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WHAT IMPEDES WATER MARKETS

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Leaseback will enable irrigators to sell their water to finance theThe development of long-term leases as well as leaseback arrangements would protect

    Paper to be presented on the fourth Australasian Water Law & Policy Conference, Sydney 24 to 25 October, 2002

    WHAT IMPEDES WATER MARKETS

    Henning Bjornlund

    School of International Business, University of South Australia

1. INTRODUCTION

    Most water resources within the Murray;Darling Basin are now fully committed, and the extraction for

    consumptive uses is effectively capped. The only way of providing water for new irrigation development is therefore through a reallocation of existing resources. Similarly, the only way of increasing the economic output from the capped resource, and thereby facilitate economic growth in rural communities depending on irrigation for their production, is to reallocate water from inefficient low value users to efficient high value users. The water market is the instrument relied on to facilitate these processes, and full-cost recovery prices is one of the drivers of the process, encouraging or forcing the inefficient low value users to make the necessary farm adjustments, or leave irrigation farming. As the combined forces of the Cap, increased demand for water for environmental purposes, a prolonged drought, and the initial success of water markets have slowly reduced irrigators’ annual access to water, this reallocation process has become imperative. The importance of a smooth reallocation process has been further emphasized, as water allocation policies have shifted the risk burden associated with annual allocation levels from water authorities to the individual irrigators (McGuckian et al. 1999). Traditionally water authorities incorporated expected inflows to the storages during the season when announcing the seasonal allocation, thereby providing some certainty for irrigators. Today most authorities base the initial allocation announcement on the water actually in the storages at the time of making the announcements, and then adjust the allocation every month during the season as additional water enters the storages. This has increased the irrigators’ need for risk management both during and between seasons.

    These developments have placed increased demand on water market mechanisms to operate quicker and with greater certainty. It is important here to acknowledge the existence of both the temporary and permanent market. Both markets provide irrigators with an important tool to manage the increased supply uncertainty and facilitate a continued reallocation of water both within and between seasons. Temporary markets have grown explosively during the last five to six years, a process which has been significantly enhanced by the emergence of water exchanges in both NSW and Victoria (Bjornlund, 2002a). The use of permanent water markets has also grown but at much lower volumes. The initial expectation was that permanent transfers were necessary to provide long-term adjustment toward more efficient and higher valued uses. The philosophy behind this is that irrigators will not commit the considerable financial outlay in this process, unless they have the long-term control of the necessary water resources to protect this investment, and enable them to make long-term financial planning. The slow uptake of permanent trade would therefore be an impediment to optimal investment in high value efficient infrastructure (Crase et al. 2000; Bjornlund and McKay, 2001a), and it has been argued that economic benefits have been postponed or foregone as a result (Marsden Jocobs, 1999). If the maximum benefits are to be gained from trade, it is therefore important to understand what impedes the operations of water markets, and in particular the use of permanent markets.

    This paper will discuss market impediments based on a series of water market workshops held with irrigators and other key actors and stakeholders in March 2002, as well as a survey of the literature. Analysis of interviews with irrigators, water exchanges, prices paid for water in various markets as well

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    as water rights and water-trading registers will be used to, where possible, identify empirical evidence of these impediments in the market. The second section will discuss the literature with respect to market impediments, while the third section will briefly describe the data sources. The fourth section will discuss the findings, and the fifth section will provide some conclusions.

