Summary of the report

Summary
This report examines changes in the Victorian Murray Valley that could be attributed to water trading. It considers the patterns of water trade and the views of irrigators and community members in three case study regions. In an effort to distinguish these changes from rural change that would in any case have occurred, the report also considers the factors that motivate decisions about trading water.

The report is for people who want to understand how water trading is changing irrigation industries and communities. For policy makers and others with a broad interest, Part One bases its findings on observations in three of the most important water trading regions in the southern Murray–Darling Basin. For those interested in particular regions, each of these regional experiences is described in the case studies that form Part Two of the report.

Background
Water trading in Australia has developed as a response to ‘the return of scarcity’. Competition from other water users and the environment became apparent in the early 1980s, at the end of a century-long drive to build dams and distribute entitlements to use water for irrigation. With all the easy-to-construct and cost-effective dams in south-eastern Australia already built, increased water harvesting had run its race as a means of enabling new irrigation developments. Implementation of a cap on diversions in 1997 then limited the amount of water available for irrigated agriculture in the Murray–Darling Basin.

Water trading was intended to facilitate more efficient use of an increasingly scarce resource by allowing water to be moved to more productive uses. It was expected that an open and robust water market would provide numerous benefits—to individuals, communities, the environment, and the economy in general.

Nonetheless, from the beginning, a number of concerns were expressed about the economic and social impacts of water trading.

Objectives
This research report examines evidence on the various social and economic impacts of water trading with a view to informing policy debate. It focuses on regions where water trading is most prevalent—the irrigation districts of Goulburn–Murray Water and throughout the Sunraysia region on the Victorian side of the Murray.

The primary objective was to ‘ground truth’ the experience with water trading. In particular, the authors sought to quantify and report on, through detailed case studies, the actual impacts of water trading on individual water entitlement holders, industries and communities in the Murray Valley, in order to test the assumed benefits and perceived concerns arising from the trade.

It is important that individuals, communities and governments are able to differentiate between changes that are the result of allowing the movement of water and those reflecting other changes in the economy that have affected industries and communities. At present it is extremely difficult to isolate the effects of water trading from a background of drought, varying commodity markets and rural adjustment. The extent to which water trading might speed up the rate of change associated with other drivers of change is also poorly understood.

The report provides for policy makers information on the potential to redress any social, economic and financial impacts on local communities without imposing major constraints on the ability for water to be traded to its most productive use.

The insights and lessons gained from the study will contribute to the Australian Government’s Raising National Water Standards project to monitor the impacts of interstate water trading—a requirement of the National Water Commission under the National Water Initiative. Although the aim is to inform policy debate, any recommendations relating to water market policy are outside the scope of the report.

Methods used
Social information was collected through interviews in the selected regions, involving irrigators and the broader community.

Thirty-three farmers and 112 other community members participated. The economic information was derived from publicly available material and the authors’ own analysis.

The regional case studies are presented as Part Two of this report:

• Sunraysia
• Pyramid–Boort
• Rochester, Central Goulburn and Kerang–Cohuna.

Results
In order to consider changes that are the result of allowing water to be moved, and those reflecting other changes in the economy that have affected industries and communities, the report examines the following:

• the size and direction of water trading
• the drivers of rural change affecting water use and trading
• the impacts that can be attributed to water trading.

Size and direction of water trading
In the past decade there has been considerable variation in regional experiences of water trading, in both the size and direction of water trading and the type of water being traded—‘permanent’ water entitlements or ‘temporary’ seasonal allocations.

• Initially, from 1995–96 to 2001–02, the dairying areas of Rochester and Central Goulburn and the horticultural region of Sunraysia were all buyers of water entitlements. Water was bought from mixed farming regions such as Pyramid–Boort.

The dairying area of Kerang–Cohuna was also initially a small buyer of water entitlements, but from 1997–98 increased demand from Sunraysia, coinciding with restricted supply from Pyramid–Boort (because annual trade out was limited to 2 per cent of total entitlements), meant that Kerang– Cohuna became a seller of water entitlements.

• In the three seasons from 2003–04 to 2005–06 Pyramid– Boort and Rochester, Central Goulburn and Kerang–Cohuna sold water entitlements to meet further increases in demand from Sunraysia.
• In aggregate, irrigators in Sunraysia are buying water entitlements and selling temporary allocations. Nonetheless, within the region there has also been trade out of irrigation districts. Private diverters account for virtually all the inward trade.

Temporary trade volumes are generally larger than permanent trade volumes. In many regions annual temporary trade volumes outweigh the effect of cumulative permanent trading, and much trade occurs within areas as well as between areas.

A common and noteworthy feature of the regions studied is that there is often an offsetting element in temporary and permanent trading. Many areas made (net) purchases of water allocations while (net) selling water entitlements; other areas were (net) sellers of water allocations while (net) buying water entitlements.

