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1 Australian water markets: trends and drivers to National Water Commission Australian water markets: trends and drivers to

2 Commonwealth of Australia 2011 This work is copyright. Apart from any use as permitted under the Copyright Act 1968, no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and enquiries concerning reproduction and rights should be addressed to the Commonwealth Copyright Administration, Attorney General s Department, Robert Garran Offices, National Circuit, Barton ACT 2600 or posted at Online ISBN Australian water markets: trends and drivers, to , June 2011 Published by the National Water Commission 95 Northbourne Avenue Canberra ACT 2600 Tel: Date of publication: June 2011 Design by Spectrum Graphics An appropriate citation for this publication is: National Water Commission 2011, Australian water markets: trends and drivers, to , NWC, Canberra

3 Foreword The National Water Commission is pleased to release its report Australian water markets: trends and drivers, to , a companion report to the Australian water markets report series. The annual Australian water markets reports provide statistics that summarise activity in Australian water markets, together with information on water market structures. The aim of this synthesis report is to analyse trends in market activity (how much water is being traded and where), as well as the drivers influencing market outcomes (why is water being traded). Although the focus is on the southern Murray Darling Basin where the majority of trade occurs, the report also provides information on trade outside the basin. This report shows the links between water availability and water allocation trade. Changes in rainfall, inflows and storage levels control allocation levels, and therefore the volume of water available for trade. Water availability and announced allocation levels affect seasonal demand for additional water, which in turn affects the extent and volume of allocation trade. The price of allocation trades is also influenced by water availability, with significant variability in allocation prices over time. The short-term water needs of different types of agriculture are key drivers of allocation trading. Crops such as rice have greater year-to-year flexibility in their water requirements, while permanent horticultural plantings have water demands that must be met each year. Regional patterns of agriculture have therefore influenced the direction of intervalley trade, especially during dry years. For example, in , growers in the Murrumbidgee and the Goulburn valleys with more flexible water needs took advantage of the high price for water allocations, trading water to areas dominated by permanent plantings such as orchards and vines. This report shows that trading in the water entitlement market, particularly in the southern Murray Darling Basin, has grown steadily. Unlike the water allocation market, the level of trading in the entitlement market is generally driven by longterm concerns such as business and risk management, and the entry or exit of participants in the irrigated agriculture sector. Changes to policy and regulation (such as water trading rules) can also influence entitlement trading. The Australian Government s purchases of water entitlements for the environment accounted for 0% of trades in , 4% in , and 36% in Prices for entitlement trades have remained relatively steady for the last three years. The growth of Australia s water markets over recent years demonstrates that the market is able to serve water users needs. Australia s water markets continue to give water users flexibility when responding to variability in water availability. Markets also enable water users to more effectively manage production and business decisions. The Commission thanks the Bureau of Meteorology and all entities named under the Water Regulations 2008 for their work in collecting and providing the water trade data that supports this report. The Commission also acknowledges Deloitte Touche Tohmatsu for its contribution to the preparation of the report. The Commission would welcome feedback on the report. James Cameron Chief Executive Officer June 2011 National Water Commission Australian water markets: trends and drivers to

4 Contents 1. Introduction Purpose of the report Overview of the water market Market segments Summary of market outcomes Data and terminology Report overview Overview of the southern MDB Physical layout and trading zones Climate, water supply and major storages Location and composition of entitlements Allocation trade in the southern MDB Allocation levels Allocation trade Entitlement trade in the MDB Volume of entitlement trade Number of entitlement trades Prices for entitlement trades Water entitlement market drivers Trade outside the MDB Allocation and entitlement trade Non-MDB trading, by jurisdiction Summary Water allocation market Water entitlement market 58 Appendix A 60 References 75 Abbreviations and acronyms 75 2 National Water Commission Australian water markets: trends and drivers to

