Australian water markets: trends and drivers to

Transcription

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: [email protected] 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

30 3.2.3 Prices for allocation trades As noted in Box 3.1, there is a strong and inverse relationship between the availability of water (as defined by allocation levels) and prices for allocation trades. This is clearly evident in prices for allocation trades in compared to previous years, as shown in Figure 3.5. In , the average price of water allocation trades was $150/ML, compared to $630/ML in Figure 3.5: Average water allocation and average allocation trade price, southern MDB, to Average allocation trade price ($/ML) $1200 $1000 $800 $600 $400 $200 $0 Jul Aug Sept Oct Nov Dec Jan Mar Apr May 70% 60% 50% 40% 30% 20% 10% 0% -10% Average % allocation in the southern MDB Month Average price ( ) Average price ( ) Average price ( ) Average allocation ( ) Average allocation ( ) Average allocation ( ) Note: Allocation levels are the total announced allocations by week for the trading zones in the southern MDB for regulated entitlements. Aggregation includes only tradeable regulated entitlements. Allocation levels are calculated as (volume allocated to regulated entitlements each week (cumulative total)) (volume of regulated entitlements on issue). Source: AWMR series. Observations Typically, water allocation trade prices in the MDB are unstable at the beginning of each water year before becoming more stable. This is likely to be a function of uncertainty in the market about the available allocation for the year and the low numbers and volumes of trade that tend to occur in July and August of each water year, as shown in Figure 3.6. Figure 3.6: Volume and number of allocation trades in the southern MDB, to Volume of trade (ML) Number of trades 0 Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Volume of trade Number of trades Source: AWMR series. 28 National Water Commission Australian water markets: trends and drivers to

31 Prices in early were at the highest levels ever recorded in the water market. While prices are a result of prevailing market conditions, the peak could possibly be attributed to declining allocation levels over the period from to (see Figure 3.1) and specifically to the very low allocations received in This may have driven concerns that low rainfall would persist in and that there would be no further increases to allocations during the year. However, there was a marked fall in allocation prices after November This occurred while allocation levels increased in most areas. Prices generally declined after November and reached a low at the start of February 2008, at which point state water ministers announced that carryover would be possible from into This meant that allocations now had greater value and prices then increased, doubling by the end of the year. Box 3.1: Allocation levels and trade The relationship between allocation levels and the volume and price of allocation trade is complex, as both supply and demand are affected by the availability of water. In years when there are above-average rainfall and significant volumes in storage, demand for additional water by irrigators will fall at any given price. Therefore, the price and quantity of allocations traded will fall. However, above-average rainfall and higher volumes in storage will also result in greater allocations, increasing supply. Price Impact of reduced demand on price and volume of water allocations traded Price Impact of increased supply on price and volume of water allocations traded Shrinking demand Supply Demand Growing supply Allocation trade in the southern MDB Section 3 P 1 P 2 P 1 P 2 Q 2 Q 1 Quantity Q 1 Q 2 Quantity The impact on prices is unambiguous, as lower demand and greater supply will cause prices to fall. However, the impact on the quantity traded is not so clear and depends on whether the magnitude of the demand fall exceeds the magnitude of the supply increase. The reverse occurs when water availability is reduced. National Water Commission Australian water markets: trends and drivers to

32 Following the initial instability at the start of , prices fell rapidly in September and October. Some observers have attributed this reduction to a realisation among irrigators that prices were not going to reach the same levels as in Prices then fell to their lowest level for the year in January 2009, which coincided with increases in allocations in most districts was characterised by substantially lower prices in the southern MDB. This was a function of the larger volume of allocations available compared to previous years (see Figure 3.1) and improved rainfall in irrigation areas (see Figure 2.2). Prices peaked very early in the year at $590/ML and dropped to between $70/ML and $90/ML by the end of the year, at which time they were less than one-quarter of prices at the end of the previous two years. The reduced prices were a response to the significant improvement in the availability of water. The volume of trade at the end of was very high, which, combined with the low prices, suggests there were many willing sellers in the market at that time. This may reflect increases in allocations from 78% to 100% in April 2010 in the Victorian Murray zones Movement of water Net interstate movement of water from to Figure 3.7 shows that relatively minor allocation volumes were traded interstate from through to ; however, much greater interstate trade occurred from to , in particular from New South Wales into South Australia and Victoria. South Australia was a net importer of water from to , and Victoria imported relatively large volumes in New South Wales has been a net exporter since ; the most substantial volume was exported in The drivers of this trading activity are explored in Section Figure 3.7: Net interstate allocation trade, southern MDB, to (ML) Inward allocation trade (ML) NSW South Australia Victoria Sources: NWC (2010b), AWMR series. 30 National Water Commission Australian water markets: trends and drivers to

33 Net interzone movement of water from to The reasons for the movement of water between trading zones include: + variations in water availability between trading zones + the price of water + the capacity of irrigators to adjust farming practices in the short term to respond to water availability + expected water availability for a given season. Figure 3.8 shows allocation trading activity between trading zones in the southern MDB between and Trading increased significantly between and The increase is likely to be attributable in part to both decreased allocations across the MDB and the difference in allocation levels between zones (see Figure 3.1). Spatial variation in water availability drives demand for trade between connected zones, as water users import or export water depending on their local conditions and water needs. Additionally, increases in trade between zones may have been influenced by administrative and institutional reforms to the water market that have enabled more streamlined trade between zones, both within and between states. Figure 3.8: Net allocation trade between trading zones, southern MDB, to (ML) Allocation trade in the southern MDB Section Net trade (ML) Lower Darling NSW Murray Murrumbidgee SA Murray Vic Goulburn Vic Loddon and Campaspe Vic Murray above Barmah Vic Murray below Barmah Sources: NWC (2010b), AWMR series. National Water Commission Australian water markets: trends and drivers to

34 Figures 3.9, 3.10 and 3.11 show the largest sources of water allocation trade and the largest destinations for water allocation trades for each trading zone from to The figures demonstrate that there was a consistent movement of water into the SA Murray from the NSW Murrumbidgee, NSW Murray and Lower Darling zones from onwards (trade into or out of the Lower Darling was not possible in ). Figure 3.9: Significant interzone water allocation trading, southern MDB, South Australia SA Murray 145 GL 32% $570/ML 2 GL 38 GL 62 GL 19 GL -18 GL VIC Murray Lower Darling 0 GL 60% $84/ML NSW Murray 5% $594/ML 34 GL 2 GL New South Wales Murrumbidgee -139 GL 24% $524/ML 96 GL 34% $670/ML 29 GL Victoria 69 GL 11 GL Goulburn -85 GL 39% $735/ML Key Water system Net trade Allocation percentage Average price Net exporter Net importer Notes: 1 Zones are stylised representations of aggregated water trading zones. They are not to scale. 2 Arrows are only shown for the largest import and largest export for each zone. They do not include all imports and exports. 3 Allocation levels are the average annual allocation 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. Source: AWMR series In , all trade zones except the Lower Darling received less than 50% of full allocations. In response to the low levels of allocation, the SA Murray and Victorian Murray trading zones were net importers of water, while the Murrumbidgee was the most significant net exporter was the only year of the three in which Goulburn became a net exporter of water. The limited availability and high price of water in meant that it was likely to have been more profitable for rice producers in the NSW Murray and the Murrumbidgee to sell their water allocations than to plant rice. Similarly, some dairy farmers in the Goulburn zone, one of the highest density dairy farming areas in Australia, are likely to have chosen to sell some of their allocations and purchase fodder or grain for their cattle in response to the very high price of water. These drivers are discussed in more detail in Section Trade was not possible into or out of the Lower Darling in due to system capacity constraints. As a consequence, prices in that zone were low in that year, but increased significantly following the relaxation of water trading rules to allow water trade into and out of the zone in Between and , the average price of water in the Lower Darling increased from $84/ML to $480/ML. 32 National Water Commission Australian water markets: trends and drivers to