2. WHAT IMPEDES MARKETS THE INTERNATIONAL LITERATURE

    Early research in the US indicates that any limitation in the ability to trade water spatially or between different user groups impedes water markets and results in lower prices and lower volume of trade (Gardner, 1985; Colby et al. 1987). Research in the US (Colby et al. 1987), in Chile (Bauer, 1998) and in Australia (Bjornlund, 2002c) indicate that the larger the trading area, and the more flexible the delivery systems, which provides greater supply security and greater variety of user groups, the higher the price and the larger the level of market activity. In Chile, Bauer also found physical constraints a significant impediment to trade. Chile has rather short and narrow rivers limiting potential market participants and thereby the scope of trade. Amplifying this impact is the fact that on most channels irrigators’ supply is controlled by the size of fixed gates, which admits water from the channel to the farm. If trade takes place between two irrigators on the same channel, only the gates of the buyer and the seller have to be adjusted to reflect the transfer. However, if trade takes place between irrigators on two different channels, all the gates, in both the buying and selling channel, need to be adjusted, which significantly increases transaction costs. The highest level of trade takes place within a system supplied by three interconnected dams, which creates a high level of supply reliability and flexibility, and with a system of flexible gates to control irrigators’ access to water, which in turn makes adjustments quick and cheap.

    Brown et al. (1982) found that the lack of market proficiency constitutes an impediment to trade. The level of proficiency was measured by factors such as the existence of experienced market intermediaries and consultants, ease of administrative procedures, and the flow of market information. They found that the more proficient the market the higher and more consistent the prices paid and the volume traded.

    Many researchers argue that the presence of politically created transaction costs is an impediment to an efficient market (Crouter, 1987; Howe et al. 1990). Colby (1990) discusses what she calls policy-induced transaction costs (PITC) used to internalise externalities, which would otherwise be ignored by water buyers and sellers negotiating in their own best interests, and thereby narrowing the gap between social and private net benefits. She argues that

    PITC that reduce willingness to pay for water transfer could promote economic efficiency…

    Transaction costs are not 'money down a rathole’, they are expended to clarify, protect and

    transfer property rights. Rights to use water are extremely heterogeneous, sometimes poorly

    defined, and involve pervasive inter-dependencies. (p1188)

    The magnitude of PITCs varies significantly between the US States depending on the approval process and the pressure on water resources. These two factors are highly related, since the more pressure the water system is under, the more opposition is experienced, and the more rigorous the approval process. Colby (1990) reported that while PITCs averaged US$112/ML, they varied from US$231 in Colorado, US$67 in New Mexico and US$81 in Utah. These differences are also reflected in the time delay caused by the process. Such time delays also represent an opportunity cost of time foregone in the process and add to the uncertainty. In Colorado, the average time delay was 29 months, 4 months in New Mexico and 5 months in Utah. In general, Colby (1990) found that transfer costs increased with the magnitude of the economic value that might be affected by the proposed transfer, and the scarcity and the price of water in the area. Under the systems in the US Southwest, parties protesting against

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    proposed transfers, in order to protect their own water right, can incur significant costs. Colby (1990) found protest costs varying from US$750 to US$24,400 with an average of US$7,052.

    Over half of the transfer costs in Colorado goes to pay legal fees to lawyers representing the applicant and protestant. One third of the US lawyers specialising in water are a member of the Colorado Bar. Colby (1990) concludes that the main beneficiaries from Colorado’s court based approach are members of the State’s water bar, but she also argues that the costs may still be lower than what might be

    socially optimal. Whittlesey’s (1990) comment to this was that if a considerable proportion of the transaction cost goes to engineers, hydrologists, lawyers and economists, in order to define water rights on a case-by-case basis, there could be significant inefficiency, and potential inequity in the process. This further underlines the need for better defining the transferable interest of an irrigation water right. Gardner (1990) had much the same comment, and stated that Colby (1990) needs to more carefully distinguish between PITCs, which serve to correct market failures, and the legal or administrative flaws in the transfer system.

    To try and control the high transfer costs, some States have introduced historic consumptive use, as well as type of water use, in order to eliminate the need for a case-by-case evaluation (Checchio and Colby, 1988). A New Mexico Supreme Court decision supported the water agency’s use of such fixed historic consumption figures. Also in Utah and New Mexico, the office of the State Engineer determines whether or not the transfer will adversely affect other water users, and while buyers and sellers can appeal the decision, it is not challenged 99% of the times (Howe, 1998). These factors might explain why transfer costs and times are lower in these two States. MacDonnel (1990) conducted research into water transfers in a number of States in the Southwest, and his findings support those of Colby (1990). McDonnel applied regression analysis to transfer costs, and found that they were mainly determined by two factors: the size of the transfer, and whether or not the transfer was opposed.