5 Tables Table 1.1: Market segments 12 Table 1.2: National Water Initiative-equivalent entitlement terminology, 30 June Table 2.1: Entitlements on issue, (ML) 20 Table 2.2: Key irrigated agricultural industries, southern MDB 21 Table 4.1: Victorian irrigation districts nearing the 10% limit at the end of Table A.1: Volume of allocation and entitlement trades in the southern MDB, to Table A.2: Volume of allocation and entitlement trades, northern MDB and non-mdb, to (ML) Table A.3: Rainfall and storage levels of major dams in the MDB, to Table A.4: Low-, general and high-reliability/security entitlements, southern MDB, by volume Table A.5: End-of-season allocations to high- and low-security entitlements, southern MDB, to Table A.6: Water allocation levels and proportions traded, southern MDB, to Table A.7: Number and average size of allocation trades, southern MDB, to Table A.8: Average water allocation and average allocation trade price, MDB, to Table A.9: Volume and number of allocation trades in the southern MDB, to Table A.10: Net allocation trade between trading zones, southern MDB, to (ML) Table A.11: Net allocation trade between trading zones, southern MDB, to Table A.12: Rice production, rice prices and water allocation prices, Murrumbidgee, to Table A.13: Wine grape production, wine grape prices and water allocation prices, SA Murray, to Table A.14: Milk production, hay prices and water allocation prices, Goulburn, to Table A.15: Water allocation trading in South Australia in Table A.16: Proportion of total entitlement trade in the southern MDB, to , by reliability class Table A.17: Number and average size of entitlement trades, southern MDB, to Table A.18: Number and average size of entitlement trades, southern MDB, to Table A.19: Average prices for entitlement trades in the southern MDB, to ($/ML) Table A.20: Average prices for entitlement trade in the southern MDB, by state and reliability class ($/ML) Table A.21: Commonwealth water purchases in the MDB, to (ML) Table A.22: Volume and number of trades out of NSW irrigation infrastructure operator districts, to Table A.23: 4% trade-out limit and total trade out of affected irrigation areas in Victoria 72 Table A.24: Allocation trades outside the MDB, to (GL) 73 Table A.25: Entitlement trades outside the MDB, to (GL) 73 Table A.26: Trade volumes and prices, Western Australia, to Table A.27: Trade volumes and number, Tasmania, to Table A.28: Volume of medium reliability entitlement trade and average price for the Nogoa Mackenzie Water Supply 74 Scheme and the Bundaberg Water Supply Scheme, to National Water Commission Australian water markets: trends and drivers to

6 Figures Figure 1.1: Simplified example of an unbundled entitlement system 9 Figure 1.2: Simplified example of trading in an unbundled entitlement system 10 Figure 1.3: Entitlement trade 11 Figure 1.4: Allocation trade 11 Figure 1.5: Volume of allocation and entitlement trades in the southern MDB, to (ML) 13 Figure 1.6: Volume of regulated allocation and entitlement trades in the northern MDB, to (ML) 14 Figure 1.7: Volume of allocation and entitlement trades outside the MDB, to (ML) 14 Figure 2.1: Trading zones in the southern MDB 18 Figure 2.2: Rainfall and storage levels of major dams in the MDB, to Figure 2.3: Percentage of total entitlements on issue (low-, general and high-reliability/security entitlements, southern 21 MDB, by volume Figure 3.1: End-of-season allocations to high- and low-security entitlements, southern MDB, to Figure 3.2: Volume of allocation trade, southern MDB, to (ML) 26 Figure 3.3: Water allocation levels and proportion traded, southern MDB, to Figure 3.4: Number and average size of allocation trades, southern MDB, to Figure 3.5: Average water allocation and average allocation trade price, southern MDB, to Figure 3.6: Volume and number of allocation trades in the southern MDB, to Figure 3.7: Net interstate allocation trade, southern MDB, to (ML) 30 Figure 3.8: Net allocation trade between trading zones, southern MDB, to (ML) 31 Figure 3.9: Significant interzone water allocation trading, southern MDB, Figure 3.10: Significant interzone water allocation trade, southern MDB, Figure 3.11: Significant interzone water allocation trade, southern MDB, Figure 3.12: Rice production, rice prices and water allocation prices, Murrumbidgee, to Figure 3.13: Wine grape production and prices, and water allocation prices, SA Murray to Figure 3.14: Milk production, hay prices and water allocation prices, Goulburn, to Figure 3.15: Water allocation trading in South Australia in Figure 4.1: Entitlement trade volumes in the southern MDB, to (ML) 40 Figure 4.2: Entitlement trade volumes in the northern MDB, to (ML) 40 Figure 4.3: Total entitlement trade in the southern MDB, to , by reliability class 41 Figure 4.4: Number and average size of entitlement trades, southern MDB, to Figure 4.5: Number and volume of entitlements traded, southern MDB, to , by month 42 4 National Water Commission Australian water markets: trends and drivers to

7 Figure 4.6: Average prices for entitlement trades in the southern MDB, to ($/ML) 42 Figure 4.7: Average prices for entitlement trades in the southern MDB, to , by state and 43 reliability class Figure 4.8: Commonwealth water purchases in the MDB, to Figure 4.9: Volume and number of trades out of NSW irrigation infrastructure operator districts, to Figure 4.10: 4% trade-out limit and total trade out of affected irrigation areas in Victoria Figure 5.1: Allocation trade outside the MDB, to (GL) Figure 5.2: Entitlement trade outside the MDB, to (GL) Figure 5.3: Trade volumes and prices, Western Australia, to Figure 5.4: Trade volumes and numbers, Tasmania, to Figure 5.5: Volume of medium reliability entitlement trade and average price, Nogoa Mackenzie and Bundaberg water supply schemes, to National Water Commission Australian water markets: trends and drivers to