35 Figure 3.10: Significant interzone water allocation trade, southern MDB, South Australia SA Murray 336 GL 18% $340/ML 3 GL 103 GL 199 GL 15 GL 3 GL Lower Darling -28 GL 60% $480/ML NSW Murray -135 GL 18% $384/ML VIC Murray 172 GL 27% $337/ML 106 GL 40 GL 15 GL 22 GL New South Wales Murrumbidgee -390 GL 33% $361/ML 57 GL Allocation trade in the southern MDB Section 3 Victoria Goulburn 42 GL 22% $337/ML Key Water system Net trade Allocation percentage Average price Net exporter Net importer Notes: 1 Zones are stylised representations of aggregated water trading zones. They are not to scale. 2 Arrows are only shown for the largest import and largest export for each zone. They do not include all imports and exports. 3 Allocation levels are the average annual allocation 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. Source: AWMR series. In , allocation levels were lower than in the previous year in Victoria and South Australia and higher in New South Wales. Hence Goulburn became a net importer of water in and the Murrumbidgee continued to export very significant quantities of water, particularly to the SA Murray. The quantity of imports into South Australia demonstrates the inelasticity of water demand from agricultural producers in that region. In , the average price per megalitre of water in the southern MDB almost halved in comparison with the previous year, while the volume of interzone trade increased. It appears that the lower prices were a result of the higher overall level of water availability, while the increased volume of interzone trade was a response to the uneven distribution of water allocations across the southern MDB. National Water Commission Australian water markets: trends and drivers to

36 Figure 3.11: Significant interzone water allocation trade, southern MDB, South Australia SA Murray 253 GL 62% $145/ML 15 GL 106 GL 59 GL 6 GL Lower Darling -68 GL 40% $144/ML NSW Murray -88 GL 34% $145/ML 96 GL New South Wales Murrumbidgee -111 GL 38% $144/ML VIC Murray -34 GL 80% $145/ML 30 GL 40 GL 49 GL 79 GL Victoria Goulburn 49 GL 49% $168/ML Key Water system Net trade Allocation percentage Average price Net exporter Net importer 1 Zones are stylised representations of aggregated water trading zones. They are not to scale. 2 Arrows are only shown for the largest import and largest export for each zone. They do not include all imports and exports. 3 Allocation levels are the average annual allocation 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. Source: AWMR series. In , the New South Wales Government limited the volume of trade out of the Murrumbidgee through the use of an embargo, which is described in more detail in Section The impact of the embargo appears to have been a significant reduction in the volume of water traded out of the Murrumbidgee in : while 390 GL was traded out in , only 111 GL was traded out in (see figures 3.10 and 3.11). It meant that the SA Murray had to import allocations from other sources notably the Lower Darling, where exports to the SA Murray rose from 15 GL in to 59 GL in Before , no trade into or out of the Lower Darling was allowed Water allocation market drivers Three major types of agricultural production in the southern MDB dictate when and where water moves: rice cropping, horticulture and dairy. This section discusses the interactions of the three sectors with the water market. 34 National Water Commission Australian water markets: trends and drivers to

37 Rice Rice production is highly water intensive and, in Australia, is very sensitive to water availability and the price of water. Rice farmers are better off selling their water allocations and not planting when water prices reach a particular point. Rice has a gross margin of approximately $ /ML, which means that once the price of water exceeds that amount rice growing can become unprofitable and rice growers may make a higher return from selling water allocations. Most rice production occurs in the NSW Murray and Murrumbidgee zones. As shown in Figure 3.12, the price of allocation water in the Murrumbidgee was more than $500/ML in and remained high in ($380/ML). Correspondingly, the level of rice production was very low, and a large volume of water was traded out of the Murrumbidgee in and and out of the NSW Murray in In , when allocation prices fell to $155/ML, rice production picked up and outward trade fell substantially. Figure 3.12: Rice production, rice prices and water allocation prices, Murrumbidgee, to Allocation trade in the southern MDB Production (kilotonnes) Price ($) Section Rice (kilotonnes) Rice ($/tonne) Water allocation price in Murrumbidgee ($/ML) Sources: Rice data, ABARE (2010); to water price data, NWC (2010a); allocation price data, Waterfind (2009:12); allocation price data, Sunraysia Water Exchange website ( Horticulture Horticulture s demand for water is relatively inelastic, as there is a high cost in losing established plantings: permanent plantings take time to establish and reach a high level of productivity. The SA Murray has a high concentration of horticulture, meaning that demand for water stays relatively constant even in years when water is scarce and allocation prices are higher. As Figure 3.13 shows, grape production did not change substantially over recent years, despite fluctuating water and commodity prices. Rather, the volume of water imported to the zone rose and fell to reflect the different allocation levels. The requirement for water by horticultural producers resulted in water being traded into the SA Murray. A substantial proportion of the water volume purchased came from the NSW Murray and the Murrumbidgee, where rice growing had been suspended. For example, in , when allocations in the SA Murray were at their lowest for three years (18%), the largest volume of water was imported into that zone (336 GL). Most of that water came from the Murrumbidgee and NSW Murray, where very little rice was being grown even though allocations had increased. In , however, allocations in the SA Murray were higher (62%) and the volume of water imported decreased (to 253 GL). Correspondingly, the level of rice production increased. National Water Commission Australian water markets: trends and drivers to

38 Figure 3.13: Wine grape production and prices, and water allocation prices, SA Murray to Production (kilotonnes) $1000 $900 $800 $700 $600 $500 $400 $300 $200 $100 $0 Price ($) Wine grapes production (kilotonnes) Wine grapes average price ($/tonne) Water allocation price in SA Murray ($/ML) Note: water allocation price data for the SA Murray was not available for this report. Therefore, that figure has been based on the average cost of water in the Murray Irrigation Area in (see Sources: Rice data, ABARE (2010); to water price data, NWC (2010a); allocation price data, Waterfind (2009:12). Dairy There is a high concentration of dairying in the northern Victorian regions, particularly the Goulburn zone. Irrigated dairy farming is sensitive to water prices: case studies developed by the Australian Bureau of Agricultural and Resource Economics found that, when water prices are lower than $300/ML, dairy farmers purchase additional water to supplement allocations to entitlements they own and use it to irrigate pasture. However, at higher prices dairy farmers may choose not to buy allocations, instead selling some of the allocation they receive from their entitlements and increasing fodder purchases. Dairy farmers also have the option of reducing the amount of feed for their cattle and reducing the amount of milk produced. As water prices decreased to around or below $300/ML in , the Goulburn zone switched from being a net exporter of water to being a net importer. In , the average water allocation price was $735/ML in the zone, and it was a net exporter of water allocation (85 GL). In the following year, the average water allocation price was $337/ML and the zone was a net importer of water allocation (42 GL). As shown in Figure 3.14, the price of hay and the price of water peaked during Figure 3.14 also shows that annual milk production generally followed a declining trend over the five years to Figure 3.14: Milk production, hay prices and water allocation prices, Goulburn, to Production (ML) $800 $700 $600 $500 $400 $300 $200 $100 $0 Price ($) Milk (ML) Hay ($/tonne) Water allocation price in Goulburn ($/ML) Sources: Milk and hay data, ABARE (2010); to water price data, NWC (2010a); water data, Waterfind (2009:12); allocation price data, Sunraysia Water Exchange website ( 36 National Water Commission Australian water markets: trends and drivers to