    The issues of culture and tradition as impediments to trade have also been discussed both in the US and in Chile. In the US, opposition to water trade has often been based on social or cultural grounds. It is often argued that water is too important to be evaluated exclusively in terms of economic welfare. Water and society are so involved and complex, especially in arid regions of the world, that a threat to the system of allocation of water is a threat to the community (Brajer and Martin, 1990). In Rio Arriba County in New Mexico, water transfers to residential subdivisions have been disallowed on the basis of community value arguments, to protect the unique culture within irrigated farming in the County. The argument was that

    when water rights are removed from the land there is no irrigation. Without irrigation, the

    land will be lost. Without the land base, the family will disintegrate, and without the families,

    the communities too, will die. Once lost, the culture could never be regained (in Brajer and

    Martin, 1990, 38).

Much the same line of argument was used in the Sleeper Case when it was proposed to transfer

    agricultural water to a resource project. The judge of the state district court said

    I am persuaded that to transfer water rights, devoted for more than a century to agricultural

    purposes, in order to construct a playground for those who can pay more is a poor trade

    indeed (Colby, 1988, 743).

    This finding was, however, overturned on appeal. Nevertheless, this case clearly demonstrates that rural to urban transfers are likely to encounter substantial local opposition and therefore be associated with significant costs.

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    Apart from the physical and economic effect on non-users in the exporting community, research has shown serious effects on community cohesion, local tradition and cultural values (Mumme and Ingram, 1985; DuMars and Minnis, 1989; and Colby and Bush, 1987). The Paiuate Tribe has proven a close cultural link with two particular fish species within the Truckee River and Pyramid Lake in Nevada. Due to this cultural link the tribe was successful in preventing out-of-basin transfers in order to protect river flows vital to the survival of the species, which were under threat due to reduced water flow, slowing down the current, which resulted in increased water temperatures (Colby et al. 1991).

    Ingram and Oggins (1992) surveyed irrigation regions affected by major water transactions, and found that the local population perceived that one of the major effects of the transfer would be on their way of life. Mumme and Ingram (1985) interviewed members of both the Papago Indian tribe in Southern Arizona and the Hispanic communities in the Upper Rio Grande River of northern New Mexico and southern Colorado. The latter has the oldest history of European settlement in the US. They found that both communities expressed concern for the preservation of their local culture, which was founded on irrigated farming. In the Hispanic communities very few respondents expressed any interest in selling water to obtain better value, even though water is used for very low value production. In the Papago Indian tribe, 92.5% of the respondents still preferred the traditional tribal rights ownership and very few expressed an interest for individual rights. Much the same concern has been expressed as one of the impediments to trade in Chile, where very little trade has taken place, despite potential significant financial gains for poorer inefficient peasants (interview with Sr. Peralta, Presidente Confederacion de Canalistas de Chile, Santiago July 1999). Other recent research in Australia and the US has clearly confirmed that irrigation communities are still not comfortable with water markets as instruments to allocate or reallocate water (Syme et al.1999; Keenan et al. 1999; Tisdel et al. 2001; Bjornlund, 2002d).

3. THE DATA

    This paper investigates the issue of water market impediments further by analysing the behavior and perceptions of irrigators in the water market based on:

     Three workshops with irrigators and key stakeholders held in Tatura, Victoria; Deniliquin, NSW;

    and Kingston on Murray, SA in March 2002.

     Telephone interviews with:

    1. 200 buyers and 200 sellers of temporary water during 1998/99, half within the Goulburn

    Murray Irrigation District (GMID) in Victoria and half within the Murray Region (incl. Murray

    Irrigation Limited, MIL) in NSW;

    2. 100 sellers and 100 buyers of permanent water during the 1995;2000 period within the Murray

    Region of NSW; and,

    3. 50 buyers and 50 sellers of permanent water within the GMID in Victoria during 1992;96, who

    were re-interviewed some four to eight years after they traded.

