IRRIGATION
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WHAT IS DRIVING ACTIVITIES IN WATER MARKETS? H Bjornlund Introduction The use of Water n,arkets have increased sign ificantly within the three southeastern states during the last six to ten years sending strong signals about the econom ic value of water to users, while emerging legislation as well as CoAG and Murray-Darling Basin Commission policy initiatives aim to ensure that the economic signals also incorporate environmental and social values. This process has been supported by the emergence of water exchanges providing farmers with easy, cheap, fas t, convenient and secure means of transferring water on the temporary market (Bjornlund 2003a,b). frrigators are therefore becoming familiar with water markets, how they operate and their potential benefits (Bjornlund 20036) and markets have assisted them in coping with water scarcity, policy uncertainty, and adjustment pressures (Bjornlund 2003c, 2002a). Many irrigators are now making annual business decisions whether to buy or sell water based on flu ctua ting commodity prices and the level of water scarcity and follow the market from year to year. There is therefore evidence of a commod ifi cation o f water in th e temporary market, whi l e in the permanent market water is still perceived as an inherent part of the farm (Bjornlund 20036, Tisdell and Ward 2003). H owever, there are also clear indications that considerab le uncertainty and ignorance exist about the way markets operate, and many factors impede their efficient operations (Bjornlund 20026). To further the adoption of water markets it is important to understand what drives buyers and sellers in the markets and thereby influence supply, demand and prices. This paper w ill explore the issue of market drivers based on workshops, focus groups and interviews with inigators, activities on the Water Exchange, and records of water authorities. Seven categories of drivers have been identified and will be discussed in this paper.
Farming Patterns and Agricultural Practices Different commodities have a different use pattern and can afford or are willing to pay different prices at different times 30
WATER NOVEMBER 2003
Northern Victorian Water Exchange
ool Prices for Zone 1A & 1B Greater Goutburn
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Figure 1 . Price levels on the Northern Victorian Water Exchange 1998/99 to 2001/02.
of the year. Dairy farm ers have a weekly income and therefore tend to buy water during the season, as they need it. They also have a higher gross margin per ML than most grazing and grain growing farmers and are therefore not as sensitive to price flu ctuations. Rice farmers an d most broad acre farmers have a fairly narrow cost margin and receive a bulk payment at the tim e of harvest; they therefore tend not to plant any more land than they can irrigate with the water they have or can buy at that time at a price where th ey can make a profit (about $30/ML). They wi ll then again be willi ng to buy just before harvest if the crop needs a bit extra to finish up or they need to fi ll the soil profile for a follow on crop. Dairy fa rmer are aware of this pattern and therefore plan their buying not to coincide. C hanges to fa rming practices also have an impact on demand for water. Within the dai1y industty there has been a trend toward split calving, which shifts demand to the winter period where the level of natural precipitation is higher, this reduces demand for water during the hot sununer months. Also, there has been a trend toward keeping animals in feedlots and then producing feed such as grain or silage. This has not been w ithout problems, since the use of feeding grain or silage requires different management practices and is more labour and capital-intensive as fomers need
co invest in equipment co harvest, handle and score the feed.
Commodity Prices The prices of and demand for various commodities has an impact on supply and demand in water markets. The price of feedi ng grain is an example of this; during the first year of the exchange dai1y farmers were advised that at prices above $90/ML they wou ld be better-off buying feeding grain. This influenced the behaviour of farmers during the first two seasons (Figure 1) . In N SW, the rule of thumb was that as long as water prices stayed below the price of half a con of grain , the farmers wou ld be better off buying water. As a resu lt of the drought the supply of feed was very low both during 2001/02 and 2002/03 and therefore very expe nsive inc reasin g dairy farmers ' willingness to pay for water toward the end of 2001/02 and the beginning of 2002/03 (Figure 2) . During 2001/02 commodiry prices for the farmers normally supplying the temporary market; that is, the cattle, lamb, wool and grain growers, were very high; these farmers were therefore reluctant to sell, which reduced supply and forced up prices; at the same time, dai1y prices were high increasi ng the dairy farmers' willingness to pay resulting in record prices (Figure 1).