39 3.2.6 Other market influences The Murrumbidgee embargo and trade Due to the relatively recent development of Australia s water markets, and various policy and management issues unique to the water market, governments intervene from time to time to address specific issues, or to pursue particular policies. In , the New South Wales Government announced a temporary embargo on water allocation trade from the Murrumbidgee Valley into the Murray Valley. At the end of , ML of water had been carried over and was required to be delivered through the Murray Valley in The New South Wales Government considered that any additional trades could not be delivered without incurring unacceptably high transmission losses. Trading downstream from the annual cropping areas (including rice-growing areas) in the Murrumbidgee to permanent plantings in the Murray Valley had been an annual phenomenon up to that point. The embargo on trade was announced on 1 July However, it was eased slightly on 21 August 2009 as ML of water that would otherwise have been released by Snowy Hydro into the Murrumbidgee was released into the River Murray instead. This freed up channel capacity in the Murrumbidgee and allowed for an extra ML to be traded out. However, this was still well below the demand for allocation trade, and a ballot system in which users could trade up to 15% of their entitlement was used. Carryover Carryover is an arrangement whereby entitlement holders are able to carry over unused allocations from one water year to the next. Limits are usually applied to allocation accounts in carryover systems. They may limit the volume that may be carried over, the maximum volume of carryover plus new season allocation that may be held in an allocation account, or both. In the absence of carryover arrangements, allocations usually expire at the end of a water year. The introduction of carryover has a number of benefits. The key advantage is that it gives irrigators greater flexibility in managing their risk and water use over time. Carryover has been available in some systems since the 1990 s. However, was the first year in which carryover provisions were available in all three southern MDB states. In , holders of some classes of entitlements in South Australia, Victoria, and New South Wales were able to carry over unused water into the season. All other things being equal, the impact of more comprehensive carryover rules on the water market would be expected to lead to: + a reduction in the automatic decline in allocation prices towards the end of the water year + less intra-year volatility in prices for allocation trades, particularly following individual allocation announcements, as allocations have a slightly more long-term nature. In relation to the first matter, it has been reported that in and the price of water allocations declined by 35% and 41%, respectively, between March and June (Waterfind 2008). However, that trend was reversed with the announcement of widespread carryover in , and the value of allocations actually increased towards the end of the year in and In the value of allocations fell, but that was consistent with the longer term trend across the year and the generally improved availability of water, particularly following rainfall in early While detailed data has not been collected on water allocation prices for and , high-level analysis of data published by Water Exchange suggests a slight reduction in the level of intra-year volatility of allocation prices, particularly towards the end of the year, although early-year volatility was still apparent in both and ade in the southern MDB Allocation tr Section 3 Market-sensitive announcements As in most markets, prices and volumes traded in the water market change in response to market-sensitive announcements. Two examples, both of which occurred in , illustrate the market response to sensitive information. National Water Commission Australian water markets: trends and drivers to

40 Allocation announcements Irrigators on the River Murray in South Australia started the water year with 4% allocations. By mid-august 2007, allocations had increased to 13%; however, inflows to the River Murray in August were less than half of average August inflows. In September 2007, it was announced that allocations would be increased to 16% from 1 October At that point, it appears that there was a strong expectation that allocations would not be increased again during the water year. On 30 October 2007, the Minister for the River Murray issued a press release that stated that further increases to allocations during summer are unlikely because of continued extreme drought conditions across the catchment (South Australian Government 2007). The following day the South Australian Minister for Water Security announced that domestic water restrictions would continue through November Prices for temporary water trades on the Murray River grew from an average of $580/ML at the start of the water year to more than $1000/ML in October and early November Similarly, the volume of water traded into South Australia reached a peak in the second week of November However, on 15 November 2007 water allocations for the Murray River in South Australia were increased to 22%. This caused a sharp reduction in prices, which had begun falling shortly before the announcement, indicating that some sections of the market were anticipating an increase. Figure 3.15 shows the impact of the expected low allocations in the SA Murray in and the market response after the announcement of further allocations for South Australian water users. Figure 3.15: Water allocation trading in South Australia in Volume of trade (ML) % allocation announced allocation announced for October 16% allocation announced 22% 32% allocation announced Carryover announced $1400 $1200 $1000 $800 $600 $400 Price ($/ML) $200 $0 Jul 2007 Aug 2007 Sep 2007 Oct 2007 Nov 2007 Dec 2007 Jan 2008 Feb 2008 Mar 2008 Apr 2008 May 2008 Jun 2008 Volume of trade (ML) Price ($/ML) Source: AWMR series. Carryover announcements The announcement that irrigators could carry over allocations between years in New South Wales, Victoria and South Australia was made on 7 February 2008 (Figure 3.15). There was an immediate increase in both the volume traded and the price of water allocations in the SA Murray as a response to the announcement. Prices also rose in the week before the announcement, suggesting that sections of the market had anticipated it. This is another example of the responsiveness of the market to the release of market information. 38 National Water Commission Australian water markets: trends and drivers to

41 Section 4 Entitlement trade 4.1 Volume of entitlement trade 40 in the MDB 4.2 Number of entitlement trades Prices for entitlement trades Water entitlement market drivers 43 National Water Commission Australian water markets: trends and drivers to

42 4.1 Volume of entitlement trade Figure 4.1 shows the volumes of entitlement traded in the southern MDB between and The volume was very modest until , when it increased significantly. Further significant increases followed in and Figure 4.1: Entitlement trade volumes in the southern MDB, to (ML) Volume of trade (ML) 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 (2010), AWMR series; approximate values for years before from the Murray Darling Basin Commission. Figure 4.2 shows the volumes of entitlement traded in the northern MDB between and As in the southern MDB, the volume of entitlement trade increased significantly over the period. Figure 4.2: Entitlement trade volumes in the northern MDB, to (ML) Volume of trade (ML) Note: Data for trade outside the southern MDB before was not available for this report. Only regulated trades are presented. Source: AWMR series. 40 National Water Commission Australian water markets: trends and drivers to

43 As demonstrated in Figure 4.3, the mix of entitlement types (by volume) traded has also changed in the past three years. In more than 10% of total entitlement purchases were for lower reliability entitlements. By the proportion of lower reliability entitlements had more than halved to less than 5%. This change in the mix of entitlement types may reflect changing market expectations about the reliability of lower reliability entitlements. Before the drought, lower reliability entitlements received much higher allocations. Figure 4.3: Total entitlement trade in the southern MDB, to , by reliability class Proportion of total entitlement trade 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Entitlement trade in the MDB Higher reliability General reliability Lower reliability Note: Higher reliability entitlements include Victorian high-reliability water shares, New South Wales high-security water access licences (WALs) and South Australian high-security water entitlements. Lower reliability entitlements include Victorian low-reliability water shares and NSW supplementary WALs. General reliability entitlements are NSW general security WALs. Data for trade outside the southern MDB before was not available for this report. Only regulated trades are presented. Source: AWMR series. Section Number of entitlement trades It was not possible to obtain data for this report on the numbers of entitlement trades before However, Figure 4.4 shows that the number of trades has increased over the past three years, while the average volume of entitlement trades has decreased. It also shows that the numbers of entitlement trades in the SA Murray, Murrumbidgee and NSW Murray zones have grown steadily over the period. Figure 4.4: Number and average size of entitlement trades, southern MDB, to Number of entitlement trades Lower Darling General NSW Murray Murrumbidgee SA Murray Vic Goulburn Vic Loddon and Campaspe Vic Murray above Barmah Vic Murray below Barmah Average size (ML) of trade Average size of entitlement trade (ML) Note: Data for trade outside the southern MDB before was not available for this report. Only regulated trades are presented. Source: AWMR series. National Water Commission Australian water markets: trends and drivers to