     An analysis of the trading and water rights registers of Goulburn;Murray Water (G;MW).

     An analysis of prices paid in the temporary and permanent markets.

    Among many other questions, the irrigators were asked to rate how important were a number of reasons for buying and selling in their decision making process to use the temporary or permanent market. During the interviews in 3 above, irrigators who had not participated in permanent trade subsequent to their first experience were asked to rate a number of reasons for why not, and if they had used the temporary market since their original permanent trade, they were asked why they had done so. A one to five scale was used with one being not important and five being very important. In the following discussion, when reference is made to irrigators finding a certain reason important, they gave that reason a rating of four or five.

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4. FINDINGS

    This part will identify evidence for the various impediments in the water markets, including brief summaries of the categories of market impediments discussed during the three workshops and a review of the Australian literature. Evidence of these impediments is then identified, where possible, based on an analysis of trading and licence registers, an analysis of the outcome of the telephone interviews listed in part 3, prices paid in the temporary and permanent water markets and the literature. The impediments can be categorised as follows:

4.1 Policy uncertainty

    Policy uncertainty came through very strongly as the main impediment to permanent trade in all three workshops, and in South Australia as an impediment to temporary trade as well. The feelings in SA were very strong; workshop participants talked about constantly ‘shifting goal posts’, and the term

    ‘total fear’ of what politicians might do was used. These feelings are likely to be stronger in SA, where diversion licences were reduced down to actual or committed use in the 1970s, without any compensation, and where a number of irrigators were left without access to water, when the old irrigation areas were refurbished in the 1990s. These irrigators did not have their entitlement taken away, but lost the ability to use the water, since the new supply system did not pass by their property. These irrigators retained their entitlement, and could subsequently sell it on the market and obtain some kind of compensation. Farmers’ memories are long when it comes to such issues, and the SA irrigators expressed the need to ‘keep some water up their sleeves’ rather than selling it ‘just in case’, and that it was better not to sell on the temporary market, because ‘you never know’, when the government will come and take the water back, arguing that ‘since you have sold it, you obviously don’t need it’.

    The impact of the Cap, perceived or real, and the unresolved issues of environmental needs have generated this policy uncertainty. The Snowy River debate has caused great unease, as has the Murray Darling Basin’s ‘Living Murray’ initiative (MDBMC, 2002), even though it strives to increase policy

    certainty. That these developments happen to coincide with one of the longest and most severe droughts in white man’s history, have worsened the impact, and in many instances confused the relationship between cause and effect. As a result of these developments, great uncertainty exists about what future allocation levels are going to be. This is a significant impediment to permanent trade. If you pay $1,000 for one ML today, you don’t know what you will receive in years to come you are

    thus bidding for an unknown commodity. Conversely, this policy uncertainty drives the temporary market here you do know what you are buying. If you pay $80 for one ML today, you will receive one ML in return, and with the Exchanges in place, you will receive it instantly. The only way this problem can be resolved is by the creation of policy certainty, which will require the completion of the ‘Living Murray’ process and the production of stream water management plans (different name in each state) throughout the basin.

    The review of the first two years of the Interstate Water Trading Pilot Project identified another policy uncertainty, which is predominantly affecting the Western Division of the Murray River in NSW. This uncertainty is generated by unresolved aboriginal native title issues, and is caused by the high proportion of leasehold land in that region. This uncertainty reduces the incentive to convert the leases into a form that would allow irrigation, and it is argued that it is a significant impediment for farmers to consider irrigating their lands, and thereby for permanent trading within the region (Young et al. 2000).

