On the surface Australia’s water market presents as one of the most sophisticated
and advanced in the world, complete with options and forward contracts.
The ability to buy and sell water based on its price and the price of commodities provides flexibility for water users, which is paramount to business decisions if your livelihood is irrigation dependant.
However, the problem with this open market is that it also allows flexibility for non-water users, investors whose livelihood does not often depend on buying water.
The market is designed to allocate water to its most profitable use, but this is often a problem for farmers in our database.
Given the possible trajectory of climate change and its environmental impacts on the Murray-Darling basin, Australia may soon be solely growing the two most lucrative crops at present; nuts and cotton.
Cotton production in Australia has drawn some criticism, even within the agricultural sector because it is not a source of food
To proponents of the open water market this shows the systems efficiencies
in directing water to the highest economic return industries.
To its detractors, it proves that the market distorts the industry by
penalizing farmers without the capital to compete against savvy investors who
understand the markets complexities.
What both sides of the argument fail to properly examine, but extensive agricultural market research confirms, is that demand for commodities changes over time.
KG2 has a comprehensive database of nut producers and over the past years we have
seen the industry grow significantly in size and profitability.
Take the almond industry for example, until recently a niche export in Australia.
However, surging demand from India and China has seen it become one of our most
profitable exports, possibly off the back of a rise in demand for plant-based
diets in more developed countries.
Who is to say that this demand will not revert to beef and wheat in a few years’ time, by which time beef and wheat farming could be confined to large scale producers.
Over extraction of water for highly profitable industrial farming is an ecological
and economic disaster unfolding right before our eyes.
The majority of Agribusiness research we’ve conducted assures us that farmers want
the water market to evolve before its impacts become irreversible.
Many farmers hope that policy changes will becoming soon to water trading in
Australia, with a competition watchdog currently conducting an inquiry into the
Speculatively speaking, this inquiry is likely to find that population growth, in conjunction with climate change over the next 15-20 years, perhaps sooner, could cause the entire system to collapse if it does not evolve.
A possible finding may be that the water market needs to be subject to increased regulation by internal stake holders, perhaps through a voluntary code of practice.