44 Figure 4.5 shows the numbers and volumes of entitlements traded in the southern MDB between and , by month. It demonstrates that entitlement trading is less volatile in numbers and volumes of trade than allocation trading. This is to be expected, given the long-term nature of the investment. Unlike in allocation trading, there is no clear trading cycle during a water year. Figure 4.5: Number and volume of entitlements traded, southern MDB, to , by month Volume of trade (ML) Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Number of trades Volume of trade Number of trades Note: Data for trade outside the southern MDB before was not available for this report. Only regulated trades are presented. Source: AWMR series. 4.3 Prices for entitlement trades Prices for entitlement trades have remained relatively constant for the past three years (see Figure 4.6). This is to be expected: entitlements are long-term (usually perpetual) products, while allocations are short-term. Figure 4.6: Average prices for entitlement trades in the southern MDB, to ($/ML) Average entitlement trade price ($/ML) $2500 $2000 $1500 $1000 $500 $0 Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Higher reliability General security Low reliability Jun Notes: 1 Data for trade outside the southern MDB before was not available for this report. 2 Only regulated trades are presented. 3 Average prices for higher reliability entitlement trades include prices for Victorian high-reliability water entitlements, New South Wales high-security water access licences and South Australian high-security water entitlements. Source: AWMR series. 42 National Water Commission Australian water markets: trends and drivers to

45 However, as demonstrated in Figure 4.7, the average price varies significantly between reliability classes. The variation reflects the market s expectation about the average amount of water likely to be allocated within a year. The concordance between reliability and price suggests that the market understands differences between the products being traded. There has been no clear trend in average prices for entitlement trades within reliability groups; some reliability classes in some jurisdictions have increased in price, while others have decreased. Figure 4.7: Average prices for entitlement trades in the southern MDB, to , by state and reliability class $3000 $2500 Average entitlement trade price ($/ML) $2000 $1500 $1000 Entitlement trade in the MDB $500 $0 Victoria low reliability Victoria high reliability NSW general security NSW high security SA high security Section Note: Data for trade outside the southern MDB before was not available for this report. Only regulated trades are presented. Source: AWMR series. 4.4 Water entitlement market drivers Unlike outcomes in the water allocation market, outcomes in the water entitlement market are generally driven by long-term concerns, such as the entry or exit of participants in the irrigated agriculture sector or the decisions of investors. Changes to policy and regulation (such as water trading rules) can also drive entitlement trading. Examples of this from to include: + the involvement of the Australian Government in the water entitlement market as a purchaser of water for the environment + rules in the Water Act 2007 governing the transformation of irrigation rights to water access entitlements + the removal of the 10% limit on ownership of entitlements by non-water users, and the addition of exemptions to the 4% limit on entitlement trade out of irrigation districts, in Victoria. Each example is discussed in more detail in this section Commonwealth purchases The Australian Government has been active in the water market for the past three years through its purchase of entitlements for environmental purposes under the Restoring the Balance in the Murray Darling Basin program. From to , the volume of water entitlements registered per year by the Australian Government grew from 0% to 36% of the total volume of entitlement trade in the MDB (see Figure 4.8). A total of 659 GL was registered in National Water Commission Australian water markets: trends and drivers to

46 Figure 4.8: Commonwealth water purchases in the MDB, to /08 Other Murray-Darling Basin entitlement trade 770GL, 100% 2008/09 Commonwealth environmental water purchases 65GL, 4% Other Murray-Darling Basin entitlement trade 1533GL, 96% 2009/10 Commonwealth environmental water purchases 659GL, 36% Other Murray-Darling Basin entitlement trade 1159GL, 64% Source: AWMR series. As discussed below, amendments were made to trade-out limits in Victoria to enable the Commonwealth to purchase entitlements in Victoria. Commonwealth entitlement purchases from New South Wales were subject to an embargo in May 2009 and were then restricted to 60 GL in The volume of entitlement trade in would probably have been lower if the Australian Government had not participated in the market. However, it is unlikely that the total 659 GL of entitlement purchases registered by the Commonwealth would otherwise not have been traded, as some of this surplus entitlement would have probably been sold to other willing purchasers. While the Australian Government has become a significant participant in the market, and is responsible for some of the growth in entitlement trade between and , there has been an increasing volume of entitlement trading by other buyers. Total entitlement trade volume grew from 770 GL in to 1159 GL in , if Australian Government purchases are netted out. 44 National Water Commission Australian water markets: trends and drivers to

47 4.4.2 Transformation A significant proportion (by volume) of water access entitlements in the MDB is held by irrigation infrastructure operators in irrigation areas. Irrigators in those areas hold irrigation rights to access water from the operator, rather than holding statutory rights (entitlements) themselves. Irrigation rights cannot be traded without the operator s consent, while statutory water access entitlements can be traded subject to restrictions imposed by state law. To prevent irrigation infrastructure operators from unreasonably delaying or preventing trade in entitlements (irrigation rights) from their areas, the Australian Government has made rules under the Water Act 2007 (the Water Market Rules 2009) to ensure that rights held by irrigators within an infrastructure operator s area can be transformed into separately held water access entitlements. This allows irrigators to hold the statutory water access entitlements directly, rather than having operators hold the entitlements on their behalf. Once irrigators hold their statutory entitlements directly, the operator cannot restrict trade. Transformation occurs only in New South Wales and South Australia. The ability to transform rights was given effect by the Water Market Rules on 23 June 2009, and included a transitional period until 31 December Thus, was the first year in which they were in effect. Because of the nature of irrigation across the MDB, the rules apply mainly in New South Wales. Data on entitlement trade out of irrigation infrastructure operator areas is available only from However, as Figure 4.9 shows, there was a significant increase in both the volume and number of trades out of the New South Wales irrigation districts in , suggesting that the Water Market Rules may have had an effect on the market. Figure 4.9: Volume and number of trades out of NSW irrigation infrastructure operator districts, to Entitlement trade in the MDB Section 4 Volume of entitlements (ML) Number of entitlements Volume of entitlements (ML) Number of entitlements Note: Figures differ from those published in the Australian water markets report due to errors in the previous data. Individual irrigator sales to the Commonwealth may or may not be combined and moved off an irrigation corporation licence as one transfer, consequently data relating to entitlement transformations can be difficult to interpret. Figures for Murrumbidgee Irrigation exclude licence conversions. Sources: Murray Irrigation Ltd; Murrumbidgee Irrigation Ltd; Coleambally Irrigation Co-operative Ltd; NSW Department of Environment, Climate Change and Water; Western Murray Irrigation Ltd. National Water Commission Australian water markets: trends and drivers to

