The Water Barons of Australia

Australia has one of the world’s most sophisticated water-trading systems, and officials in other water-challenged places—notably California and China—are drawing on its experience to manage what the World Bank has called world’s “most precious resource.”  The system here, set up after a catastrophic drought in the 2000s saw the country’s most important river system almost run dry, aims to make sure each gallon of river water goes to higher-value activities.

But the return of severe drought to an area of eastern Australia more than twice the size of Texas is testing the system…Putting a price on water is politically unacceptable in many countries, where access to lakes and rivers is considered a basic right and water is often allocated under administrative rules instead of by markets.

Many water markets that do exist only allow landowners to buy and sell water rights. Australia since 2007 has allowed anyone to trade water parcels, putting supply under the influence of market forces in a system now valued at about $21 billion. Water may be freely bought and sold by irrigators, farmers, water brokers or investors through four exchanges—H2OX, Waterfind, Water Exchange and Ruralco—which allow real-time pricing…

As Australia rewrote the rules of its water market over the last decade to deal with its own drought crises, many farmers chose to sell their water licenses and rely on one-off purchases to keep farming.  The tactic worked until winter rains failed to arrive this year, turning fertile areas into dust bowls. Where a megaliter of water in June last year, before the drought took hold, cost around 3,000 Australian dollars (U.S. $2,166), the price is now closer to A$5,000, according to Aither Water, an advisory firm. The high cost has left smaller farmers praying for rain…

Australia’s drought is splitting agriculture-producing regions into those who have water and those who don’t.  Large investors—including Canadian and U.S. funds—bought high-price water licenses to set up agribusiness ventures in profitable almonds, cotton and citrus, with an eye to growing Asian markets. Others have set up dedicated water investment funds, with prices at the highest levels seen since the drought last decade.

In a country where boom-and-bust cycles, through drought and flood, have historically made water a political flashpoint, some rural Australian lawmakers and farmers want the government to divert water to help parched farms…In August 2018, Victoria state auctioned 20 gigaliters of water that had been earmarked for the environment, putting it on the market for dairy and fruit regions around Cohuna…Some water traders and environmentalists criticized the move as political interference—and said it risked undermining the water market by giving priority to farmers and disrupting forward trades and planning by other irrigators….Euan Friday, a water manager for farm and water investment company Kilter Rural, said the market is doing what it is supposed to do, and warned that the country’s fragile rivers—much smaller than the major rivers of North America—would be facing a dire situation without it. Supported by Australian pension funds, Kilter Rural has invested $130 million in buying water rights and redeveloping farmland.

Excerpt from Australia Model Water Market Struggles with Drought, WSJ, Nov. 8, 2018

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