Case Study: Water Trading in Northern Victoria

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Case Study Water Trading in Northern Victoria

• Sigmund Fritschy
• Senior Economist, Climate Change, Environment
  Water Team
• Department of Treasury and Finance, Victoria
• Victorian Adaptation Symposium
• 4 June 2009

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Outline

• History/ rationale for markets
• Water market in Northern Victoria
• Prices within season
• Prices across seasons

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History/ rationale for markets

• Small fee for water use
• Tragedy of the commons there was insufficient
  incentive to reduce growth in water use
• Over-extraction was starting to affect
  reliability of entitlements, increased concern
  about environment
• Cap introduced, on 1994 levels
• The only way to expand or enter irrigated
  agriculture was to buy water from existing
  entitlement holders
• Scarcity lead to trading and a water market

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History/ rationale for markets
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Water market in Northern Victoria
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Water market in Northern Victoria how it works

• Allocation vs entitlement
• Temporary vs permanent trade

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Water market in Northern Victoria

• Vast majority occurs in Nth Victoria (35,000 Nth
  vs 3,300 Sth)
• Permanent trade Nth Vic 2007/08
• gross value of trade approx. 277 million
• 2,200 water trades (in 2009/10, 4,000
  applications in 1st month) and
• 217GL traded.
• Temporary trade Nth Vic 2007/08
• gross value of trade approx 270 million
• 14,377 water trades and
• 313GL traded.
• Value of ag production (if possible),
• kinds of crops (if possible)
• Temporary market is more liquid, more data on how
  conditions affect trade

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Trade within season
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Trade within season

• Less water higher prices
• Heterogeneous participants
• Horticulture high value, permanent plantings
• Dairy farmers perennial and annual grasses, can
  substitute by buying in feed
• Broad acre lower value annual crops and
  livestock, can be opportunistic
• Intermediaries brokers speculate, take margin
• Decisions/ strategies at different points in
  time
• Start of season produce or not substitute
  uncertainty over allocations get certainty at a
  price wait and see
• Mid season understand how season is playing out
  (e.g. crop failure sell, bumper crop buy)
  lower cost water
• End of season save a crop sell unused portion
  not much water left carry over

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Trade over the years

• Goulburn system has become drier over time, with
  very dry years in 2002/03 and 2006/07
• Water is moving to higher value uses
• Response from the market
• Prices increasing over time
• Prices increase more in drier years
• Lower allocations increase volume traded
• Value of market increases with scarcity market
  has provided additional options to farmers and
  reduced cost of drought
• Following slides illustrate these points

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Goulburn system becoming drier

• Bjornlund, Rossini (c. 2007), Are the
  fundamentals emerging for more sophisticated
  water market instruments? Paper presented on the
  14th Annual Conference of the Pacific Rim Real
  Estate Sociey, Kuala Lumpur, January

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Water moving to higher value uses

• Returns vary
• Horticulture generates relatively large returns
• Dairy has reasonable gross margins, and can
  substitute
• Broad acre/ cropping is low value
• During drought
• water availability decreasing
• horticulture has held its ground/ increased water
  use

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Water moving to higher value uses (DSE, unpub)
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Prices increasing over time

• Bjornlund

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Prices higher in drought 2002/03, 2006/07

• Bjornlund

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Lower allocation more trade

• Bjornlund

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Trade reduces the impact of drought

• Productivity Commission modelled 10-30 reduction
  in allocation in Southern MDB
• Intra-region trade reduces impact of water
  reduction on GRP by 35 to 42
• Inter-region trade reduces impact of water
  reduction on GRP by further 22 to 24
• Together reduce impact on GRP by more than half
• PC (2004), Modelling Water Trade in the Southern
  Murray-Darling Basin, staff working paper

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Conclusion

• The water market has
• Increased the ability to respond flexibly within
  seasons and over the years
• Improved environmental outcomes
• Achieved reallocation of water to higher value/
  more productive uses
• How would all this have been achieved without
  markets?
• Government takes water from some farmers with
  compensation
• Government gives water to other farmers and
  charged them for it
• Over the years, within seasons (!)