeano said.
Using ABARES’ model of the Southern Basin for the 2004-5 period, where irrigators built up carryover in preparation for increasingly austere irrigation availability, was an early indication of the increasing influence of the market mechanism.
“Entitlement holders built up their carryover reserves (in 2004-5) which had the implication of building up prices slightly,” Mr Galeano said.
“But at peak of the drought they drew down on those reserves, which had a tempering effect on the market.”
Hodge Farms principal Stuart Hodge, a mixed farmer in the Goulburn Murray Irrigation District, told the conference said market reforms were generally beneficial.
But market complexity is a challenge, particularly to time-poor individual operators.
Going for broke
He cited the example of water broker regulation.
“I participate in the grain futures market and that is very heavily regulated in terms of what brokers are and aren’t allowed to do," Mr Hodge said.
“Anyone can put a shingle out and say they’re a broker.”
Mr Hodge said some behave like its the wild west and “do whatever they like”.
“Sometimes they’ll trade, sometimes they’ll broker, sometimes both. It’s equivalent to selling cattle out of a paddock where your local agent is a cattle punter as well as an agent.
“Is he buying for them for himself, is buying them on behalf of a meat buyer? How is it working? You don’t know.”
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