4.2 Physical constraints

    Channel capacity was mentioned as an important constraint both within MIL and GMID. In both districts trade into a channel will not be allowed, unless the additional demand created by the trade can

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    be supplied, without affecting the supply reliability of existing irrigators. This is particularly a problem in rice growing areas, where large volumes of water are needed during short periods of time, when all farmers want to fill their bays to plant the crop, which typically takes place during October. Similar problems, however, also exist on some channels in the intensive dairy regions of the GMID. This problem could be partly overcome by the use of separate channel capacity rights, allowing irrigators to buy these rights, and thereby enabling them to ensure access to supply for a certain period. Further, if water rights were designed to include the period during which delivery can take place, it would be possible to buy water for delivery by constrained channels during off-peak period relying on on-farm storage.

    Water trading in general has potentially exacerbated the channel capacity issue by congesting water use during peak periods. While interviewing the buyers and sellers on the temporary market, the sellers were asked when they traditionally used their water and the buyers were asked when they used the purchased water. Within the GMID, it was found that among the sellers only 21% concentrated their use between December and May, by far the majority used it evenly over the season or at the beginning and the end of the season, whereas among the buyers 82% used the purchased water during the December to May period. In particular, the use of water was concentrated in the March to May period, with 57% of the purchased water being used during that period. Within the MIL, the most significant shift in use was to the mid-season, from December to February, with only 10% of sellers using the water during that period against 40% of the buyers.

    For inter-valley and inter-state trade a major impediment is the Barmah Choke. The capacity of the Choke has caused restrictions of trade from above to below the Choke. In Victoria no such trade can take place, while in NSW trade is restricted during periods of peak demand (DLWC, 2002).

    Within the GMID, trade from the Murray System back into the Goulburn System can only be allowed, if trade in the opposite direction has taken place first. This substitution rule was used for the first time during 2001/02, when G;MW allowed 5,000 ML to be traded from downstream of the Goulburn Weir

    and upstream. This increase in supply had an immediate impact on prices of temporary water on the Exchange, until all the water was taken up, at which time prices increased again.

4.3 Limitation on trade out of some irrigation areas

    Limitations on trade out of irrigation areas were mentioned as an impediment to permanent trade on the workshops in NSW and SA. Within all three States some type of limitations out of certain areas exist, effectively impeding trade. The systems used, however, vary from state to state and district to district. Since privatisation of the irrigation areas in NSW, it has been the responsibility of the Board of Directors of the new irrigation companies to make decisions for the common good of the company and its shareholders (irrigators). The boards of most areas have not found it to be for the common good to allow trade out, and permanent trades out are therefore not permitted or are strictly limited (MDBC, 2000). Permanent water trade out of the MIL is not permitted, if a trade reduces the total entitlement of the MIL to a level below their original 1995 licensed volume; at present there seems to be some limited scope for trade out due to inward trade (Watts, pers. com. August, 2002). Western Murray Irrigation generally does not allow permanent trade out of the area. If land is taken out to create land for urban subdivision, transfers are allowed subject to the payment of exit fees. This fee is amortisation based, and set at a level to cover the future running costs of the area, for which the seller would have been liable (MDBC, 2000) reportedly at $350/ML (Cummins, 2000). Temporary trade is also restricted out of most irrigation companies to a certain proportion of the district’s allocation (MDBC, 2000). For example the net annual export out of the Murrumbidgee Irrigation Area is defined in the annual Water Allocation Plan for the Murray Region, and for 2002/03 is set at 100,000 ML (DLWC, 2002).

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    Within the Central Irrigation Trust (CIT) in SA, there is a 2% cap on trade out of any given area, that is, no irrigation area’s entitlement can be reduced by more than 2% compared to the original licence

    issued to that district. This restriction on trade has in effect prevented trade out of most of the irrigation areas of the CIT. Additional trade out can only take place if trade has taken place into the area first. When trade was first introduced in SA, trade was not possible between Irrigation Districts and private diverters. Such trade was subsequently allowed in 1994, and resulted in an initial peak in export out of the districts, until the 2% limit was reached, and the water left idle as a result of the refurbishment of the districts (see 4.1) was sold (Bjornlund 2002c).

