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Abstract
The nature of the seasonal water market is examined using a theoretical model and
empirical evidence from the Victorian market. Drivers of the seasonal opportunity
cost of water include the underlying nature of investment in the industry made in the
context of risky entitlement yields; and the timing and nature of information regarding
seasonal water availability and rainfall. Seasonal water markets facilitate the reallocation
of water availability according to this short-run opportunity cost. Evidence
from the market suggests that transactions costs are low and most of the existing constraints
to trade in seasonal allocations are the result of hydrological conditions. Analysis
of market data suggests that the price response of the market to water availability is
much more pronounced in years of low rainfall. The implications of the paper for wider
policy reform are that attention should be paid to improving property rights for the
management of intertemporal risk before other reforms, such as broadening of permanent
water markets and institutionalising environmental flows, are implemented.
This is because these other reforms will change the spatial and temporal pattern of
water use and thus affect reliability, which underpins the value of water in irrigated
agriculture.