Drought Tests Australia's Model Water Market

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The Goulburn Weir in Victoria, Australia, was built across the Goulburn River in the late 1800s to divert water for irrigation.

The Goulburn Weir in Victoria, Australia, was built across the Goulburn River in the late 1800s to divert water for irrigation.


Photo:

SIMON DALLINGER FOR THE WALL STREET Journal

COHUNA, Australia—The world’s driest inhabited continent is struggling to sustain its pioneering effort to put water supply in the hands of market forces, as authorities contend with a drought and complaints by farmers who say the system is putting them out of business.

Australia has one of the world’s most sophisticated water-trading systems, and officials in other water-challenged places—notably California and China—are drawing on its experience to manage what the World Bank has called world’s “most precious resource.”

The system here, set up after a catastrophic drought in the 2000s saw the country’s most important river system almost run dry, aims to make sure each gallon of river water goes to higher-value activities.

But the return of severe drought to an area of eastern Australia more than twice the size of Texas is testing the system.

Gary Wight, 46 years old, thinks he will be the last in his family to raise dairy cows here in Cohuna, Victoria. The drought-hit town has long relied on irrigation from one of the country’s longest rivers to grow pastures for livestock in the water-intensive dairy industry.

Gary Wight says Australia’s water market has left behind dairy farms like his.

Gary Wight says Australia’s water market has left behind dairy farms like his.


Photo:

Rob Taylor/ The Wall Street Journal

With supply shrinking, Mr. Wight said he can no longer match prices being paid by corporate rivals in the dairy industry and investors buying water for other crops.

“The water market in Australia has been a failure,” Mr. Wight said one recent morning as he climbed into a tractor. “Water now has become a commodity for big corporations to make a buck, while places like this are left behind.”

Putting a price on water is politically unacceptable in many countries, where access to lakes and rivers is considered a basic right and water is often allocated under administrative rules instead of by markets.

Many water markets that do exist only allow landowners to buy and sell water rights. Australia since 2007 has allowed anyone to trade water parcels, putting supply under the influence of market forces in a system now valued at about $21 billion. Water may be freely bought and sold by irrigators, farmers, water brokers or investors through four exchanges—H2OX, Waterfind, Water Exchange and

Ruralco

—which allow real-time pricing.

The challenge of managing supply when water is scarce has intensified around the world with rising populations and growing demand for food. More than 50% of the world’s cities and 75% of all irrigated farms are regularly experiencing water shortages, according to U.S. environment body The Nature Conservancy. That jeopardizes agriculture and economic growth, and threatening fragile environments.

As Australia rewrote the rules of its water market over the last decade to deal with its own drought crises, many farmers chose to sell their water licenses and rely on one-off purchases to keep farming.

October rainfall provided some relief on Australia’s east coast. Above, a drought-stricken area in New South Wales early last month.

October rainfall provided some relief on Australia’s east coast. Above, a drought-stricken area in New South Wales early last month.


Photo:

perry duffin/epa-efe/rex/shutterstock

The tactic worked until winter rains failed to arrive this year, turning fertile areas into dust bowls. Where a megaliter of water in June last year, before the drought took hold, cost around 3,000 Australian dollars (U.S. $2,166), the price is now closer to A$5,000, according to Aither Water, an advisory firm. The high cost has left smaller farmers praying for rain.

Peter Hall, who grows apples and pears near Victoria’s historic Goulburn Weir—built in the 1800s to open up irrigated farming—was one of those farmers who sold off some of his rights.

“People need to be in the water market all the time, which has been great if you’re an investor. They’ve made a ton of money. But the problem is the market is damaging our main primary industries,” he said. “In a country that’s never previously gone hungry, we’re on our knees.”

Australia’s drought is splitting agriculture-producing regions into those who have water and those who don’t.

Large investors—including Canadian and U.S. funds—bought high-price water licenses to set up agribusiness ventures in profitable almonds, cotton and citrus, with an eye to growing Asian markets. Others have set up dedicated water investment funds, with prices at the highest levels seen since the drought last decade.

Peter Hall, who grows apples and pears in Victoria, sold off some of his water rights but now sees the water market as harmful to Australian farming.

Peter Hall, who grows apples and pears in Victoria, sold off some of his water rights but now sees the water market as harmful to Australian farming.


Photo:

SIMON DALLINGER for The Wall Street Journal

“With water moving to higher valued uses, dairy and rice growers will continue to struggle,” said Chris Olszak, a director at Aither Water.

In a country where boom-and-bust cycles, through drought and flood, have historically made water a political flashpoint, some rural Australian lawmakers and farmers want the government to divert water to help parched farms.

“Cheap water used to be Australia’s competitive edge and that grew the whole economy,” said Mr. Wight, the dairy farmer. “With the market we’ve given that competitive edge away to a few water barons.”

In August, Victoria state auctioned 20 gigaliters of water that had been earmarked for the environment, putting it on the market for dairy and fruit regions around Cohuna or larger agribusinesses downriver.

Some water traders and environmentalists criticized the move as political interference—and said it risked undermining the water market by giving priority to farmers and disrupting forward trades and planning by other irrigators.

Euan Friday, a water manager for farm and water investment company Kilter Rural, said the market is doing what it is supposed to do, and warned that the country’s fragile rivers—much smaller than the major rivers of North America—would be facing a dire situation without it. Supported by Australian pension funds, Kilter Rural has invested $130 million in buying water rights and redeveloping farmland.

“There’s been a concerted effort to introduce an effective market for these assets to foster confidence in these investments. You can’t now decide to undo that,” said Mr. Friday.

Australia’s flexibility and openness to a range of participants makes it a possible template for places such as California, said Professor David Feldman, a water expert at the University of California Irving.

Officials from northern China visited Australia in September, examining the market’s operation and how Australia values and manages water. Others from India, Europe, Japan and Egypt have also visited recently.

“It is a highly transparent system,” Mr. Feldman said. “There’s been discussion in California over the last two years on how the model Australian market could be used for the management here of drought water.”

Orchardist Peter Hall in Mooroopna, Victoria.

Orchardist Peter Hall in Mooroopna, Victoria.


Photo:

SIMON DALLINGER for The Wall Street Journal

Write to Rob Taylor at rob.taylor@wsj.com