Economic effects of water recovery on irrigated agriculture in the Murray‐Darling Basin*

In October 2010, the Murray‐Darling Basin Authority (MDBA) proposed that a range of 3000–4000 GL per year, on average, of additional water be made available for the environment in the Murray‐Darling Basin (MDB) to mitigate the effects of what it considers to be inadequate environmental flows. To help quantify the costs of this water reallocation, a hydro‐economic model was constructed based on the 19 regions of the MDB. The model results indicate the following: (i) substantial reductions in surface water extractions of up to 4400 GL per year impose only a moderate reduction on net profits in irrigated agriculture, Basin wide, given competitive water markets, but the effects are much more pronounced in particular regions/catchments and (ii) the costs of the water reallocation are comparable with the amount budgeted by the Australian government to acquire water from willing sellers and increase environmental flows if inter‐regional water trade is unrestricted.     

Elicitation of irrigators' risk preferences from observed behaviour

Water trading in the Murray–Darling Basin of Australia has developed to the point where it is a common adaptation tool used by irrigators, making it an apt case study to elicit the marginal value of irrigation water and irrigators' risk preferences in two key industries with differing levels of water dependence. Our data come from large‐scale and representative surveys of irrigated broadacre and horticultural farms in the Murray–Darling Basin over a 6‐year period. The marginal contribution of irrigation water to profit is estimated at $547 and $61/ML on average in horticulture and broadacre, respectively. Horticultural irrigators are found to be averse to the risk of large losses (downside risk) while broadacre irrigators are averse to the variability (variance) of profit.     

Presumptions of linearity and faith in the power of centralised decision‐making: two challenges to the efficient management of environmental water in Australia

Water policy in the Murray‐Darling Basin continues to be dominated by the trade‐offs between agricultural and environmental interests. This has recently been played out with the acrimonious debate that circumscribed the release of the Guide to the Murray‐Darling Basin Plan. In this paper, we argue that too much emphasis has been placed on the volume of held water as an indicator of environmental benefit. We also contend that there is an attendant presumption of linearity in the relationship between volumes of held water and environmental benefit which could lead to perverse outcomes. A second problem is that there is too much enthusiasm for contemplating the solutions to water management problems as residing primarily at the federal level of government. These factors stand to ultimately limit the efficient delivery of environmental objectives.     

Allocation trade in Australia: a qualitative understanding of irrigator motives and behaviour*

Governments in Australia are purchasing water entitlements to secure water for environmental benefit, but entitlements generate an allocation profile that does not correspond fully to environmental flow requirements. Therefore, how environmental managers will operate to deliver small and medium‐sized inundation environmental flows remains uncertain. To assist environmental managers with the supply of inundation flows at variable times, it has been suggested that allocation trade be incorporated into efforts aimed at securing water. This paper provides some qualitative and quantitative perspective on what influences southern Murray–Darling Basin irrigators to trade allocation water at specific times across and within seasons using a market transaction framework. The results suggest that while irrigators now have access to greater risk‐management options, environmental managers should consider the possible impact of institutional change before intervening in traditional market activity. The findings may help improve the design of intervention strategies to minimise possible market intervention impacts and strategic behaviour.     

Declining inflows and more frequent droughts in the Murray–Darling Basin: climate change,impacts and adaptation*

It is likely that climate change will be associated with reductions in inflows of water to the Murray–Darling Basin. In this study, we analyse the effects of climate change in the Murray–Darling Basin using a simulation model that incorporates a state‐contingent representation of uncertainty. The severity of the impact depends, in large measure, on the extent to which climate change is manifested as an increase in the frequency of drought conditions. Adaptation will partially offset the adverse impact of climate change.     

Achieving environmental flows where buyback is constrained

Theory suggests that the development of common property increases national welfare, and consistent with this thinking Australia's Murray–Darling Basin (MDB) Plan uses a common property approach to recover environmental water rights in the national interest. Two water recovery instruments are used: purchasing water rights (buyback) from farmers, and saving water by subsidising irrigator adoption of technically efficient technology. A moratorium on buyback has focused environmental recovery on subsidised technically efficient technology adoption. Economists argue that national welfare is maximised via buyback and highlight the limitations of efficiency savings to recover sufficient environmental water. A risk is that water recovery targets may be reduced in future, limiting welfare gains from water reform. This article evaluates possible welfare trade‐offs surrounding environmental water recovery outcomes where arbitrary limits on buyback are imposed. Results suggest that, on average, strategies which attempt to obtain >1500 gigalitres (GL) of water from on‐farm efficiency investments will only provide sufficient resources to meet environmental objectives in very wet states of nature. We conclude that reliance on technically efficient irrigation infrastructure is less economically efficient relative to water buyback. Importantly, the transformation of MDB irrigation will significantly constrain irrigators' future capacity to adapt to climate change.     