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9 Section 1 Introduction 1.1 Purpose of the report Overview of the water market Market segments Summary of market outcomes Data and terminology Report overview 15

10 1.1 Purpose of the report In December 2010, the National Water Commission released the Australian water markets report (NWC 2010a), which was the Commission s third annual statement of water trading activity across Australia. The objective of the Australian water markets report series (the AWMR series: NWC 2008, 2009, 2010a) is to inform market participants and other interested parties about the structure of water markets in Australia by documenting trading products, activity and prices. The AWMR series focuses on the market institution and describes the institutional, regulatory and legislative arrangements that enable water trade in each jurisdiction. This report, Australia s water markets: trends and drivers, to , identifies and analyses trends in water market activity and key drivers of market outcomes. It draws on the three years of data collected for the AWMR series and builds on the series by providing additional analysis and explanation of trends and activity over an extended timeframe. This report also draws from a range of other data sources for statistics before , and related water markets reports prepared by the Commission, such as The impacts of water trading in the southern Murray Darling Basin (NWC 2010b), in order to provide some insights into recent activity in Australia s water markets. The report includes: + summary information on the number of trades, volume of trading and prices at which water has traded + analysis of the supply of and demand for water, including where water has been traded from and to + discussion about why the water market is acting in the way it does, including drivers of market activity. The report focuses on the period covered by the AWMR series ( to ), as that is the period for which the most comprehensive and reliable dataset is available. However, where relatively comparable data is available, the report also identifi es and discusses longer term trends. The long-term trend information provides a picture of how the market has developed and matured over time and demonstrates why the water market is one of the success stories of water reform in Australia. This report is not intended to be a comprehensive review of all aspects of Australia s water markets. The intention is to highlight trends and provide comment on the operation of particular aspects of the market. Furthermore, the report focuses on the Murray Darling Basin (MDB) and in particular the southern part of the basin, as that is where most trade occurs. The Commission welcomes comments and feedback on this report. 1.2 Overview of the water market This section provides a brief overview of the water market. More detail on the market framework and market activity can be found in the AWMR series. Water is managed by individual states and territories that issue water users with entitlements to access and use water. The entitlements are referred to using differing (jurisdiction-specific) terminology (see Section 1.4). Water allocation systems throughout the MDB generally define pools of water that are available for consumptive use and share the available resource among entitlement holders. Holders of water entitlements receive water allocations every season based on the amount of water in storages, expected inflows and other factors. The allocations are defined as a percentage of the nominal quantity of water entitlement available for consumptive use. Water entitlements exist in both regulated and unregulated systems. In regulated systems, flows are controlled through the use of infrastructure that stores and releases water, while flows in unregulated systems are not controlled through the use of infrastructure. Water entitlements to regulated sources have different levels of reliability, such that higher reliability entitlements receive their allocations before lower reliability entitlements. A holder of a water entitlement with an estimated reliability of 90% would expect to receive full allocations in 90 years out of 100. The levels of reliability of water entitlements vary by jurisdiction. Water entitlements in unregulated systems have no formal reliability. The ability to take water from an unregulated water source is generally specified by stipulating a number of restrictions on extraction (minimum flow conditions, maximum daily extraction and extraction timing). Entitlements can be either bundled or unbundled. Unbundling refers to the separation of bundled entitlements into their individual elements, including their separation from land title. Historically, most entitlements were bundled with land, and bundled use and access rights. However, most entitlements in significant surface water systems have now been unbundled from land. Additional degrees of unbundling are also possible, for example to include a share of channel capacity (a delivery share). 8 National Water Commission Australian water markets: trends and drivers to

11 The most common model that has been adopted in regulated surface water systems involves: + a tradeable water access entitlement + a water use right, which is non-tradeable and site specific, and defines the terms and conditions under which water can be used on land. The unbundled entitlement system is illustrated in Figure 1.1. Figure 1.1: Simplified example of an unbundled entitlement system PRE-WATER REFORM NWI REFORMS Introduction Section 1 Water storage Water storage Water right Water access entitlement Water access entitlement a perpetual or ongoing entitlement to a share of water from a specified consumptive pool as defined in the relevant water plan. Unbundling Water allocation Delivery share Water use licence Water allocation the specific volume of water allocated to water access entitlements in a given season. Delivery share a share of capacity in an irrigation supply channel or a water course. Land Land Traditional water right a right to an annual volume of water, subject to available water in storage. Inseparable from land. Water use licence the rights and obligations relating to the use of water on a specific parcel of land. Generally, there are two types of water trade transactions (see Figure 1.2): + the transfer of an entitlement (the right to take and use water) from one legal entity to another + the transfer of water allocation (water allocated to an entitlement) from one authorised user to another. National Water Commission Australian water markets: trends and drivers to