    The argument in both NSW and SA is that the economic development potential should be retained within the district, and that substantial export of water out of a district will leave the rest of the irrigators to pay a larger burden of the delivery and maintenance costs. The CIT argues that the irrigation infrastructure in the districts has just been refurbished at great cost. Loxton Irrigation Area was the last one completed at a cost of $100,000+ per property. In this process many farms were not reconnected, because this was found to be unviable. The Trust therefore considers it irresponsible to take the water off properties actually connected to the refurbished infrastructure. The present refurbishment charge is $17/ML pa in Loxton for a yet undetermined period of time (not less than 10 years). For the rest of the CIT it is $8/ML for 7 years. The CIT is aware of the potential competition policy implications, but argues that since these rules have been voted on and approved by all members, they cannot be challenged. (meeting with Jeff Parish 27 November 20001)

    Western Murray Irrigation argues that they want the development potential retained within the area, and argue that the present policy uncertainty associated with crown leases and aboriginal issues, prevalent in the western NSW (see 4.1), impedes development in the area. They expect that development will pick up, once these issues have been settled, and want to keep the development potential within the area until that day. (discussion on Permanent Interstate Water Trading Workshop in Albury, 15 December 2000).

    Within the GMID, a different approach has been taken, with a 2% per annum cap being placed on water out of any district. That is, no more than 2% of the total area entitlement at the beginning of the year can be traded out during the year. This limit was retained in the new Water (Permanent Transfer of Water Rights) Regulations 2001 (DNRE, 2001b). The argument here is to prevent water from trading out of any given area at too rapid a pace, allowing both communities and the authority to adjust. The rule has had limited impact on trade. It has only been invoked properly once in 1998/99, when trade out of Torrumbarry reached 7,500 ML or 2% in February, further trade was delayed until July 1999 (DNRE 2001a). Initially trade could not take place between Irrigation Districts and private diverters as in SA, but such trade was made possible in 1994, and effectively freed up trade in the same way as discussed for SA. Also in Victoria, this change resulted in an increase in trade, in this instance from private diverters to district irrigators, and price volatility was thus reduced (Bjornlund, 2002c)

    The workshop in SA used a lot of time discussing this issue. The predominant feeling was against what was perceived to be protectionism. It was argued that areas with a well functioning infrastructure would not be at risk of losing water, because good infrastructure attracts development, whereas areas with poor infrastructure will lose development and ultimately collapse. It was suggested that such a development might be a good outcome, because poor infrastructure achieves low efficiency. It was also argued that water trading should move water to the areas with the lowest cost structure. Developers should prefer to invest in areas where the cost of water supply is lowest. This would allow irrigators to vote with their feet, by transferring their water right and production from one area to another, and

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    thereby telling their infrastructure provider to get their cost structure under control. People will only move from an area if the services provided by the new area are cheaper or better; this therefore puts pressure on the system managers to perform. The fact that only 5% of CIT irrigators have an interest in trading seems to reflect the fact that there is a high level of satisfaction with the system. The insistence on the 2% export rule by the irrigators therefore seems unfounded. It was argued that irrigators obviously felt more secure with the rule in place.

    It has been argued that exit fees could be used to ease the burden on the remaining irrigators (Marsden Jacobs, 2000; MDBC, 2000), as it has been done within Western Murray Irrigation, to ensure that other users are not left worse of as a result of some users trading out. The argument against this is that exit fees are a hindrance to trade, and force irrigators to incur costs for a capital resource they do not want to use (MDBC, 2000)

4.4 Issues of culture and tradition

    The workshop in Tatura placed some emphasis on cultural issues. Participants argued that traditionally irrigators do not see themselves as water traders but as farmers, and will therefore only consider growing a crop. It would be against their culture and tradition to sell the water to gain an income, rather than grow a crop. The participants also indicated a high level of ignorance within the community about how the system operates, which resulted in an emerging division in the community, between those who understand the way the market operates, and those who do not, with the former group benefiting at the expense of the latter. It was therefore argued on the workshop that there is a considerable need for education and information about how the market operates to increase community awareness, and to make sure that irrigators have a better understanding of how the market operates. This is consistent with the findings of Tisdell et al. (2001) based on extensive interviews with irrigators within the Goulburn;Broken Catchment. There are some signs that this is changing, to a large extent driven by the emergence of the Exchange (Bjornlund 2002a), even though signals from the market and irrigators are inconsistent.