Water use and salinity in the Murray–Darling Basin: A state-contingent model*

The supply of water for irrigation is subject to climatic and policy uncertainty. The object of the present paper is to show how the linear and non-linear programming models commonly used in modelling problems such as those arising in the Murray–Darling Basin may be adapted to incorporate a state-contingent representation of uncertainty. Estimates showing the potential value of improved water use are also derived.     

The role of the commonwealth environmental water holder in annual water allocation markets

In recent years, the Government of Australia has bought back a significant amount of water entitlements in the Murray‐Darling Basin (MDB) through its Commonwealth Environmental Water Holder (CEWH) agency. This has been a welcome development, as it is an efficient way of securing water for the environment in the basin. However, the question of how to best manage water holdings held by the government is as yet unresolved. In particular, the question of whether and how should the CEWH engage in water markets is still grappling the government and academia alike. This paper addresses that question by evaluating total benefits to a range of water users, including the environment, under a variety of hydro‐climatic conditions. This is approached through running simulations based on environmental benefit function that varies with prevailing hydro‐climatic conditions. The findings indicate that the benefits are greater when CEWH actively participates in annual water allocation market and that such participation enables the CEWH to secure most water when it is needed the most by the environment. This suggests that policy should encourage the CEWH to further explore opportunities to engage with the water markets to the benefit of communities and the environment in the MDB.     

Spot water markets and risk in water supply

Water availability patterns in semiarid regions are typically extremely variable. Even in basins with a highly developed infrastructure, users are subject to unreliable water supplies, incurring substantial economic losses during periods of scarcity. More flexible instruments, such as voluntary exchanges of water among users, can help users to reduce risk exposure. This article looks at the effects of spot water markets on the economic risk caused by water availability variations. Our theoretical and empirical risk analyses are based on the random profits of water users. Profit probability density functions are formally and graphically characterized for both water sellers and buyers under several possible market outcomes. We conclude from this analysis that, where water supply is stochastic, water markets unambiguously reduce both parties' risk exposure. The empirical study is conducted on an irrigation district in the Guadalquivir Valley (Southern Spain), where there is a high probability of periods of extreme water scarcity. Water demand functions for the district representative irrigators and a spatial equilibrium model are used to simulate market exchanges and equilibrium. This programming model is combined with statistical simulation techniques. We show that the profit probability distribution of a representative irrigator is modified if water exchanges are authorized, leading to risk reductions. Results also indicate that if the market were extended to several districts and users that are subject to varying hydrological risk exposure, extremely low‐profit events would be less likely to occur. In sum, we show that exchanging water in annual spot markets can reduce farmers' economic vulnerability caused by water supply variability across irrigation seasons. These results support the water policy reform carried out in Spain in 1999 to allow for voluntary water exchanges among right holders.     

Upstream demand for water use by new tree plantations imposes externalities on downstream irrigated agriculture and wetlands*

Large‐scale tree plantations in high rainfall upstream areas can reduce fresh water inflows to river systems, thereby imposing external costs on downstream irrigation, stock and domestic water users and wetland interests. We take the novel approach of expressing all benefits and costs of establishing plantations in terms of $ per gigalitre (GL) of water removed annually from river flows, setting upstream demands on the same basis as downstream demands. For the Macquarie Valley, a New South Wales sub‐catchment of Australia’s Murray‐Darling Basin, we project changes in land and water use and changes in economic surpluses under two policy settings: without and with a policy requiring permanent water entitlements to be purchased from downstream parties, before plantation establishment. Without the policy, and given a high stumpage value for trees ($70/m³), upstream gains in economic surplus projected from expanding plantations are $639 million; balanced against $233 million in economic losses by downstream irrigators and stock and domestic water users for a net gain of $406 million, but 345 GL lower mean annual environmental flows. With the policy, smaller gains in upstream economic surplus from trees ($192 million), added to net downstream gains ($138 million) from sale of water, result in gains of $330 million with no reduction in environmental flows. Sustaining the 345 GL flow for a $76 million (406–330) reduction in gains to economic surplus may be seen to cost only $0.22 million/GL; but this is much lower than the market value of the first units of that water to agriculture and forestry.     

A Holistic vs. an Attribute‐based Approach to Agri‐Environmental Policy Valuation: Do Welfare Estimates Differ?