48 4.4.3 The 10% limit Before September 2009, the Victorian Government restricted the volume of Victorian water entitlements that could be owned without being associated with a particular piece of land (to be associated with land, a water entitlement must be tied to a water-use licence or water-use registration for particular land). The restriction was originally put in place to address community concerns about speculators buying entitlements and forcing up prices. The limit was 10% for each entitlement type in each water system. At the end of , no water systems had reached the limit. However, an increasing volume of water entitlements was held without association with land during , partly because of Commonwealth environmental purchases under the Water for the Future program (the Commonwealth does not hold water-use licences for land, so environmental purchases are disassociated from land). By the end of , some systems had less than 50% of the limit remaining, including those shown in Table 4.1. Table 4.1: Victorian irrigation districts nearing the 10% limit at the end of Irrigation district Reliability Non-water user limit (ML) Water held by non-users (ML) Volume of limit remaining (ML) % of limit remaining Campaspe High % Goulburn High % Low % Vic Murray High % Source: DSE (2010). Low % Earlier, in May 2009, the Victorian Government had announced that the 10% limit would be removed once legislative amendments could be put in place. During the early part of the disassociation of water from land (either as trades to those without land and a wateruse licence, or as trades to those choosing to hold their water shares unassociated) continued apace. 3 By 16 September 2009, when the limit was removed, it had been reached for Victorian Murray high-reliability water entitlements. The limits on Campaspe high-reliability, Goulburn low-reliability and Victorian Murray low-reliability entitlements had almost been reached (DSE 2010). Data from Goulburn Murray Water suggests that 50 GL of trades were applied for but delayed until the 10% limit was removed on 16 September It may also be that a small number of prospective trades were not submitted for approval until after the limit was removed because the proponents knew that they were not going to be approved The 4% limit The 4% limit in Victoria limits the net trade of entitlement out of each irrigation area to a maximum of 4% per year (defined as a percentage of the volume of water access entitlement associated with land in an irrigation area), subject to certain exemptions. Unlike the 10% limit, before the 4% limit had restricted the amount of entitlement trade possible. In , the 4% rule restricted entitlement trade in most districts. Only trade in low-reliability entitlements in the Campaspe, Central Goulburn and Shepparton districts and all trade in the FMIT and Nyah, Tresco and Woorinen areas was unaffected (Frontier Economics 2009). In addition, because the trade limits were usually reached at the start of the water year, the limit was binding for the full year. 3 This became apparent as Goulburn Murray Water processed trades as part of its start-of-year ballot process to determine which trades would be able to proceed in accordance with the 10% and 4% limits. 46 National Water Commission Australian water markets: trends and drivers to

49 In , the Victorian Government announced a number of more extensive exemptions to the 4% limit. Most apply to trades being made to the Commonwealth for environmental purposes. Before then, exemptions were only available for mortgagee sales. The exemptions increased the amount of entitlement trade that could take place, particularly in high-reliability entitlements. While the 4% limit would have restricted net trade out in high-reliability entitlements to 65 GL in , the exemptions enabled 141 GL of trade to occur. Figure 4.10 shows the difference between the volume of trade out of irrigation districts allowed within the 4% limit and the volume of trade out that occurred, for all entitlement classes. Figure 4.10: 4% trade-out limit and total trade out of affected irrigation areas in Victoria Volume of trade out of irrigation districts (ML) Entitlement trade in the MDB Section % trade-out limit Total trade out Source: AWMR series. The additional exemptions have permitted increased entitlement trade in northern Victoria; however, they only allow materially increased sales to the Commonwealth. The 4% limit will continue to restrict all other potential buyers and sellers. In , seven of the nine irrigation areas reached or came very close to the 4% limit for high-reliability entitlements, preventing entitlement trades from occurring. The 4% limit also applies in New South Wales, but has only been reached once in the Murrumbidgee Irrigation area towards the end of the irrigation season in (Frontier Economics 2009). National Water Commission Australian water markets: trends and drivers to

50

51 Section 5 Trade outside the MDB 5.1 Allocation and entitleme nt trade Non-MDB trading, by jurisdiction 51

52 Water markets outside the MDB typically have a much lower level of trading activity than those within the MDB. The reasons for this include the following: + In some areas of the country, there is not yet significant scarcity pressure on water resources, and rights to unallocated water are still being issued. + In some areas, the level of irrigated agricultural development is not sufficient to support a water market. + There is much less connectivity, both natural and engineered, between water systems outside the MDB than between systems within the basin. In many cases this means that holders of entitlements or allocations are restricted to trading with others within smaller water systems. Where those systems contain homogeneous users with similar demand profiles, there may be limited gains from trade in the short term, as all potential buyers and sellers face the same climatic and market conditions. + Enabling mechanisms for trading, such as the unbundling of water rights from land, or statutory water plans are often incomplete. + Reforms to administrative and institutional arrangements for water trading are less developed outside the MDB. Market mechanisms such as registers, trading platforms, trade processing and market information are also often much less developed. This can result in thin markets with lower transparency, which may discourage participation. + Water markets have been operating for a much shorter time outside the MDB, meaning that the market has not necessarily been accepted by irrigators in those areas as a business and risk management tool. However, water trading has occurred outside the MDB in recent years. Parts of South Australia, Western Australia, Tasmania and Queensland have all experienced trade. While trading is possible in both the Australian Capital Territory and the Northern Territory, very little or no trading has occurred in those jurisdictions to date. 5.1 Allocation and entitlement trade Figure 5.1 shows allocation trading outside the MDB from to Allocation trade volumes remained steady for the three years. Reductions in allocation trading activity in Victoria were offset by an increase in trading in Queensland. The decline in allocation trade volumes in Victoria is partly a result of the decommissioning of the Wimmera irrigation zone in Figure 5.1: Allocation trade outside the MDB, to (GL) Volume of allocation trade (GL) outside the MDB Queensland South Australia New South Wales Western Australia Victoria Tasmania Note: Data for trading outside the southern MDB before was not available for this report. Source: AWMR series. 50 National Water Commission Australian water markets: trends and drivers to

53 The volume of entitlement trades fell by 35% from (202 GL) to (131 GL) (see Figure 5.2). Reductions occurred in Queensland, New South Wales, Victoria and Tasmania, while the volume of trade in South Australia and Western Australia grew. Figure 5.2: Entitlement trade outside the MDB, to (GL) Volume of entitlement trade (GL) outside the MDB Queensland South Australia New South Wales Western Australia Victoria Tasmania Trade outside the MDB Note: Data for trading outside the southern MDB before was not available for this report. Source: AWMR series. 5.2 Non-MDB trading, by jurisdiction This section comments on trading in areas outside the MDB. As outlined above, markets for both allocation and entitlement trading are still developing and are relatively thin outside the basin. Therefore, large single trades or other events (such as the transfer of an entitlement as part of a land sale) can result in large changes in year-to-year trading aggregates. When combined with a lack of consistent and reliable data for the years before , this means that longer term trends are difficult to identify. Section Western Australia In Western Australia, rainfall deficiencies worsened from to and again from to Most areas of south-west Western Australia received from 60% to 100% of long-term average rainfall in However, areas further north, including the Gascoyne irrigation district, had rainfall of only 20% to 60% of long-term averages. Water levels in many of Western Australia s most important aquifers have been falling over the past few years. In April 2010, drought conditions were declared for the Lower Gascoyne River aquifer, and in 2010 the level of the Gnangara Mound aquifer (which supplies up to 60% of Perth s drinking water as well as water for irrigation and horticulture in the Wanneroo and Swan areas) was at its lowest recorded level. In line with the declining availability of water, trade in licences increased significantly in Western Australia, particularly for groundwater licences in areas managed by the Department of Water (where the volume of licences transferred increased from 486 ML in to ML in ). This increase in the trade in licences also appears to be a function of water management areas becoming fully allocated. In such circumstances, trading becomes the only option for sourcing additional water. Many water management areas recorded no licensed groundwater trades in or , but did so in The Goldfields, Gascoyne and South West Coastal areas are examples: a total of eight trades across the three areas accounted for around two-thirds of the total trade in groundwater licences in areas managed by the Department of Water. National Water Commission Australian water markets: trends and drivers to