12 Figure 1.2: Simplified example of trading in an unbundled entitlement system Water access entitlement trade: Transfer of ownership of the right to a perpetual share of the consumptive pool. Water access entitlement Water access entitlement Water access entitlement W ater allocation Water allocation Seller $ Buyer Water allocation trade: Transfer of ownership of the right to a specified volume of water allocated to a water access entitlement. Water access entitlement Water access entitlement Water allocation Water allocation Seller $ Buyer Water entitlement trading is generally driven by changes in long-term demand and in the nature and location of water-using industries. Entitlements can be purchased as an investment or risk management tool, and entitlement trading may also reflect shifts between agricultural sectors, or participants exiting irrigated agriculture. Water allocation trading generally assists users to respond to seasonal conditions and other short-term events by reallocating water between users within a particular year. Water markets differ between jurisdictions due to the jurisdictions differing approaches to water planning and management and differing administrative and institutional arrangements. Each jurisdiction records and manages trade transactions on its own registry system. The broad processes for entitlement and allocation trading are outlined in figures 1.3 and 1.4, although specifi c arrangements may differ between jurisdictions. 10 National Water Commission Australian water markets: trends and drivers to

13 Figure 1.3: Entitlement trade Contract of sale + + Buyer and seller locate each other and agree to a price A contract is drawn up Introduction Lodgement of application + Regulatory approval is sought in cases where trade might impact on the water resource and the environment (otherwise it is generally not required) Section 1 Settlement + Buyer and seller sign transfer papers and exchange title documents Registration + Buyer lodges transfer documents with appropriate registry (transfer takes legal effect) Figure 1.4: Allocation trade Contract of sale + + Buyer and seller locate each other and agree to a price A contract is drawn up Lodgement of application + + Regulatory approval must be sought for allocation Upon approval, water accounts are adjusted for buyer and seller and the transaction is registered Settlement + Buyer and seller are advised in writing of determination + Consideration amount is exchanged from buyer to seller. National Water Commission Australian water markets: trends and drivers to

14 The outcomes of any market, which are mainly assessed by reference to prices and quantities traded, depend on both supply and demand in that market. The factors influencing supply and demand in the water market are more numerous and complex than in many other markets: + Seasonal events and longer term climate trends affect supply and demand. For example, a dry period will increase demand for water and also restrict its supply. Furthermore, because seasonal weather patterns can vary across areas covered by the market, supply and demand can differ widely between different catchments. + Demand for water is partly a function of supply and demand for a wide range of agricultural commodities. + Water markets are governed by various physical and hydrological constraints, and delivery of the commodity requires transport via natural systems or large infrastructure. Where there is no interconnection between areas, supply and demand conditions can be very different, even in areas that are physically very close. + While water has been traded for some time, the water market it is not yet fully mature. Changes in governance and administration of the market, and the products that are traded in the market, are still occurring. + Efforts are underway to address historical overallocation of water resources in many areas, which may result in changes to the volume of water available for consumptive use and trade. + The water market is a composite of a number of different submarkets, some of which interact and some which are totally independent of other submarkets. The submarkets exist mainly due to physical constraints on trading, but can also occur because of policy decisions or for other reasons. + Differences exist between water markets across states. They include different trading rules, trading processes, attributes of the product being traded (particularly relating to entitlement reliability), fees and charges, and other matters. + Unlike in other markets (such as the Australian Stock Exchange), there is no single or dominant trading platform. + There has been recent and relatively high government participation in water markets compared to other markets (primarily to recover water for the environment). The Australian Government and the state governments are committed to implementing the National Water Initiative, which aims to improve the effectiveness of various aspects of water management, including water markets. Further reforms and improvements to administrative and institutional arrangements are likely to remedy some shortcomings in water markets, but the physical and hydrological constraints are likely to persist. For further information on factors affecting the efficient operation and further development of Australia s water markets, see NWC (2011). 1.3 Market segments The Australian water market consists of a number of separate markets of varying size, activity and connectivity with each other. The separate markets are generally defined by physical water system boundaries and interact with each other where there is hydrologic connectivity. Table 1.1 summarises the water market segments in Australia. Table 1.1: Market segments Major market segment Murray Darling Basin Outside the Murray Darling Basin Market segment Northern Murray Darling Basin Southern connected Murray Darling Basin Tasmania Northern Territory Western Australia South Australia outside the Murray Darling Basin Queensland outside the Murray Darling Basin New South Wales outside the Murray Darling Basin Victoria outside the Murray Darling Basin 12 National Water Commission Australian water markets: trends and drivers to