Different economic valuation methodologies can be used to value the non‐market benefits of an agri‐environmental scheme. In particular, the non‐market value can be examined by assessing the public’s willingness to pay for the policy outputs as a whole or by modelling the preferences of society for the component attributes of the rural landscape that result from the implementation of the policy. In this article we examine whether the welfare values estimated for an agri‐environmental policy are significantly different between an holistic valuation methodology (using contingent valuation) and an attribute‐based valuation methodology (choice experiment). It is argued that the valuation methodology chosen should be based on whether or not the overall objective is the valuation of the agri‐environment policy package in its entirety or the valuation of each of the policy’s distinct environmental outputs.     

Is there evidence of insider trading in Australian water markets?

Insider trading is a much studied form of market manipulation in the financial market literature. However, studies addressing the issue of insider trading in resource markets, and in particular water markets, are rare. This study investigates the occurrence of insider trading practices around important water market allocation announcements in the Goulburn temporary water market trading zone in the Murray–Darling Basin, Australia, which is one of the largest and longest operating water market districts in the world. Nine years of daily water allocation volume and price transactions between 2008 and 2017 are modelled, with some evidence found of abnormal price movements in the 3 or 5 days preceding water allocation announcements, and especially before the introduction of insider trading rules in 2014. However, although the results do suggest some very weak statistically significant evidence that insider trading may still be present in Goulburn water markets post‐2014, it is just as feasible that our results may also reflect an increased sophistication of trader behaviour over time.     

Policy review of water reform in the Murray–Darling Basin,Australia: the “do's” and “do'nots”

The water reforms undertaken in the Murray–Darling Basin, Australia since 2007 have been viewed as a model for other countries seeking to respond to water insecurity. Here, a policy review is provided of this water reform and whether it delivers on key environmental objectives in the 2007 Water Act (the Act). The evaluation includes a review of the 2012 Basin Plan, a key instrument of the Act, and complementary policies associated with the acquisition of water entitlements for the environment via direct (reverse tenders) and indirect (infrastructure subsidies) means. Using the objects of the Act as a benchmark, an evaluation is provided of the following: (i) planned reductions in irrigation water extractions in the 2012 Basin Plan; (ii) risks associated with the 2018 amendments to the Basin Plan that, collectively, allow for an increase in irrigation water extractions of some 22 per cent, relative to the sustainable diversion limits specified in the 2012 Basin Plan; (iii) Basin‐scale environmental outcomes achieved, as of the end of 2018; and (iv) economic effects of direct and indirect methods of acquiring water for the environment. Findings from the review generate the “Do's” and “Do Nots” of water reform for Australia, and possibly other countries, when managing the trade‐offs between water for irrigation and the environment.     

Effective use of public funding in the Murray‐Darling Basin: a comparison of buybacks and infrastructure upgrades

Policy instruments designed to increase environmental flows in the Murray–Darling Basin are compared using TERM‐H₂O, a detailed, dynamic regional CGE model. Voluntary and fully compensated buybacks are much less costly than infrastructure upgrades as a means of obtaining a target volume of environmental water, even during drought, when highly secure water created by infrastructure upgrades is more valuable. As an instrument of regional economic management, infrastructure upgrades are inferior to public spending on health, education and other services in the Basin. For each job created from upgrades, the money spent on services could create between three and four jobs in the Basin.     

Cattle Farmers’ Preferences for Disease‐Free Zones in Kenya: An application of the Choice Experiment Method

Management of livestock diseases is important in ensuring food safety to consumers in both domestic and export markets. Various measures are prescribed under the Sanitary and Phytosanitary Standards (SPS) agreement of the World Trade Organization. In order to prevent the spread of trans‐boundary cattle diseases, the SPS agreement recommends the establishment of Disease‐Free Zones (DFZs). These have been implemented successfully in some major beef‐exporting countries, but in Kenya are still at a pilot stage. To understand Kenyan farmers’ preferences on the type of DFZ that would be readily acceptable to them, a choice experiment was conducted using a D‐optimal design. Results show that farmers would be willing to pay to participate in a DFZ where: adequate training is provided on pasture development, record keeping and disease monitoring; market information is provided and sales contract opportunities are guaranteed; cattle are properly labelled for ease of identification; and some monetary compensation is provided in the event that cattle die due to severe disease outbreaks. Preferences for the DFZ attributes are shown to be heterogeneous across three cattle production systems. We also derive farmers’ preferences for various DFZ policy scenarios. The findings have important implications for policy on the design of DFZ programmes in Kenya and other countries that face similar cattle disease challenges.     

