Fundamentals Determining Prices in the Market for Water Entitlements: An Australian Case Study

Abstract

Prices paid in the market for water entitlements within the Goulburn-Murray Irrigation District in Australia have increased by 15% p.a. over the 10-year period from 1993 to 2003. This is less than half the increase that has taken place in the market for water allocations during the same period. Regression analyses show very few relationships between commodity prices and prices of water entitlements, with only wine grape prices having a significant positive influence on price. Correlation analyses show strong negative correlations between commodity prices and the price of water entitlements, especially with dairy products, which is the main high value industry within the district. The major factors influencing the price of water entitlements are: the price of water in the allocation market, the level of seasonal allocation, vine grape prices and interest rates. There is some evidence to suggest that high value producers have been willing to pay increasing prices as supply has declined in order to protect their long-term investments in permanent plantings and other capital investments such as dairy equipment and cattle. The negative correlation with dairy prices indicates that dairy farmers have had to accepted to pay higher prices despite a relative fall in commodity prices; the increase in the price of water has therefore come out of irrigators' profit margins and not out of increased income.

Acknowledgements

The Australian Research Council funded this research project together with 10 industry partners: Department of Water Land and Biodiversity Conservation, Department of Primary Industries, SA-Water, Central Irrigation Trust and River Murray Catchment Water Management Board in South Australia, Goulburn-Murray Water, and Department of Sustainability and Environment in Victoria, Murray Irrigation Limited, and Department of Infrastructure, Planning and Natural Resources in New South Wales, and the Australian National Committee on Irrigation and Drainage.

Notes

1. In the US this determines the reliability of supply under the prior appropriation doctrine.

2. The authority managing Australia's largest river system, which accounts for some 75% of all irrigation in Australia.

3. Irrigators have a water right which is delivered in full 96 years out of 100. In addition, irrigators receive sales water allocations during most seasons. The long-term mean sales water allocation is expected to be 60%, i.e. for each ML water right the irrigator can use 1.6 ML. However, if an irrigator decides to sell any water the maximum sales water allocation will be reduced to 30%, i.e. 1.3 ML per ML of water right.