Australia’s Water Market Reforms – Implications For The Dairy Sector

By most estimates it takes a little over 1,000 litres of water to make one litre of milk – dairy production relies heavily on water to make it viable. In large parts of Australia that water is delivered through irrigation, particularly in the southern parts of the Murray Darling Basin.

The recent drought is proving to be a significant challenge for the dairy sector. That challenge is significantly exacerbated by the impacts of water market regulation and water trading practices which are resulting in an unprecedented contraction in the sector, particularly in the southern Murray Darling.

 

How Do Water Markets Work?

In 2007 significant water market reforms came into place, specifically the “unbundling” of water entitlements. Unbundling meant that the individual components of a landowner’s water entitlements (water shares, delivery shares and water use licenses) were separated out from each other and from the encumbrance of the land ownership. The intent of this change was to create greater opportunities and flexibility to allow these components to be managed independently and for water to be managed independently from land.

The very nature of the way water is accessed in any particular year, and from year to year, is exceedingly complex with seasonal allocations, base water rights, carryovers and spot sales all part of the mix. It is a challenge for even the most sophisticated rural producers to understand and manage, let alone smaller family farms. Adding further complexity, the rules vary from state to state as well as federally – with the Murray Darling Basin covering areas of Queensland, New South Wales, Victoria and South Australia, this is a major complicating factor.

This has allowed the development of a complex water trading system where very large water rights are owned and traded separately from any land base, and in many cases by large institutional funds, retired farmers and large corporate farming interests. While the water trading regime is intended to ensure water is traded to the most appropriate land use for the most appropriate price, there are now serious concerns that the purchasing power and manipulation of the trading system are placing other users, specifically dairy producers, at a major disadvantage.

 

Dairy Farmers Exiting

 

Earlier this year the ABC reported that an estimated 400 dairy farmers have exited the Murray Valley in the past 12 months and that for the second year in a row NSW irrigators have not been able to legally access water from the Murray River. As a consequence, milk production from the region has halved to 1 billion litres and dairy herds are being disposed of at large scale. https://www.abc.net.au/news/2019-10-06/dairy-farmers-leaving-industry-due-to-lack-of-access-to-water/11564562 Many in the dairying sector believe that they have been hung out to dry by state and federal government regulatory ineptitude and by large commercial interests further north in the Basin that are perceived to be manipulating the market.

 

Water Is King

While dairy farmers are exiting because of lack of water availability, the land value at which they are being forced to sell is diminished because water fundamentally drives the value of Australian agricultural land. https://www.commercialrealestate.com.au/news/how-water-is-driving-the-value-of-australian-farms-53118/

For those reliant on irrigation allocations and accessing surplus water on market pay considerably for traded water when volumes are low, like at the moment. Water prices are currently as high as they have been for a decade, with some irrigators paying as much as $4,000 per megalitre on the spot market.

While in many cases that means farm acquisitions are focused in higher and more secure rainfall areas, such as the Northern Tablelands in NSW, for southern dairy farmers it means they are selling to interests that are looking to move to beef or broadacre cropping – immediately reducing the value of the properties.

 

 

Government Action

The dairy sector has been calling for Australian governments to take action to rectify the perceived inadequacies in the water market functioning within the Murray Darling Basin. In October this year, the Australian Consumer and Competition Commission (ACCC) announced a major review into behaviour in water markets, with five key focus areas:

https://www.canberratimes.com.au/story/6444915/accc-sets-goalposts-for-new-water-inquiry/?cs=14231

  1. Market trends and drivers – considering the variety of tradeable water rights and water market products as well is the impacts of geographic diversity and climate, economic, legal, policy and social factors.
  2. Market transparency and information – addressing whether the market and the information supplied by traders and brokers is sufficiently transparent to allow for informed and rational purchasing and land-use decisions.
  3. Regulation and institutional settings – do governments have these settings right?
  4. Market participant practices and behaviours – how to the different practices and behaviours of the wide variety of water market players impact on the functioning of those markets and the ability for all to access it.
  5. Competition and market outcomes – how has the introduction of markets influenced the diversion of water to highest and best use and have the impacts (negative and positive) been distributed evenly on both a geographic and land-use basis.

https://www.accc.gov.au/system/files/Murray-Darling%20Basin%20water%20markets%20inquiry-Short-form%20Issues%20Paper.pdf