54 Figure 5.3: Trade volumes and prices, Western Australia, to $ $ $15 Volume (ML) $10 Average price ($/ML) $5 $ Volume (water allocation trades) Volume (water licence transfers) Average price (water allocation trades) Note: Volumes exclude water savings trades out of Harvey Water. Source: AWMR series. In , the average price for water licence transfers across the Harvey Irrigation districts was $320/ML; in , it fell to $150/ML. The reason for the sharp fall is not clear. It could be a function of a relatively shallow market and, potentially, poor data quality. Trades in Western Australia display a high level of price volatility throughout the year, not just at the start of the season. This is likely to be for the following reasons: + The state has relatively thin markets: despite recent increases, the number of trades remains low in comparison with eastern states. + Water trading systems are not as well developed as in other states, so market information tends to be less widely available. + The lack of connectivity across aquifers and irrigation districts means it is not possible to sell water to or buy water from areas with relatively less or more water. In addition, individual irrigation areas tend to be relatively homogeneous in the types of crops produced, so different conditions in different commodity markets are unlikely to drive trades. + There is no provision for carryover in Western Australia, so the value of annual allocations trends to zero at the end of the water year. The volume and number of water allocation trades (which are possible only in Harvey Water s irrigation districts) increased to 12 GL in from 7 GL in This occurred despite the absence of interdistrict trading of allocations in National Water Commission Australian water markets: trends and drivers to

55 5.2.2 Tasmania Tasmania s water markets are constrained by limited connectivity between water systems. Most trades occur within major irrigation schemes as a result of property sales. Figure 5.4: Trade volumes and numbers, Tasmania, to Volume (ML) Number of trades Trade outside the MDB Section Volume (water licence transfers) Number (water licence transfers) Volume (water allocation trades) Number (water allocation trades) Source: AWMR series. It is difficult to discern any clear trends in the Tasmanian water market. The number and volume of entitlement trades can be influenced by a small number of relatively large trades and have fluctuated over the past three years. In four transactions accounted for more than half of the total volume of licence trade, and in two trades accounted for 70% of the total volume of water allocation transfers. The Tasmanian Government has announced its intention to significantly expand irrigation infrastructure in Tasmania by building 12 new irrigation projects. The schemes are being developed by the Tasmanian Irrigation Development Board. National Water Commission Australian water markets: trends and drivers to

56 The ability to trade water entitlements will be a key feature of the new schemes. It is proposed that: + entitlements arising from the schemes will come unbundled into irrigation rights, which are rights to annual allocations of water, plus delivery rights + irrigation rights will be tradeable to any party + a state-wide register of water entitlements will be established, with published trading rules and oversight of trades. The Tasmanian Irrigation Development Board has also foreshadowed that a state-wide trading scheme may be established if demand warrants it. The development of these schemes should result in an expansion of the water market in Tasmania in future years Victoria (outside the MDB) Water trading in Victoria outside the MDB occurs in Southern Rural Water s Werribee, Bacchus Marsh and Thomson Macalister districts. Trade in both entitlements and allocations within the Werribee and Bacchus Marsh districts, which are both on the Werribee River, has been minimal in recent years. This is a result of extremely low allocations, which reached only 8% in , 5% in and 14% in Until very recently, no trade has been possible between the Werribee and Bacchus Marsh districts and other districts, and this has also contributed to the shortage of water for trading. Trading has fluctuated in the Thomson Macalister districts in response to levels of supply. Those districts have not endured the rainfall deficiencies that have occurred in other parts of Victoria, and allocations have been at or above 100% in the past few years. In , an extra 43% of allocation was also available because Lake Glenmaggie was spilling. Allocation trade rose from 12 GL in to 20 GL in before returning 12 GL in The generally good availability of water has meant that allocation trades account for less than 1% of the available water in any year. In 2010, water trading was permitted for the first time between the Thomson Macalister district and the Bacchus Marsh Werribee system. Trading was limited to water allocations (not entitlements) from the Thomson Macalister trading zone 42B. Trading is possible due to the interconnected grid of pipes between the Thomson Dam, Melbourne and the Bacchus Marsh irrigation area; instead of water being released down the Thomson River, it can be sent to Melbourne and across to the Bacchus Marsh area. Despite trading being possible, no trade between the Thomson Macalister system and the Bacchus Marsh Werribee system occurred Queensland (outside the MDB) With the exception of the catchments that make up the northernmost reaches of the MDB 4, Queensland is made up of small hydrologically isolated trading zones. The water market within each zone tends to be shallow due to the small number of market participants and the zone s uniform climatic conditions and agricultural production profile. The price and volume of water traded vary significantly between trading zones. The legislative framework for water trading in Queensland was introduced in Trading has been possible in the Nogoa Mackenzie Water Supply Scheme and the Bundaberg Supply Scheme since As demonstrated by Figure 5.5, there was initially significant fluctuation in the price of medium security water. As the market in the two water supply schemes has matured, however, a more stable market price for medium reliability water entitlements has emerged. 4 The Border Rivers, Moonie, Condamine Balonne and Warrego, Paroo, Bulloo and Nebine resource operations plan areas. 54 National Water Commission Australian water markets: trends and drivers to

57 Figure 5.5: Volume of medium reliability entitlement trade and average price, Nogoa Mackenzie and Bundaberg water supply schemes, to Volume of trade (ML) Price ($/ML) Trade outside the MDB Section Nogoa Mackenzie WSS volume Nogoa Mackenzie WSS price Bundaberg WSS volume Bundaberg WSS price Note: Volumes of trade for all years except relate to the sale of water without land. Sources: Queensland Department of Environment and Resource Management and AWMR series New South Wales (outside the MDB) The major trading zone in New South Wales outside of the MDB is the Hunter Valley. Irrigators in the Hunter Valley received 100% allocations between and The price of water entitlements and water allocations in the Hunter tends to be significantly higher than in the rest of the state. In the average cost of general security water entitlements was $2829/ML, compared with the state average of $1318/ML. The higher prices are driven by the type of agricultural production the Hunter is a grape-growing region and hydrological isolation. National Water Commission Australian water markets: trends and drivers to