    Table 1: Proportion of farm businesses, which have not participated in

    any kind of water trading.

    Area % of farm businesses

    Pyramid Hill/Boort (Victoria) 10.6

    Torrumbarry System (Victoria) 35.4

    Murray irrigation limited (NSW) 11.9 1 27.0 Private diverters Murray Region (NSW)

    Private Diverters River Murray SA (Riverland) 60.6

    Private Diverters River Murray SA (lower Murray) 44.5

    Central Irrigation Trust, SA 85.3

    Based on an analysis of water entitlement registers and water trading registers for the 1 respective areas as of 30 June 2001. Upstream Section (50 licences)

    Analysing the water rights and water trading registers suggests that market participation is quite high in New South Wales and Victoria (table 1), with only 10-12% of farm businesses within the Pyramid Hill-Boort area and MIL never having participated in any kind of water trading. Table 2 reflects the increase in trade participation in any given year within the MIL and shows a doubling of the participation rate since 1997/98, which was the year the exchange was introduced, but was also the first serious year of the present drought cycle. During the last four seasons more than two thirds of all farm businesses were active in the temporary water market. The participation rate in South Australia is much lower; this reflects the much higher level of reliability of water entitlements in that state.

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    Table 2: Trading activity on the temporary market 1995/96 to 2000/01 - MIL

     % of farm businesses

     Buying Selling Not trading

    1995/96 23.4 23.2 53.5

    1996/97 21.2 15.4 63.6

    1997/98 40.3 29.4 30.2

    1998/99 38.8 31.5 29.7

    1999/00 44.6 25.4 29.9

    2000/01 37.1 30.2 32.7

    These figures indicate that markets have been fairly widely adopted by irrigators; however, in asking irrigators what they think about the market in general it was indicated that many are reluctant participants (table 3). Table 3 indicates some disagreement with the water market concept as such, especially among the buyers and the irrigators who have never traded. That the buyers to some extent are against water markets is further supported by the fact that 30% of buyers, both within GMID and MIL, are against water markets, because they activate unused water, and thereby reduce annual allocations. Bjornlund (2002d) analyses and discusses in more depth how irrigators’ behavior is

    influenced by the combined impact of the new water policy framework: full cost recovery prices, water markets, the Cap and environmental allocations.

Table 3: Irrigators perception of a number of statements related to water trading 1 % of farmers agreeing or strongly agreeing

    Statement GMID (western part) MIL

     Seller Buyer Non-trader Seller Buyer

    Water trade is a very good idea 87 82 48 81 63

    I only agree with temporary trade since the water stays 63 58 67 61 49

    with the property

    It has to be possible to transfer permanently otherwise 61 69 35 51 62

    it is not possible to make long term decisions

    Water trade should not be allowed: it activates unused 15 30 28 18 33

    water and reduces annual allocations

    Based on interviews with irrigators during 2000. The category of sellers and buyers refer to their activity in the market 1 during the 1998/99 season, and non-traders had never participated in any kind of water trading as of 30 June 1999.rated 4

    or 5 on a 1-5 scale with 1=strongly disagreeing and 5=strongly agreeing

    An Analysis the full dataset, gathered as part of the interviewing process outlined in section 3, by using a number of multivariate techniques, indicates that more than 50% of farm businesses are using the market to retain their rural life style and avoid exit adjustment for their generation. Of the temporary buyers during 1998/99, 35% bought water for this purpose these farmers perceive that the existence

    of the water market has forced them to buy water to retain their production and stay on their property. Among the temporary sellers, up to 60% sell all or a large proportion of their water right every year to support off-farm income, and some farm income, to sustain their farming lifestyle (Bjornlund, 2002b). This struggle, to avoid exit adjustment for the present generation of irrigators is exemplified by the low level of expectancy of family continuity of the property: within the GMID 39% of sellers, 48% of buyers and 26% of non-traders expected family continuity, while about 15% expressed uncertainty, while the rest did not expect family continuity; within the MIL, 37% of sellers and 47% of buyers

