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Abstract
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.