Does the market have a role in managing water supplies?

Lessons from Australia

With its arid climate, Australia has had to constantly reinvent how it farms and uses water. Since the late 1980s, the country has used markets to allocate water more efficiently. What lessons can the rest of the world learn from its experience?

When it comes to water management, Australia is an instructive case study. In many ways, it is an agricultural success story: government subsidies are low and it is one of the few countries in the world that is a net food exporter. From the outside, it looks like a perfectly sustainable model.

However, Australia’s success cannot be taken for granted. Its geographical location makes the country particularly susceptible to severe climate change impact. Coping with water scarcity has long been a reality for farmers. Due to variable rainfall, for example, wheat harvests can fluctuate by as much as 50 percent from the average. Naturally, this can compromise the sustainability of rural communities.

Wheat harvests fluctuate depending on how much water the crop receives.

The future of the Australian agricultural model is not just important as a case study in self-sufficiency and sustainability in the face of water scarcity. It also plays a crucial role in meeting the planet’s needs. The country’s agricultural production represents one percent of all food consumed in the world, feeding 40 million people each day outside of Australia. With growing demand in Asia, Australia is strategically important to the future of the global food supply.

Leading the way in water markets

Water markets are one instrument Australia has used to become a leader in sustainable agriculture. But how does marketing such an essential resource work?

A series of reforms implemented since the 1980s has created a market with a turnover of between 1 and 3 billion Australian dollars (630 million to 1.9 billion euro). But the idea is not to simply sell off all water to the highest bidder. Drinking water for towns, households and stock animals is protected in water resource plans. Access to shared water resources is regulated through tradeable water access entitlements. This is how the majority of water used in agriculture is now allocated.

“When water is scarce, its price is high”

- Georgia Twomey, Rabobank

Incentivizing efficiency

Rabobank’s Georgia Twomey, a Sydney-based commodities analyst, explains the basic principle: “You buy water licenses which are separate from land. In any one year, you get an allocation of water against that license. You can sell that water to willing buyers, use it yourself, or hold on to it as an asset.”

Licenses are held by farmers and investors, but also by governments to ensure enough water is available for communities and the environment. The system is driving farmers to be a lot more efficient with their water use – in 2012, for example, cotton growers were using around 40 percent less water than they did in the ten years prior. Comparable results have been achieved with rice, grapes and other commodities. “When water is scarce, its price is high. You need to use that water as efficiently as possible to get the most out of that investment,” adds Twomey.

More farmers grow high-value crops like cotton thanks to the water markets.

Water and sustainable textiles

The licenses have reshaped farming in the Murray Darling basin in the southeast of the country, the region where the vast majority of irrigated crops are grown. Irrigated agriculture accounts for 27 percent of Australia’s agricultural product by value, using just 0.6 percent of agricultural land.

One of the main beneficiaries of water markets has been the cotton industry. The evolution of this sector is relevant for a number of reasons. Not only is it one of the major water users in Australia, cotton is a key product for the future of renewable and biodegradable textiles (many chemical fibers are produced using petroleum). Australia is one of the largest global exporters.

“As water increases in value, it’s going on high-return crops”

- Michael Murray, Cotton Australia

According to Michael Murray of Cotton Australia, water markets have provided a significant boost. “There’s a lot more flexibility,” he explains. “They make space for different business models as water is no longer directly attached to land. As water increases in value, it’s naturally going on crops that can give a higher return. We’ve seen huge growth in Southern New South Wales towards cotton, mostly at the expense of pasture and rice.”

Can water markets work elsewhere?

Ultimately, it’s important to remember that water markets are just a tool. How well they work in any given region depends on the frameworks they operate within: what water uses are included, how the market is monitored, and how unintended consequences and associated resources are managed.

Water supply is a global issue and choices about its use and regulation would ideally adhere to common principles, or at least fall in alignment with global agendas such as the UN’s Sustainable Development Goals. As a Rabobank report published in 2016 put it, markets can play an important part in delivering water where it is most valued. As in the Australia model, the key will be to make sure “value” is determined in a sustainable way.

Want to find out more? Read the report by Food & Agribusiness Research Rabobank.