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    expected family continuity, while 18% of sellers and 11% of buyers were uncertain, and the rest did not expect family continuity. Both the interviews of the temporary sellers during 1998/99 and the re-interviews of permanent sellers indicate that the most significant reason for using the temporary market, in preference to the permanent market, is a desire to keep their asset intact, to retain its value, and to leave their future options open (64% of temporary sellers within the GMID and 54% within the MIL, and 79% of permanent sellers who used the temporary market for subsequent sales). Similarly, sellers predominantly only sold water on the permanent market if they were under significant financial pressure to do so, and did not have any other way out.

    The above discussion is also supported by the findings of Tisdell et al. (2001). They found that irrigation communities strongly disagreed with the idea that ‘water entitlements will no longer be an inherent asset in farming’, and strongly supported the authorities’ right ‘to intervene in the market if

    trade has the potential to impact on third parties, the economic viability of local towns and communities, environmental flow objectives, and when the negotiated conditions of trade or resulting distribution from trade is seen as unjust or unfair’ (at 28). They also found a strong level of opposition

    to allowing ‘individuals and companies who do not intend to use water’ to participate in trade.

    A final impediment identified in SA, which could be mentioned in this category, is an unwillingness of SA irrigators to sell water (table 1). This is especially evident within the CIT. This unwillingness is caused by a number of factors: 1) irrigators don’t want to sell to their competitors, such as other vineyards in the Barossa or elsewhere; 2) irrigators don’t want to sell water to rice growers, and other

    inefficient broad acre water users upstream, whom they perceive to be damaging the health of the river with their practices (as a consequence, irrigators wanting to buy water from CIT irrigators have to state what they are going to use the water for, and where they are going to use it); 3) irrigators within the CIT have relatively small entitlements, and the gain from temporary trade is therefore limited relative to the cost and inconvenience (CIT has tried to bundle all the small entitlements and sell them, but there is still no interest); 4) irrigators are high value producers and are not desperate for the cash, they have therefore often refused offers to buy from NSW at below $50/ML; and 5) irrigators within the CIT perceive that the river is in trouble, they are close to the mouth of the river and very aware of the problems there they will therefore rather see the water flow by to the benefit of the environment, than selling it cheaply upriver (meeting with Jeff Parish 27 November 2001 and workshop discussions). This reluctance is clearly illustrated when the trading and licence registers are analysed only 15% of

    farm businesses within the CIT have ever participated in any kind of water trading (table 1). Also, when CIT asked irrigators to register an interest in temporary trading only 10% expressed an interest and only half of these traded water.

4.5 Lack of more flexible and secure property rights consistent across jurisdictions

    Present property right structures and the lack of secure registers of water entitlements were mentioned in all three states as important impediments to the further adoption of water markets both permanent and temporary. In SA, water and land rights have been formally separated for quite some time, while in NSW the separation is part of the new Act, which is scheduled to come into force in December 2002. Victoria, so far, has not taken any steps to implement this separation, but is instead pursuing other ways of unbundling the water entitlement, without separating it from the land, thereby hoping to achieve some of the same benefits (DNRE, 2002). Discussion at the Victorian workshop was therefore lively with respect to this issue; proponents of the separation were vocal, while others reported significant opposition to such a move among irrigators. The perceived benefits of this separation would be more flexible use of instruments such as long-term leases and leaseback arrangements. Both these lease forms would provide irrigators who rely on temporary markets for their water supply much more security of prices and supply. Presently, long-term leases are not possible in Victoria, although they are

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