15 Murray Darling Basin Most water trading occurs in the MDB, particularly the southern connected MDB. Unlike most other catchments in Australia, the southern connected part of the basin is hydrologically linked, which allows for trade between catchments, and is a much larger and deeper market. Most of the southern MDB is regulated. It receives most of its rainfall in the winter months, while in the north about half of annual inflows occur during the summer. Consequently, the types of irrigated agriculture differ across the basin. Irrigation in the north is typically opportunistic and based on the prevailing rainfall patterns, while in the south, at least in the hotter and drier parts downstream of Mildura, irrigation (especially for perennial horticultural crops and viticulture) is based on more reliably supplied water released from upstream dams. Most of the analysis in this report focuses on the MDB, particularly the southern MDB, because: + most trading activity has occurred in that area (as a result of its large proportion of land under irrigated agricultural production and its well-developed water infrastructure) + there is significantly more data available on trading in the region. Introduction Section 1 Outside the Murray Darling Basin Catchments in areas outside the MDB are typically hydrogically isolated, and trade is limited to smaller geographical areas. As a result, markets are often thin and trading activity varies widely. The level of market maturity in the jurisdictions outside the MDB varies. For example, while trade is possible in the Northern Territory, no water trading has occurred there, largely because water resources have not yet been fully allocated. 1.4 Summary of market outcomes Figures 1.5, 1.6 and 1.7 show the volumes of allocation and entitlement trade for the southern MDB, northern MDB and areas outside the MDB, respectively. The volume of allocation and entitlement trade in the southern MDB has grown steadily since the introduction of water trading in the early 1980s. Initially there was limited trading because trading was not widely accepted by irrigators, there was limited demand for trade, and formal market mechanisms and information about the market did not exist in most areas. In key areas of the MDB there were also few limitations on additional extractions. However, as demonstrated in Figure 1.5, there was a significant increase in the volume of trade following the establishment of the interim cap on the volume of surface water extractions in the mid-1990s. Trade volumes have also increased in response to climate and water supply variability over the past 10 years and to the implementation of water market reforms driven by the National Water Initiative. Figure 1.5: Volume of allocation and entitlement trades in the southern MDB, to (ML) Volume (ML) Interim cap announced June 1995 Southern MDB allocation trade National Water Initiative signed June S outhern MDB entitlement trade Note: Includes only trades of regulated water from the Lower Darling, NSW Murray, Murrumbidgee, SA Murray, Victorian Murray, Goulburn and Campaspe Loddon systems. Sources: NWC (2010b), AWMR series; approximate values for years before from the Murray Darling Basin Commission. National Water Commission Australian water markets: trends and drivers to

16 The volume of entitlement trade in the northern MDB has followed the same trend as in the southern MDB; however, the volume of allocation trade did not change over the period from to Entitlement and allocation trade are not possible between trading zones in the northern MDB. This is likely to have an impact on the volume of allocation trade, as localised climatic and production effects cannot be offset by importing water from other regions. The ability of these markets to respond to changes in water availability is limited. Figure 1.6: Volume of regulated allocation and entitlement trades in the northern MDB, to (ML) ML Northern MDB allocation trade Northern MDB entitlement trade Note: Data for areas outside the southern MDB for the years before was not available for this report. Only regulated trades are presented, as groundwater allocation trades were not reported for NSW in Source: AWMR series. Outside the MDB, both allocation and entitlement trade remained steady from to (Figure 1.7). Figure 1.7: Volume of allocation and entitlement trades outside the MDB, to (ML) ML Non-MDB allocation trade Non-MDB entitlement trade Note: Data for areas outside the southern MDB before was not available for this report. Source: AWMR series. 14 National Water Commission Australian water markets: trends and drivers to

17 1.5 Data and terminology This is the first water markets analysis and commentary report produced by the Commission. The report builds on, and sources data from, the AWMR series from to and uses reporting conventions established by those reports. It also uses data from a number of different sources, particularly for years before However, directly comparable data is available only from the time of production of the first Australian water markets report in For example, data before that date does not include trades in unregulated rivers and groundwater; nor does it include trades within New South Wales irrigation corporations or South Australian irrigation trusts. A large amount of the information presented in the body of this report is shown in charts. The numerical values underlying tables and charts are in Appendix A. The Australian states and territories use differing terminology to describe statutory water rights and dealings. In some cases, different terms are used to refer to essentially the same market product or dealing (see Table 1.2). To avoid confusion, this report uses the generic terms entitlement and allocation : + entitlement an entitlement to exclusive access to a share of available water resources that exists by virtue of or under state law + allocation the volume of water allocated to water access entitlements in a given period (usually a water year, from 1 July to 30 June). Introduction Section 1 Table 1.2: National Water Initiative-equivalent entitlement terminology, 30 June 2010 Jurisdiction Water access entitlement Water allocation Queensland Water allocation Seasonal water assignment Victoria Water share Water allocation South Australia Water licence (bundled) and water access entitlement (unbundled) Water allocation a New South Wales Water access licence Water allocation Western Australia Water licence Water allocation a Northern Territory Water licence Water licence Australian Capital Territory Water access entitlement Water allocation Tasmania Water licence Water allocation Applicable only to Harvey Water. Note: This is not a complete list of entitlements on issue in each jurisdiction. 1.6 Report overview The remainder of this report is structured as follows: + Chapter 2 summarises the characteristics of the southern MDB + Chapter 3 discusses allocation trading in the southern MDB + Chapter 4 comments on entitlement trading in the southern MDB + Chapter 5 discusses trading outside the MDB. + Appendix A lists the numerical values underlying the tables and figures in body of the report. National Water Commission Australian water markets: trends and drivers to

