The value of inter seasonal arbitrage in water markets

There is pressure in Australia for water management reform to ensure an efficient allocation of resources between productive uses and to provide adequate conservation of the environment. The establishment of water markets and trade has been seen as the primary mechanism for improving the efficiency of water use in the Southern Murray Darling Basin. However, with the existing trading arrangements, irrigators can only reallocate water within a season. Individuals do not hold property rights that allow them to manage the variability in water demand and supply between seasons. The objective of the study presented in this paper is to establish an order of magnitude for the benefits of property rights that allow for inter-seasonal arbitrage in water markets. A stochastic optimal control model was developed for the Murrumbidgee catchment, which integrates agronomic, economic and hydrologic aspects of farm irrigation. The modelling framework allows consideration of the impact of alternative strategies for the pricing of water released from storages, when there exists uncertainty in both water availability and demand. The current allocation system adopted in the Murrumbidgee valley has the traded price of water largely determined at the start of the irrigation season according to allocation levels. The impact of this strategy on water use and farm incomes is compared with that which would arise from a system of property rights that allow trade of water held in storage within and between seasons. The results indicate that under a system of storage access rights which allows trade between seasons, irrigators could increase returns compared to the current allocation rule by reducing the average amount of water held in storage between seasons. The increase in returns was estimated to be in the order of $700 million, discounted over 30 years. However, the associated increase in water use would result in lower but more volatile water prices and greater variability in water use between seasons. Realising these benefits might require investments in delivery and farm infrastructure. There would also be implications for the overall management of water flows for the environment.

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 Record created 2017-04-01, last modified 2017-08-26

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