The prolonged drought is possibly masking the full implications of this: a return to the seasonal rainfall patterns of the late 20th century might see much more temporary trade into areas such as Pyramid–Boort.

In the future, water that has currently been secured for maturing trees and vines in Sunraysia might not be sold on the temporary market as the water demands of these trees and vines increase.

An important point here is that, to understand the trade, permanent and temporary water trading need to be considered together. Both types of trading affect water use in a region.

Irrigators’ views on the two types of trading differ greatly A comparison of total water reallocated through trading for each of the regions shows how the often-offsetting effects of temporary and permanent trading have led to increased water for irrigation use in the Sunraysia and Rochester, Central Goulburn and Kerang–Cohuna regions, while reducing the water used in Pyramid–Boort (see the accompanying figure).

Drivers of water trading
Water trading in the Victorian Murray Valley follows the postulations of economic theories of trade and investment.

The trade increases different parties’ capacity to react to changes in circumstances. This report finds that water trading is a catalyst for other drivers of change in rural economies, rather than being, of itself, the primary driver of change.

There are three key drivers of water use and trading:

• the settlement history of irrigation districts
• seasonal water scarcity
• commodity markets and industry pressures.

The history of irrigation districts has implications for current water trading and emerging pressures. Water trading provides a mechanism for adjusting for past decisions in irrigation development that are no longer appropriate—such as irrigation of unproductive land or land less suitable for irrigation or independently irrigating small, separate blocks. In Sunraysia there is a trend away from existing shared-channel infrastructure and towards direct river pumping because greenfield sites offer advantages to horticultural industries, which benefit from new irrigation layouts and economies of scale.

Dry weather has two main effects on water trading. It increases the demand for irrigation water and reduces the water supply.

With or without water trading, drought would lead to tough times and many property foreclosures. Water trading delays and prevents some of the sales by giving farmers an additional asset with which to manage debt. Trading out of dairying regions, for example, is a mechanism for clearing some of the debts accumulated from 2002–03 and, although this is perceived as detrimental to the local community, the alternative mechanism for managing this debt would have arguably been even more detrimental, with impoverished farm families, fire sales of assets and bank foreclosures.

Changes in the economic circumstances of different industries are also key drivers of water trading. Trading in northern Victoria is consistent with commodity prices and prospects. This applies to both permanent and temporary trading. For example, the 1990s saw favourable terms of trade for manufactured dairy products, and the dairy industry expanded accordingly. Trade in water has coincided with major changes in marketing arrangements for irrigated commodities (dried vine fruit and dairying), episodes of severe drought, and responses to taxation and other policy settings. The specific influence of water trading is hard to isolate from these developments. If no trading of water (separate from land) were possible, the investment, employment and regional boom observed in Sunraysia might never have occurred. Future commodity price changes will affect prospects in different industries and the pattern of water trading.

Regional experiences

• The Sunraysia region has been a large purchaser of water entitlements whilst also selling large volumes of water allocations. Mildura and Robinvale have both been growing rapidly, prompted by the expansion in the horticultural industries in the surrounding districts. Mildura’s growth cannot, however, be attributed entirely to the water trade since the growth of regional centres is common throughout rural Australia. Growth places pressure on services and infrastructure in rapidly growing communities; this is especially apparent in Robinvale.
• Pyramid–Boort was the only region studied that has been a net seller of both permanent water entitlements and seasonal water allocations. In Pyramid Hill the loss of water from the district has been associated with the loss of farms and production and the subsequent loss of people and income for the town. For Boort, this was offset by recreational tourism centred on Little Lake Boort and the development of the olive industry, which provides alternative demands for water in the region.
• Rochester was a purchaser of water entitlements in the late 1990s and early 2000s but sold large volumes of permanent water in 2003–04 to 2005–06. Water use in the area has not changed dramatically because recent sales of water entitlements have been offset by purchases of water allocations from other areas. Irrigation in the area is predominantly for dairy farming. The community of Rochester is under great pressure from the very low seasonal allocations in 2002–03 (57 per cent of entitlements) and 2005–06 (23 per cent) as well as the trend to farm amalgamation.

Until the past three irrigation seasons Central Goulburn had bought and sold small (net) volumes of water entitlements. From 2003–04 to 2005–06 larger volumes of water entitlements were traded out of the area. Many dairy farms in the area were geared towards using more than 100 per cent of water allocations when sales water was available. Lower allocations in recent years have therefore meant buying water on the temporary market, supplementing feed or reducing production. The residents of Kyabram and Tatura were aware of the effect of the water trade on their communities, but they were more concerned about the impact of drought and the loss of young people, who leave for better education and career prospects and rarely return.

Since the late 1990s Kerang–Cohuna has consistently sold water entitlements and purchased water allocations. The combination of dairying and mixed farming allows for diversification between irrigation and dryland agriculture. The communities of Kerang and Cohuna fear that the current water trading trends will mean the eventual closure of the ageing irrigation infrastructure in the area.