Double trouble: the importance of accounting for and defining water entitlements consistent with hydrological realities*

When entitlements to access water in fully allocated river and aquifers are specified in a manner that is inconsistent with the ways that water arrives, flows across and flows through land, inefficient investment and water use is the result. Using Australia's Murray Darling Basin as an example, this paper attempts to reveal the adverse economic and water management consequences of entitlement and water sharing regime misspecification in regimes that allow water trading. Markets trade water products as specified. When entitlements and the water sharing system are not designed in a way that has hydrological integrity, the market trades the water management regime into trouble. Options for specification of entitlement and allocation regimes in ways that have hydrological integrity are presented. It is reasoned, that if entitlement and allocation regime are set up in ways that have hydrological integrity, the result should be a regime that can autonomously adjust to climatic shifts, changes in prices and changes in technology without compromising environmental objectives.     

Investment Spikes in Dutch Greenhouse Horticulture

The presence of investment cycles demonstrates the long‐run policy of firms investing in particular periods (investment spikes) with lower or zero investment levels in between, which contradicts the smooth pattern predicted by a convex adjustment model. This paper investigates the spells between investment spikes in a discrete‐time proportional hazard framework to estimate the probability of observing lumpy investment and factors underlying lumpy and intermittent patterns of investment. Duration models were estimated on two datasets: on an unbalanced panel and on average data of 10 ‘firm size’ groups of Dutch greenhouse firms over the period 1975–1999. Two specifications of the model were estimated: one includes only theoretically grounded variables, and the other specification is extended by empirically grounded variables. Theoretically based models can explain the occurrence of investment spikes. Both specifications of model show an investment cycle of six years. This is also confirmed for the average firm, which exhibits a higher hazard ratio in the 6th, 12–13th and 21st years of duration.     

Tenure security, resource poverty, public programs, and household plot-level conservation investments in the highlands of northern Ethiopia

Land degradation poses a serious problem for the livelihoods of rural producers. Furthermore, there is rarely enough private investment taking place to commensurate the scale of the problem. This article examines the role of tenure insecurity, resource poverty, risk and time preferences, and community‐led land conservation on differentiated patterns of household investment in land conservation in northern Ethiopia. We control for biophysical, household characteristics, market access conditions, and village level factors. Investments in soil bunds and stone terraces are specifically studied so as to capture the link between these various factors and the durability of conservation investments. We introduce the distinction between the determinants of the decision to invest and how much to invest in conservation. Regression results show that publicly led conservation programs seem to significantly stimulate private investment. A host of plot‐level variables and household perceptions of returns on conservation investments, expressed in terms of perceived improvements in land quality and increased crop yields, were found to be critical to the decision to invest and intensify soil conservation. The evidence on the significance of households' attitudes toward risk aversion suggests the important role of risk and the household's risk‐bearing capacity in the decision to intensify conservation measures. At the same time, tenure security indicators and households' resource endowments (resource poverty) had weaker effects in increasing willingness to invest and the level of investment made. The policy implications of these results point to the importance of agricultural research and extension efforts that target technologies which reduce household risk and poverty while enabling sustainable investments in conservation measures by individual households.     

Environmental economics and the Murray–Darling river system

Much concern about the negative environmental consequences of agricultural development in Australia, including salinisation, waterlogging and algal blooms, has focused on the problems of the Murray–Darling Basin. The aim of this article is to provide an overview of the environmental problems of the Murray–Darling Basin from an economic perspective, and a selective survey of the relevant economic literature, including theoretical analysis, modelling and contributions to the development of water policy. In attempting to understand the complex problems of the Murray–Darling Basin, an eclectic approach drawing on externality, sustainability and property rights perspectives seems most appropriate.     

The impact of drought and water scarcity on irrigator farm exit intentions in the Murray–Darling Basin

Drought and future water scarcity in the Murray–Darling Basin (MDB) will continue to restructure the irrigation industry in the coming decades. There has been little work conducted in Australia that has modelled farm exit or exit intention. ABARES farm survey data were used to model irrigators’ farm exit intentions across the southern MDB from 2006 to 2013. In particular, we examined the hypotheses that drought and water scarcity positively impacted on farm exit intentions and that it is the poorest performing farms that intend to exit in times of drought. Results revealed that water scarcity impacts varied considerably. There was only weak evidence to suggest that irrigators’ exit intentions were higher in times of drought, but there was stronger evidence to support the influence of a lagged water scarcity impact on farm exit intentions during periods of nondrought (e.g. intending to exit at times when the property market was less depressed). There was also strong evidence that poorer performing farms (measured by rates of return and higher debt over a certain level) were more likely to have exit intentions in drought periods, but not necessarily so in nondrought periods. Older age is the most consistent predictor of farm exit intentions across all industries, though it was most significant in drought periods.