Known as “Australia’s food bowl” because of its vital role in the country’s agricultural sector, the Murray-Darling Basin touches four Australian states and covers a vast freshwater system relied on by thousands of farms.
The water that flows through the region via 23 river systems and 30,000 wetlands — and who has rights to use it — was once a source of open conflict between the state governments of Victoria, New South Wales, South Australia and Queensland. Today the flow of water remains of critical concern to farmers, industries and environmentalists.
Informal trading of water for agricultural use in the basin has a long history. In the 1940s, according to Australian folklore, farmers would exchange surpluses for a “slab” of beer. But in the 1980s and 1990s, trading was formalised to improve management of supplies across the rivers, dams and tributaries of the basin system.
Demand for better resourcing, and a political shift towards competition policy, led to the separation of water rights and allocations from land titles. Farmers could sell off part of their water rights to bigger irrigation companies or sell their water licence altogether and buy back only what they needed.
The result was a trading system designed to divert water towards its highest-value use, but excluding residential supply. The theory was that those getting the most value from the water could trade for a greater share, which would ultimately result in less wasted resource. Farmers can sell on their water rights or divert allocations to other users with thirstier crops, such as almond farmers or grape growers.
Trading was thin at first but the 2001 to 2009 Millennium Drought triggered a surge as the economics of water use was put to the test. The government entered the market as it began to buy up rights at above-market rates to protect the country’s environment.
Tanya Plibersek, Australia’s water minister, said this month that under the Labor party, elected in 2022, an additional 114,000 or so of “Olympic swimming pools of water” had been secured through government purchasing “to stop the mouth of the river Murray dying”.
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Around A$6bn ($3.8bn) of water was traded in the fiscal year 2021, according to government data, as the system boomed, before falling rapidly to A$4bn the next year. The price of water fell when flooding in the northern regions fed into the top of the basin, and tested the system from another angle.
Cullen Gunn, chief executive of Kilter Rural, which operates one of the biggest water funds in Australia, says the trading system has shown it can withstand both prolonged drought and flooding, and support Australian agriculture.
“It’s a robust system of defence against extreme events, from the biggest drought in living memory to three of the wettest years on record. But the system coped,” he says. It has benefited Australia’s economy and improved political stability, he adds. “We don’t have to look too far around the world to see people fighting over water.”
Diverting water to its highest value use has helped Australian agriculture to extend exports beyond the traditional wheat, red meat and wool. It has created a cottage industry of water brokers, consultants and irrigation funds that generate lucrative returns for investors by facilitating the trades or buying up licences from landowners.
In turn it has also changed Australia’s rural economy, with some permanent crops, such as high-value but thirsty almonds and olives, booming in the past two decades on the back of trading. More traditional industries, including dairy farms and rice growers, have struggled to compete to buy enough water when the price has risen steeply.
That has bred resentment in some parts of the basin, say water industry advisers, as family cattle farms close and small rural towns shrink because the value inherent in the asset has flowed elsewhere. “There has been a lot of collateral damage,” says one water consultant, who declines to be named.
Willem Vervoort, professor in hydrology and catchment management at the University of Sydney, says the trading system prioritises efficient use of water but ignores other elements such as downstream employment on farms. “The economic theory breaks down a bit,” he says, of the system itself and the challenges in balancing socio-economic factors with environmental protection.
Only a small fraction of water rights is controlled by Australia’s Indigenous population in the basin. That is a form of economic dispossession, say some Indigenous leaders and researchers, with a devastating impact on communities that have long relied on the water. Pilot programmes to include “cultural flows” provisions that would provide Indigenous people with rights within the trading system have not been implemented.
The system has also triggered warnings that funds could manipulate the market by buying up licences and hoarding water. Concerns over “water barons”, accused of cornering the market, were the subject of regulatory investigation in 2021 after fruit farmers struggling with drought complained that investors were “parasites”.
The Australian Competition and Consumer Commission, the regulator, scrutinised 8mn water trades and found no evidence of abuse of market power. But it did call for reform of the market because of the potential for manipulation and the lack of transparency.
The government has since introduced new data requirements for the water industry and has new rules around market manipulation and insider trading in the market that kick in next year.
Gunn questions whether speculation in the water market will yield the sort of benefits to investors that critics of water trading presume, given that the system is geared towards using water efficiently. “If you’re an irrigator or an investor, then the only way to capitalise is if someone grows something,” he says.
Also, hoarding could prove a risky ploy if seasons change, the unnamed water consultant points out. “Going long is not great when it’s raining.”
Yet Vervoort argues for more research on how the system would cope if extreme weather events trigger further price volatility that undermines the functioning of the market. “The value of the water could evaporate to the point where there is no trading,” he says.
