Explaining permanent and temporary water market trade patterns within local areas in the southern Murray–Darling Basin

Abstract

The southern Murray-Darling Basin of Australia has the world's largest and most sophisticated water markets. However, there has been little study on the drivers of permanent and temporary water market movements within local areas, or the substitution effects between groundwater and surface-water extraction over time. This topic is important as it is often claimed that water market trade patterns (especially selling large amounts of permanent water) are associated with rural decline. This study uses random-effects tobit panel models to investigate the association of regional and spatial socio-economic characteristics with temporary and permanent southern Murray-Darling Basin water market trade, using a broker panel database at postcode level from 2010/11 to 2013/14. Overall, results suggest there is no statistical significant evidence that more disadvantaged communities sold larger amounts of permanent water. Permanent water selling was statistically more likely to be associated with other spatial and land productivity characteristics, while temporary water market trade volumes were more related to water scarcity factors. In addition, there was evidence to suggest a substitution effect between rural areas selling higher volumes of permanent water and using higher volumes of groundwater.

Debunking Murray‐Darling Basin water trade myths

“…Nauges et al (2016) established horticultural irrigators used temporary water trading because they were averse to the risk of large losses (downside risk), while broadacre irrigators used water temporary trading as they were averse to profit variability (variance). Haensch et al (2021) found no statistically significant association of poorer socio‐economic areas with water allocation trade. They suggested water allocation trading was more significantly associated with water scarcity, confirming that markets provide an important adaptive tool for irrigators in response to unfavourable conditions.…”

“…This finding indicates that, at some point, selling more permanent water entitlements may be a negative financial strategy for an individual farm if the desire is to continue irrigation, and more research is needed in this area using longitudinal panel datasets. Haensch et al (2021) investigated the drivers of permanent water trade and found that key influences on the volumes of entitlements sold included net rainfall, groundwater use and dryland salinity -while water entitlement purchase volumes were far more likely to be associated with water market prices, location and soil productivity. No significant association between socio-economic status and amount of water entitlements sold was found, although there did seem to be a significant association between more disadvantaged areas and higher volumes of water entitlements purchased (which is the opposite of the belief that selling water entitlements disadvantages local areas).…”