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19 Section 2 Overview of the 2.1 Physical layout and trading zones 18 southern MDB 2.2 Climate, water supply and major storages Location and composition of entitlements 20

20 The MDB is Australia s main water market, making up 93% of the volume traded across Australia in The MDB is considered to comprise two parts: the southern MDB and the northern MDB. That distinction in part reflects the variability of connectivity between the northern and southern systems. The southern MDB includes a number of distinct but connected water systems that cross state boundaries. It accounts for most of the water used and traded, and most of the irrigated agricultural activity, in the entire basin. Therefore, it is the main focus of this report. 2.1 Physical layout and trading zones The southern MDB comprises the northern river systems of Victoria, the southern river systems of New South Wales, and the River Murray in South Australia (see Figure 2.1). The boundary with the northern MDB is the Lower Darling regulated river zone, which feeds directly into the Menindee Lakes in New South Wales. Trading zone boundaries are usually defined according to water system or water source boundaries. Figure 2.1: Trading zones in the southern MDB South Australia New South Wales L ower Darling Lachlan SA Murr ay NSW Murray below Barmah Murrumbidgee VIC Murray below Barmah NSW Murray above Barmah VIC Murray above Barmah Victoria Loddon Campaspe Gr eater Goulburn L ower Goulburn 18 National Water Commission Australian water markets: trends and drivers to

21 This report uses the boundaries of eight zones defined in The impacts of water trading in the southern Murray Darling Basin (NWC 2010b), which aggregates smaller trading zones defined under Victoria s water resource plans (the Loddon and Campaspe systems). The zones are: 1. Lower Darling 2. Murrumbidgee 3. NSW Murray (including above and below Barmah) 4. SA Murray 5. Vic Goulburn (including Greater and Lower Goulburn) 6. Vic Loddon and Campaspe 7. Vic Murray above Barmah (including the Lower Broken Creek) 8. Vic Murray below Barmah. 2.2 Climate, water supply and major storages Climate is arguably the biggest determinant of supply and demand for water. The key influence is rainfall, but other factors (such as temperature and evaporation levels) also affect the supply of and demand for water. Storage levels (including in dams, reservoirs and groundwater aquifers) are a key determinant of the water available for consumptive uses and a major determinant of allocation levels. However, even if there is little water available in storages and river systems, good rainfall (in terms of both spatial and temporal distribution) in agricultural areas can sharply reduce demand for water from storage and supply systems. Figure 2.2 shows the generally declining level of major storages supplying the MDB between and On average, storages were more than 90% full at the end of but fell until , when they were just 15% full. This was because of a period of sustained lower than average rainfall from to Rainfall improved slightly in , but storage levels remained very low. In the MDB experienced the best rainfall for many years, well above the long-term average. Storage levels began recovering as a result, and in are likely to be at their highest for a number of years. Overview of the southern MDB Section 2 Figure 2.2: Rainfall in the MDB and storage levels of major dams in the southern MDB, to Rainfall (mm) / / / / / / / / / / /10 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Percentage of storage capacity Total storages % Annual rainfall Average annual rainfall Note: Major dams are Dartmouth, Eildon, Hume, Blowering and Lake Victoria. Long-term average rainfall is based on rainfall measurements in the MDB between 1961 and 1990, and annual rainfall is an average figure for all of the MDB. Sources: Bureau of Meteorology (for rainfall data for the MDB) and Murray Darling Basin Authority (for storage data). National Water Commission Australian water markets: trends and drivers to

