Understanding adaptation and water market behaviour of irrigators and non-landholder stakeholders in the Murray-Darling Basin

The impacts of water scarcity and climate change, such as a drier future with increased frequency of extreme events, have resulted in increasing pressure on already over-allocated Murray-Darling Basin (MDB) water resources. Therefore, understanding how irrigators adapt to future uncertainty is important for both economic, social and environmental reasons in the MDB. This thesis examines the key drivers for different types of MDB irrigators’ planned future adaptation. One key mechanism that irrigators have used for adapting and mitigating water shortage includes participating in water markets. The evolution of water markets in the MDB, and the implementation of unbundling from the 2000s onwards, has seen both a) the emergence of new water products, and b) increasing involvement of environmental and non-landholder stakeholders. However, little is known about non-landholder behaviour and involvement in water markets. This thesis extends the current literature by exploring water ownership and trading strategies of all major MDB water market stakeholder groups, including environmental and non-landholder actors, and gives special focus to “derivative-type” temporary trading products. The first analytical chapter used a quantitative data set of 1,000 sMDB irrigators to investigate irrigators’ planned adaptation strategies and their drivers. Seemingly unrelated regressions, recursive biprobit, and multivariate probit modelling found that while all types of capital (e.g. farm, physical, etc.) are significant drivers of planned future adaptation, financial capital (e.g. debt, net farm income) is one of the most important. Other drivers vary in importance across types of adaptation and industry. The second analytical chapter explores MDB stakeholders’ water ownership and trading strategies, with special attention given to agri-corporate and non-landholder stakeholders, and new water products such as water futures and leases. Three different data sets are drawn upon: 1) the quantitative sMDB irrigator survey; 2) quantitative water forward and parking trade data provided by a private broker; and 3) qualitative in-depth interview data from 63 experts representing a variety of stakeholders. It was found that agri-corporates and non-landholders hold more diverse water portfolios, and engage more in derivative-type water product trading. Three areas of water policy reform are identified: data, rules and regulations, and new institutional development. The third analytical chapter explored valuation and accounting methods used to estimate the financial asset value of MDB water entitlements. Drawing mainly upon the qualitative interview dataset, a wide divergence in methods was found with comparative valuation the most common valuation method used. Most MDB stakeholders account for water entitlement value at historic cost, while financial investors use fair market accounting to represent current market values. Historical cost accounting undervalues entitlements compared to fair value accounting. The case study of the environmental strategic purchase of Kia Ora overland-flow entitlements in southern Queensland illustrates the impact of valuation discretion on water entitlement values, leading to value differences for the same entitlement, of up to 97%. As the need to adapt to climate change and future uncertainty increases, it is important to utilise all tools available to incentivise more irrigator adaptive behaviour. Water markets will remain an important adaptation tool, but along with their increased adoption there must be a similar evolution in the design of water markets for their efficient and equitable functionality for all stakeholders.