58

59 Section 6 Summary 6.1 Water allocation market Water entitlement market 58

60 6.1 Water allocation market Participation in the water allocation market, particularly in the southern MDB, has grown steadily since the introduction of water trading in the early 1980s. The use of allocation trading mechanisms between trading zones within the southern MDB has also increased significantly, particularly in the past three years. It is likely that this was a response to significantly lower allocation levels in and resulting from the worsening drought. During years in which there were low allocations in the southern MDB, prices for water allocations increased. In , the SA Murray and Victorian Murray trading zones were net importers of water, while the Murrumbidgee was the most significant net exporter was the only year between and that Goulburn was a net exporter of water. Murrumbidgee remained the dominant water exporter in the southern MDB in , trading a considerable proportion of the water traded into the SA Murray was the first year that interzone trade was possible for the Lower Darling. Exports from the Lower Darling rose from 28 GL in to 68 GL in , most of it destined for the SA Murray. There was a decline in water exported from the Murrumbidgee to the SA Murray was the only year between and that the Victorian Murray was a net exporter of water. As allocation levels rose in and then increased more significantly in , the price of water allocations fell in response to greater supply; however, the quantity of water allocation trade remained high. The price of water allocations has continued to fall in The water allocation market is responsive to short-term market impacts, such as allocation and carryover announcements, suggesting that the market is relatively mature and informed. 6.2 Water entitlement market Participation in the water entitlement market, particularly in the southern MDB, has also grown steadily since the early 1980s. Unlike outcomes in the water allocation market, outcomes in the water entitlement market are generally driven by long-term concerns, such as the entry or exit of participants in the irrigated agriculture sector or the decisions of investors. Changes to policy and regulation (such as water trading rules) can also drive entitlement trading. Changes that have had an impact on the water entitlement market in the southern MDB in the past three years include: + the involvement of the Australian Government in the water entitlement market to purchase water for the environment + rules in the Water Act 2007 governing the transformation of irrigation rights to water access entitlements + the removal of the 10% limit on ownership of entitlements not associated with land, and exemptions to the 4% limit on entitlement trade out of irrigation districts, in Victoria. Prices for entitlement trades have remained relatively constant for the past three years. This is to be expected: entitlements are long-term (usually perpetual) products, while allocations are short-term products. 58 National Water Commission Australian water markets: trends and drivers to

61 Summary Appendix pendix A References Abbreviations and acron yms 75 Section 6 National Water Commission Australian water markets: trends and drivers to

62 Appendix A Table A.1: Volume of allocation and entitlement trades in the southern MDB, to Water year Allocation trades Entitlement trades 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 the years before from the Murray Darling Basin Commission. Table A.2: Volume of allocation and entitlement trades, northern MDB and non-mdb, to (ML) Non-MDB allocation trades Non-MDB entitlement trades Northern MDB allocation trade Northern MDB entitlement trade Note: Data for trade outside the southern MDB before was not available for this report. Only regulated trades are presented, as groundwater allocation trades were not reported for NSW in Sources: AWMR series. 60 National Water Commission Australian water markets: trends and drivers to

63 Table A.3: Rainfall in the MDB and storage levels of major dams in the southern MDB, to Year Annual rainfall (mm) Total storages (%) Note: Major dams are Dartmouth, Eildon, Hume, Blowering and Lake Victoria. Long-term average rainfall is 488 mm, based on rainfall measurements in the MDB between 1961 and Annual rainfall is an average figure for all of the MDB Sources: Bureau of Meteorology (for rainfall data) and Murray Darling Basin Authority (for storage data). Table A.4: Low-, general and high-reliability/security entitlements, southern MDB, by volume Trading zone High Low/General Goulburn Loddon and Campaspe Murrumbidgee SA Murray Vic Murray below Barmah Vic Murray above Barmah NSW Murray and Lower Darling Total Source: AWMR series. A Appendix National Water Commission Australian water markets: trends and drivers to

64 Table A.5: End-of-season allocations to high- and low-security entitlements, southern MDB, to High-reliability entitlements Lower reliability entitlements Year Vic Goulburn Vic Murray NSW Murray NSW Murrumbidgee SA Murray Vic Goulburn (low) Vic Murray (low) NSW Murray (general) NSW Murrumbidgee (general) % 100% 100% 100% 100% 0% 100% 93% 85% % 100% 100% 100% 100% 0% 90% 35% 78% % 100% 100% 100% 100% 0% 100% 95% 90% % 100% 100% 100% 100% 0% 100% 105% 72% % 100% 100% 100% 100% 0% 29% 10% 38% % 100% 100% 95% 95% 0% 0% 55% 41% % 100% 97% 95% 95% 0% 0% 49% 40% % 100% 97% 95% 100% 0% 0% 63% 54% % 95% 69% 90% 60% 0% 0% 0% 10% % 43% 50% 90% 32% 0% 0% 0% 13% % 35% 95% 95% 18% 0% 0% 9% 21% % 100% 97% 95% 62% 0% 0% 27% 27% Note: Low-reliability water shares in Victoria were created on 1 July No low-reliability allocation has been made available for the subsequent years. Before that time, this water was referred to as sales water and was not separated from higher reliability water. Sources: NWC (2010b), AWMR series. Table A.6: Water allocation levels and proportions traded, southern MDB, to Year Announced allocation volumes (ML) Allocations sold (ML) Allocations traded as % of announced allocations % % % % % % % % % % % % Sources: NWC (2010b), AWMR series. 62 National Water Commission Australian water markets: trends and drivers to

65 Table A.7: Number and average size of allocation trades, southern MDB, to Trading zone Lower Darling NSW Murray Murrumbidgee SA Murray Vic Goulburn Vic Loddon and Campaspe Vic Murray above Barmah Vic Murray below Barmah Average volume of allocation trades (ML) Source: AWMR series. Table A.8: Average water allocation and average allocation trade price, MDB, to Month Average price ($/ML) Average price ($/ML) Average price ($/ML) Average allocation Average allocation Average allocation July 2.9% 3.1% 2.7% % 3.1% 2.7% 2.9% 3.1% 2.7% % 3.1% 2.7% % 4.5% 3.0% August % 4.5% 3.2% % 5.4% 3.2% % 5.4% 3.9% % 5.4% 3.9% September % 6.4% 5.9% % 6.4% 5.9% % 9.0% 9.8% % 9.0% 9.8% October % 12.8% 18.6% % 12.8% 18.6% % 14.7% 22.1% % 14.7% 24.6% % 14.7% 24.6% A Appendix National Water Commission Australian water markets: trends and drivers to

66 Month Average price ($/ML) Average price ($/ML) Average price ($/ML) Average allocation Average allocation Average allocation November % 15.2% 30.0% % 15.2% 30.0% % 16.1% 30.7% % 16.1% 30.7% December % 17.4% 31.6% % 17.4% 31.6% % 19.4% 32.4% % 19.4% 32.4% January % 20.7% 32.4% % 20.7% 32.5% % 24.7% 33.8% % 24.7% 33.8% % 24.7% 33.8% February % 24.7% 35.3% % 24.7% 35.3% % 24.8% 38.0% % 24.8% 38.0% March % 24.9% 39.9% % 24.9% 39.9% % 25.0% 44.4% % 25.0% 44.4% % 25.2% 47.9% April % 25.2% 47.9% % 25.2% 47.9% % 25.2% 47.9% % 25.2% 47.9% May % 25.2% 47.9% % 25.2% 47.9% % 25.2% 47.9% % 25.2% 47.9% June % 25.2% 47.9% % 25.2% 47.9% % 25.2% 49.2% % 25.2% 49.2% Note: Allocation levels are the total announced allocation by week for the trading zones in the southern MDB for regulated entitlements. Aggregation includes only tradeable regulated entitlements. Allocation levels are calculated as (volume allocated to regulated entitlements each week (cumulative total)) (volume of regulated entitlements on issue). Source: AWMR series. 64 National Water Commission Australian water markets: trends and drivers to

67 Table A.9: Volume and number of allocation trades in the southern MDB, to Year Month Number of trades Volume (ML) July 1 7 August September October November December January February March April May June July August September October November December January February March April May June July August September October November December January February March April May June Source: AWMR series. A Appendix National Water Commission Australian water markets: trends and drivers to

68 Table A.10: Net allocation trade between trading zones, southern MDB, to (ML) Year Lower Darling NSW Murray Murrumbidgee SA Murray Vic Goulburn Vic Loddon and Campaspe Vic Murray above Barmah Vic Murray below Barmah Sources: NWC (2010b), AWMR series. Table A.11: Net allocation trade between trading zones, southern MDB, to State NSW South Australia Victoria Sources: NWC (2010b), AWMR series. 66 National Water Commission Australian water markets: trends and drivers to

