Can water markets assist irrigators managing increased supply risk? Some Australian experiences

Australia has undergone comprehensive water policy reforms since the mid-1990s. These reforms have imposed considerable uncertainties with respect to future supply and passed the risk management burden from water authorities to irrigators. There is, therefore, an increased need for risk management tools to assist irrigators in managing this increased uncertainty. Water markets are seen as important tools for managing this uncertainty and in assisting irrigation communities in the necessary adjustment process. Australia, therefore, provides an excellent case study in the extent to which irrigators have used markets as a risk management tool. It is concluded that allocation markets have been used by irrigators to manage uncertainty and risk within and between seasons while entitlement markets have been used to adjust irrigators' risk position in the long term, resulting in subsequent use of the allocation market to manage this new risk position. However, there is clear evidence that the substantial uncertainty with respect to future supply has made irrigators reluctant to use the entitlement market and has therefore seen them rely heavily on the allocation market to manage their existing risk position. Also, existing water trading arrangements are impeding new investments in high value, efficient production systems. To address these two issues and to remove these impediments a new National Water Initiative is presently being implemented.