The impact of water ownership and water market trade strategy on Australian irrigators’ farm viability

Abstract

Reforms in the Murray-Darling Basin over the past several decades have led to well developed water entitlement and allocation markets. Irrigators now use a diversity of water trade and ownership approaches, ranging from owning relatively large amounts of water entitlements relative to their annual demand and selling when they have excess water, to owning smaller amounts (or less secure) water entitlements and relying heavily on water allocation markets to meet annual demands. Some irrigators do not trade at all. Although the benefits of water markets in reallocating water have been well established, there has been very little empirical analysis of the impact that water ownership and water market trade strategy has had on irrigators’ farm net incomes. This study uses irrigation industry survey data collected over a five year period from 2006/2007 to 2010/2011 across the Murray-Darling Basin to investigate the relationship that water trade strategy and water ownership have with farm viability (namely farm net income and rate of return). Although this is an interesting period to investigate these relationships, it must be noted that it was a period of extreme water scarcity and high water prices; hence any interpretation of results must take this into account. It was found that the actual volume of water received (which is a measure of water allocations for that region and size and security of water entitlements) is a more significant and positive influence on farm net income than water ownership per se, with this result most strongest in the horticulture industry. Water reliability is not as important in the broadacre industry as other industries. Selling water allocations was a significant and positive influence on farm net income and rate of return. Buying water entitlements was sometimes associated negatively with farm net income and rate of return in our time period, with no statistical significance found for the impact of selling water entitlements in the current year.