69 Table A.12: Rice production, rice prices and water allocation prices, Murrumbidgee, to Rice average price ($/tonne) Rice production (kilotonnes) Water allocation price ($/ML) Sources: Rice data, ABARE (2010); to water price data, NWC (2010a); allocation price data, Waterfind (2008:12); allocation price data, Sunraysia Water Exchange website ( Table A.13: Wine grape production, wine grape prices and water allocation prices, SA Murray, to Wine grapes average price ($/tonne) Wine grapes production (kilotonnes) Water allocation price ($/ML) 45 a a water allocation price data for the SA Murray was not available for this report. Therefore, this figure has been based on the average cost of water in the Murray Irrigation area in (see Sources: Wine grape data, ABARE (2010); to water price data, NWC (2010a); allocation price data, Waterfind (2008:12). Table A.14: Milk production, hay prices and water allocation prices, Goulburn, to Hay ($/tonne) Milk (ML) Water allocation price ($/ML) Sources: Milk and hay data, ABARE (2010); to water price data, NWC (2010a); allocation price data, Waterfind (2008:12); allocation price data, Sunraysia Water Exchange website ( A Table A.15: Water allocation trading in South Australia in Week starting Volume of trade (ML) Price ($/ML) 1-Jul-07 8-Jul Jul Jul-07 Appendix 29-Jul-07 5-Aug Aug Aug Aug Sep Sep National Water Commission Australian water markets: trends and drivers to

70 Week starting Volume of trade (ML) Price ($/ML) 16-Sep Sep Sep Oct Oct Oct Oct Nov Nov Nov Nov Dec Dec Dec Dec Dec Jan Jan Jan Jan Feb Feb Feb Feb Mar Mar Mar Mar Mar Apr Apr Apr Apr National Water Commission Australian water markets: trends and drivers to

71 Week starting Volume of trade (ML) Price ($/ML) 4-May May May May Jun Jun Jun Jun Source: AWMR series. Table A.16: Proportion of total entitlement trade in the southern MDB, to , by reliability class High reliability 39% 30% 45% General reliability 50% 62% 50% Low reliability 11% 8% 5% Note: Data for trade outside the southern MDB 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. Table A.17: Number and average size of entitlement trades, southern MDB, to Trading zone A Lower Darling NSW Murray Murrumbidgee SA Murray Vic Goulburn Vic Loddon and Campaspe Vic Murray above Barmah Appendix Vic Murray below Barmah Average volume of trade (ML) Note: Data for trade outside the southern MDB 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. National Water Commission Australian water markets: trends and drivers to

72 Table A.18: Number and average size of entitlement trades, southern MDB, to Year Month Number of trades Volume (ML) July August September October November December January February March April May June July August September October November December January February March April May June July August September October November December January February March April May June Note: Data for trade outside the southern MDB 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. 70 National Water Commission Australian water markets: trends and drivers to

73 Table A.19: Average prices for entitlement trades in the southern MDB, to ($/ML) Year Month High-reliability General reliability Low-reliability 2007 July August September October November December January February March April May June July August September October November December January February March April May June July August September October November December January February March April May June Note: Data for trade outside the southern MDB 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. A Appendix National Water Commission Australian water markets: trends and drivers to

74 Table A.20: Average prices for entitlement trade in the southern MDB, by state and reliability class ($/ML) Victoria low-reliability Victoria high-reliability NSW general security NSW high-security SA high-security Note: Data for trade outside the southern MDB 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. Table A.21: Commonwealth water purchases in the MDB, to (ML) Commonwealth environmental water purchases Private Murray Darling Basin entitlement trade Source: AWMR series. Table A.22: Volume and number of trades out of NSW irrigation infrastructure operator districts, to No. of entitlements Volume of entitlements (ML) Note: Figures differ from those published in NWC (2009) due to errors in the previous data. Individual irrigator sales to the Commonwealth may or may not be combined and moved off an irrigation corporation licence as one transfer. Figures for Murrumbidgee Irrigation exclude licence conversions. Sources: Murray Irrigation Ltd; Murrumbidgee Irrigation Ltd; Coleambally Irrigation Co-operative Ltd; NSW Department of Environment, Climate Change and Water; Western Murray Irrigation Ltd. Table A.23: 4% trade-out limit and total trade out of affected irrigation areas in Victoria 4% trade-out limit Total trade out Source: AWMR series. 72 National Water Commission Australian water markets: trends and drivers to

75 Table A.24: Allocation trades outside the MDB, to (GL) State Queensland New South Wales Victoria South Australia Western Australia Tasmania Total Note: Data for trade outside the southern MDB before was not available for this report. Source: AWMR series. Table A.25: Entitlement trades outside the MDB, to (GL) State Queensland New South Wales Victoria South Australia Western Australia Tasmania Total Note: Data for trade outside the southern MDB before was not available for this report. Source: AWMR series. A Table A.26: Trade volumes and prices, Western Australia, to Volume (water allocation trades) (ML) Volume (water licence transfers) (ML) Average price (water allocation trades) ($/ML) $20 $14 $20 Note: Volumes exclude water savings trades out of Harvey Water. Source: AWMR series. Appendix National Water Commission Australian water markets: trends and drivers to

76 Table A.27: Trade volumes and number, Tasmania, to Volume (water licence transfers) (ML) Volume (water allocation trades) (ML) Number (water licence transfers) ($/ML) Number (water allocation trades) ($/ML) Source: AWMR series. Table A.28: Volume of medium reliability entitlement trade and average price for the Nogoa Mackenzie Water Supply Scheme and the Bundaberg Water Supply Scheme, to Nogoa Mackenzie WSS Volume (ML) Nogoa Mackenzie WSS Price ($/ML) Bundaberg WSS Volume (ML) Bundaberg WSS Price ($/ML) Note: Volumes of trade for all years except relate to the sale of water without land. Sources: Queensland Department of Environment and Resource Management and AWMR series. 74 National Water Commission Australian water markets: trends and drivers to

77 References ABARE (Australian Bureau of Agricultural and Resource Economics) 2010, Australian Commodities, June. DSE (Department of Sustainability and Environment) 2010, Water trade in Victoria , DSE, Melbourne, Frontier Economics 2009, Volumetric restrictions on water entitlement trade: a report prepared for the ACCC, available at www. accc.gov.au (accessed 1 March 2011). NWC (National Water Commission) 2008, Australian water markets report , NWC, Canberra. NWC (National Water Commission) 2009, Australian water markets report , NWC, Canberra. NWC (National Water Commission) 2010a, Australian water markets report , NWC, Canberra. NWC (National Water Commission) 2010b, The impacts of water trading in the southern Murray Darling Basin: an economic, social and environmental assessment, NWC, Canberra. NWC (National Water Commission) 2011, Strengthening Australia s water markets, NWC, Canberra. Office of Water 2009, Final Northern Region Sustainable Water Strategy, Victorian Department of Sustainability and Environment, Melbourne. Ribbons C 2009, Water availability in New South Wales Murray Darling Basin regulated rivers, NSW Department of Water and Energy, Sydney South Australian Government 2007, Bleak outlook for irrigation allocations, media release, 30 October. Waterfi nd 2008, Annual water market report, 28. Waterfi nd 2009, Annual Murray Darling Basin water market report. Abbreviations and acronyms AWMR series GL Australian water markets reports series gigalitre ML megalitre National Water Commission Australian water markets: trends and drivers to

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