22 2.3 Location and composition of entitlements Entitlements on issue Table 2.1 summarises the entitlements on issue in in the southern MDB. The largest volume was in the NSW Murray and the Murrumbidgee, but a proportion was in unregulated systems. Table 2.1: Entitlements on issue, (ML) Trading zone Entitlements on issue Lower Darling Murrumbidgee NSW Murray (including above and below Barmah) SA Murray Vic Goulburn (including Greater and Lower Goulburn) Vic Loddon and Campaspe Vic Murray above Barmah (including the Lower Broken Creek) Vic Murray below Barmah Total entitlements on issue in the southern MDB Proportion of total entitlements on issue in Australia 47.8% Note: Entitlement volumes include regulated and unregulated surface water and groundwater. Source: AWMR series Composition of entitlements Regulated entitlements are split between higher reliability entitlements and lower reliability entitlements. In New South Wales, lower reliability entitlements are referred to as general security water access licences; in Victoria, they are referred to as low-reliability water shares. General security and low-reliability entitlements only receive allocations once there is enough water to meet high-reliability entitlements in the current year and, with minimum inflows, the following year. High-reliability entitlements in Victoria are expected to reach 100% of allocations in from 89 to 98 years out of 100, depending on the zone (Office of Water 2009). Similarly, in New South Wales water sharing plans for the NSW Murray and the Murrumbidgee indicate that reliability for high-security shares is 97% and 95%, respectively (Ribbons 2009). While the reliability of lower reliability entitlements varies by location, Victorian low-reliability water shares tend to be less reliable than New South Wales general security entitlements (Office of Water 2009, Ribbons 2009). Almost half of the entitlements (by volume) in the southern MDB are held in two general security products in New South Wales. There is only one class of regulated entitlement in South Australia (referred to as high-security water entitlements). Figure 2.3 shows the composition of the total regulated entitlement pool in the southern MDB, by reliability class. 20 National Water Commission Australian water markets: trends and drivers to

23 Figure 2.3: Percentage of total entitlements on issue (low-, general and high-reliability/security entitlements, southern MDB, by volume Goulburn High12.6% Goulburn Low 5.5% Overview of the southern MDB Murrumbidgee General 23.4% Murrumbidgee High 4.7% Loddon and Campaspe High 0.7% Loddon and Campaspe Low 0.3% Vic Murray above Barmah High 3.9% Section 2 Vic Murray above Barmah Low 1.7% Vic Murray below Barmah High 10.8% Vic Murray below Barmah Low 2.1% NSW Murray and Lower Darling General 21.7% SA Murray High10.2% NSW Murray and Lower Darling High 2.5% Source: AWMR series Irrigated agricultural activities in the southern MDB Table 2.2 summarises the key irrigated agricultural industries operating in southern MDB trading zones. Table 2.2: Key irrigated agricultural industries, southern MDB Region Horticulture Rice Dairy Mixed farming Lower Darling 9 NSW Murray Murrumbidgee 9 9 SA Murray 9 9 Vic Goulburn Vic Murray 9 9 Source: NWC (2010b). National Water Commission Australian water markets: trends and drivers to

24 Horticulture The highest concentration of horticulture is in the Victorian Murray below Barmah, Lower Darling, Murrumbidgee and SA Murray trading zones. Horticultural demand for water can be inelastic in the short term, as there is a high cost in losing established plantings. This means that allocation water is often purchased and imported during times of low local water allocations to ensure the survival of permanent plantings. Rice The NSW Murray and Murrumbidgee zones have a high concentration of irrigated annual cropping, which includes rice growing. Demand for water for rice growing is relatively elastic, in that it changes significantly from year to year depending on water availability and prices (for both water and crops). Because rice is an annual crop, rice growers can sell water allocations and reduce the area under production in relatively dry years. During a water season, they can respond to low water allocations by delaying their plantings until they get a more accurate indication of available water. They can also source additional water through the allocation market to support planting decisions, or they can sell their water allocation if planting does not proceed (providing a return on their water entitlement). Dairy Dairying is highly concentrated in the Goulburn, Victorian Murray above Barmah and NSW Murray zones. Similarly to rice farmers, dairy farmers can respond to dry years in various ways, including by buying allocations to grow feed or selling allocations to assist in purchasing feed substitutes (allowing farmers to maintain their herds for the next season). Mixed farming Mixed farming varies across the southern MDB trading zones, but is most common in the Victorian Loddon Campaspe and Murray above Barmah zones. Water demand is highly elastic, as it is possible to substitute irrigated and dryland production depending on water availability and prices. 22 National Water Commission Australian water markets: trends and drivers to

25 Section 1 Introduction Section 3 Allocation trade in 3.1 Allocation levels 24 the southern MDB 3.2 Allocation trade 26 National Water Commission Australian water markets: trends and drivers to

