Water market drivers in the southern MDB: Implications for the dairy industry

Aither’s report for Dairy Australia on trends in the southern MDB water market was released earlier this week. The report builds on previous reports by bringing together supply and demand side drivers, including the reallocation of water to the environment and increased demand by some irrigation industries and urban water authorities.

Our main finding is that, accounting for seasonal water allocations, temporary water prices have increased substantially and are likely to continue to increase in the medium term. For example, in low water allocation seasons, we estimate that temporary prices will be around 35 per cent higher in 2020-21 in total than they were in 2005-06. This reflects the combined effects of expansions in the cotton and nuts industries as well as environmental water purchases.

Note that much of this price increase has already occurred and there is uncertainty around future increases. The analysis was undertaken before the recent fall in farm gate milk prices and the numbers also do not include the price impacts of on-farm water efficiency programs, which could be as large as, or larger than, equivalent environmental water purchases.

The report also assesses the economic cost of environmental water purchases. Allocations to entitlements acquired through environmental water purchases would have generated approximately $440 million in net returns if used in agriculture between 2008-09 and 2015-16. These costs should be weighed against the benefits of environmental water purchases to ensure that an appropriate balance is achieved.