More transparency needed to improve water trading

After sustained pressure from farmers, the Morrison government launched an Australian Competition & Consumer Commission inquiry into the Murray- Darling Basin water market. As the terms of reference were announced last month, Water Resources Minister David Littleproud explained farmers were concerned about changes in water use, trade between valleys and the effect speculators had on the water market. National rural reporter Ean Higgins reported on Monday that representatives from a dozen horticultural groups had written to the minister claiming investors allegedly were hoarding billions of litres of water and ratcheting up its cost, leading to financial and emotional distress in the farm sector. Water rights and land ownership have been decoupled; one in seven water trades are by companies or individuals who don’t own land.

Food growers point to a massive artificial price spike — not seen since the millennium drought — that is crippling agriculture. The price of water for irrigation in the Victorian Murray River district has jumped from a long-term average of about $135 a megalitre to $800. At that rate, many crops are no longer profitable, forcing growers to “turn off”, or not water, grape vines and nut and citrus trees. In the recent past, when storage levels in the basin slumped to about one-third capacity, the spot market price was in the vicinity of $250 a megalitre. Trading, and drought, is changing the landscape of Australia’s food bowl and pushing up prices at the kitchen table for city folk.

In theory, water trading is a helpful activity. It has been going for decades. Australia is a world leader in it and 90 per cent of trading is in the basin. In practice, however, trading is complex, opaque and often asymmetric. There are several rights in play, including entitlements (ongoing rights to a share of water) and allocations (the volume of water given in a season or period). The Productivity Commission’s 2017 report on national water reform found trading benefited the community “by allowing water to move to higher value uses, creating incentives for water to be used more efficiently and enabling irrigators (and other water users) to better manage drought and other risks”. The commission said trading was one of the “major successes” of national water reform, making the irrigation sector “more prosperous and resilient”.

So far, so good. But water trading can be disruptive for individuals and regions as activity moves to different locations. We must also bear in mind the counterfactual of life without water trading. How would those producers who need water every year, such as nut farmers, make it through droughts? Yet markets can overshoot and are plagued by imperfect information, making rational decisions difficult to execute; water trading has transaction costs, such as long approval times and trade application fees. As the commission found, and as farmers told Higgins, for water markets to operate efficiently traders need access to reliable and timely information, including about prices. “Governments should focus on improving the quality and accessibility of basic trade data, and allow the private sector to provide more tailored information services,” it said, adding officials should look to improve information about water resources and market rules. Many small operators are stumbling about in the dark.

On Monday, Mr Littleproud ordered an ACCC crackdown on alleged “unconscionable conduct” in the water trade. He asked the Murray-Darling Basin Authority to use its powers to inquire into allegations water pricing reporting is not transparent. As a partner in the annual Global Food Forum, The Australian recognises the vast potential of the $150bn agribusiness sector. Managing scarce water resources efficiently in the basin — where one-third of food production occurs — will require farm innovation, transparency and effective regulation to ensure rights are traded fairly.