26 3.1 Allocation levels Each season, entitlement holders in regulated systems are allocated a proportion of the available consumptive pool. The allocation is based on the reliability of the entitlement, the amount of water in storages and the expected climatic and system conditions. Allocation levels determine the amount of water that may be consumed during a season. Allocations usually increase cumulatively throughout the season. Allocation announcements in the MDB are typically made on the first and fifteenth days of each month. Figure 3.1 shows end-of-season allocations to the major tradeable water entitlement products in the southern MDB. It shows four stages of allocation levels over the past 12 years. From to (the early stages of drought), end-of-season allocations were consistently high and often at or above 100%. From to , there was a clear trend of declining allocations to low-reliability (and general security) entitlements because rainfall was below average, before very low levels were reached in and In those years, allocations for high-reliability (and high-security) entitlements also declined dramatically. In and , a recovery in allocations was evident. The significant variation in end-of-season allocations between the trading zones reflects the spatial variation in water availability. This factor, in concert with the variations in elasticities of demand and the value of agricultural production, is a key driver of allocation trade in the southern MDB. For example, in irrigators in the SA Murray received an average allocation level of 18%, whereas irrigators in New South Wales received much higher average allocations (33% in the Murrumbidgee and 60% in the Lower Darling). 1 As a result, there was significant allocation trade out of New South Wales into South Australia in that year (see Figure 3.10). 1 Allocation levels are the average annual allocations received by a trading zone in the southern MDB for regulated entitlements. Aggregation includes only tradeable regulated entitlements. Allocation levels are calculated as (volume allocated to regulated entitlements) (volume of regulated entitlements on issue). See Appendix A for end-of-season allocation levels by reliability of entitlement. 24 National Water Commission Australian water markets: trends and drivers to

27 Figure 3.1: End-of-season allocations to high- and low-security entitlements, southern MDB, to Early drought Declining storages Very low Recovery % of allocation at end of season Vic Goulburn - high SA Murray - high Vic Murray - high Vic Murray - sales water NSW Murray - high NSW Murray - general NSW Murrumbidgee - high NSW Murrumbidgee - general Note: Victorian low-reliability water shares were created on 1 July Before that time sales water existed. No low-reliability allocations were made between and Sources: NWC (2010b), AWMR series. Section 3 Allocation trade in the southern MDB National Water Commission Australian water markets: trends and drivers to

28 3.2 Allocation trade Volume of allocation trade Figure 3.2 shows that the volume of allocation trade in the MDB has continued to grow over time, reaching1652 GL in the southern MDB (2301 GL across the entire MDB) in A key turning point for the market occurred in 1995 with the establishment of a cap on total extraction in the MDB. The cap, which limits the volume of water available for consumptive use, meant that new demand could only be satisfied through trading. Allocation trade generally grew consistently until , when allocations for lower reliability entitlements 2 fell substantially in both Victoria and New South Wales. It was also the first year since the introduction of water trading in which not all key high-security products received 100% allocations. The volume of allocation trades then generally declined over the next four years as allocations (and hence the volume of water available) fell, reaching a low in that coincided with the lowest storage levels. Trade then increased in and again in and Increases in and were possibly due to increased water availability in those years. The reason for the apparent rebound in is not entirely clear: allocations remained low in that year. It is possible that the increase was related to the extremely high prices for water allocations during the first quarter of the year stimulating additional supply (see Figure 3.15). Data limitations may also be a factor: data for the years before does not include trades in unregulated rivers and groundwater or trades within New South Wales irrigation corporations or South Australian irrigation trusts. Figure 3.2: Volume of allocation trade, southern MDB, to (ML) Volume of trade (ML) Interim cap announced June 1995 National Water Initiative signed June Note: Includes only trades of regulated water from the Lower Darling, NSW Murray, Murrumbidgee, South Australian Murray, Victorian Murray, Goulburn and Campaspe Loddon systems. Sources: NWC (2010b), AWMR series; approximate values from the Murray Darling Basin Commission for the years before Low-reliability water shares in Victoria were created on 1 July Before that time, this water was referred to as sales water and was not separated from higher reliability water. 26 National Water Commission Australian water markets: trends and drivers to

29 Figure 3.3 shows that there has historically been a broadly inverse relationship between water allocation levels and the proportion of water allocations traded. As the volume of water allocated fell from to , the percentage of the total allocation that was traded tripled, going from approximately 5% to 15%. Figure 3.3: Water allocation levels and proportion traded, southern MDB, to Announced allocation volumes (ML) Allocations traded as % of announced allocations Announced allocation volumes (ML) % of announced allocation traded Allocation trade in the southern MDB Section 3 Sources: NWC (2010b), AWMR series Number of allocation trades It was not possible to obtain data on the number of allocation trades before for this report. However, Figure 3.4 shows that both the number and the average size of allocation trades have increased since It also shows that the numbers of trades originating from the NSW Murray, Murrumbidgee and Victorian Murray below Barmah zones are typically much larger than for other zones. Figure 3.4: Number and average size of allocation trades, southern MDB, to Number of allocation trades Average size of allocation trades (ML) Lower Darling Murrumbidgee Vic Goulburn NSW Murray Vic Murray above Barmah Average size (volume) of allocation trades SA Murray Vic Loddon and Campaspe Vic Murray below Barmah Note: To avoid double counting, the numbers of trades and volumes used to calculate the average size of trades are based on internal trades plus trades out of each water system. Source: AWMR series. National Water Commission Australian water markets: trends and drivers to

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