Findings
Separating the effects of water trading from other causes of rural change requires a counterfactual: how would decision making and outcomes in the various regions be different in the absence of water trading?

Economic impacts
It is difficult to untangle the effects of water trading from the background of drought but, by considering observed outcomes and possible actions in the absence of such trading, the authors found the following:

• Without temporary trade the dairy industry would have fared much worse than it did during the past 10 years of drought.
• Even with temporary trading many dairy enterprises collapsed as a result of the extraordinarily low seasonal allocations of 2002–03 and 2006–07. Permanent trading meant that those farmers left farming with more money than they otherwise would have had.
• Without temporary trading many existing horticultural enterprises in the Goulburn system would not have survived the extraordinarily low seasonal allocations.
• Many mixed farms survived the low seasonal allocations by selling water on the temporary market, thus making more money than they would have done by growing crops.
• In the absence of drought—when high seasonal allocations would be expected—temporary trading into regions such as Pyramid–Boort could be expected to be higher.

It is also difficult to separate the effects of water trading from the background of structural adjustment, but the authors nevertheless found the following:

• Water is being permanently traded out of closer settlement areas with small farms—such as Mildura in Sunraysia and Tongala in the Central Goulburn area.

Because of the advantages of developing greenfield sites and the difficulty of achieving economies of scale as a result of the small block sizes in some irrigation districts, new developments mainly occur outside constituted irrigation districts.

• Without permanent trading there would have been very little large-scale horticultural development in Victoria in the past 10 years.

Similarly, while it is difficult to untangle the effects of trade from the background of commodity markets, the authors found the following:

• Without permanent water trading the wine boom would have been confined to existing irrigators switching away from dried fruit to wine grapes, rather than the extensive plantings of wine grapes that have occurred.
• The almond boom might not have taken place, since that is an industry heavily reliant on economies of size.
• Less water will be available for temporary trading back into dairy areas as current plantings of vines and trees mature.
• Changes in the relative prices of commodities are likely to alter the patterns of trade.

Social impacts
Water trading can have both positive and negative effects on local communities:

• There is widespread, vehement community opposition to permanent trading out of a district. Some farmers have been ostracised by their community for selling their permanent water entitlements. With persistent drought, though, there is a greater appreciation that many individuals might be selling unwillingly.

Most of the people interviewed were strongly supportive of the principles and practice of temporary water trading.

• Water trading has imposed greater management challenges for irrigators in industries where price and marketing risks were previously regulated and production risks were managed by conservatively run irrigation systems.
• Social impacts in the regions studied are not simply a temporary phenomenon associated with the introduction of water trading. Rather, they are likely to be a permanent feature of regional economies exposed to the rapid shifts— facilitated by water trading—in investment between different types of irrigated agriculture.
• Although water trading by entitlement holders is voluntary, the trade also affects third parties. Trade into a region can lead to increased competition in production, queuing for timely irrigation water delivery, and higher water tables.

Trade out of a region can lead to increased water delivery charges to remaining users (because of stranded assets), the build-up of disease and pest plants and animals, and depopulation.

• Change and adjustment can be difficult. Communities in regions exporting water can experience reduced populations and less spending. Communities in regions importing water can experience increased populations without necessarily having the infrastructure and services to properly accommodate these new arrivals.
• Service industries—such as agricultural services, farm supplies, and machinery sales and service—that supply inputs to irrigated industries are affected by the growth and contraction of irrigated industries through the water trade.

Not only does demand in these industries depend on whether water is moving into or out of a region; it also depends on the types of farms between which water is moving.

Conclusions

• In broad terms, water trading in the Victorian Murray Valley follows the postulations of economic theories of trade and investment. Similarly, the economic and social impacts identified through this study are generally consistent with what would be predicted from rural sociology theory relating to communities exposed to rapid structural change associated with boom-and-bust cycles in agriculture.
• To understand the water trade, it is necessary to consider permanent and temporary water trading together. Both types of trading affect water use in a region, and there is often an offsetting direction in observed temporary and permanent trading.
• Water trading prompts change that would in any case have happened as a consequence of other forces for change in rural economies—such as drought, varying commodity prices and rural adjustment—rather than being, of itself, the primary force for change.
• It is difficult to untangle the effects of the water trade from the background of drought. Any approach implying that all impacts associated with changes in water use facilitated by trading are attributable to or caused by trading would be misleading and unhelpful for policy development.
• Future changes in commodity prices will affect prospects in different industries and the pattern of water trade.

Recommendation
When considering the impacts of water trading, it is important to take into account both temporary and permanent trading and to acknowledge the context of the observed changes in water use—which is a context of rural change and structural adjustment.

Any approach implying that all impacts associated with changes in water use facilitated by trading are attributable to or caused by trading would be misleading and unhelpful for policy development.

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