On Water Markets

You can die falling from a height when you strike water. That is its nature. It is incompressible.

Water is also intractable, especially when it comes to managing the precious resource in a modern economy. In Australia, water is a commodity. We have the most laissez faire water market in the world. Water is owned and traded by anyone from the little irrigator to the big family business and the global superannuation fund. There is fierce argument over whether applying free-market philosophy to water is a good thing.

Since the eighties, we have been trained to think of free markets as the ‘natural’ arrangement of the economy. The deregulation of agriculture began under the Hawke and Keating governments. John Howard’s government doubled down. Competition policy broke apart the old agricultural marketing boards, privatising or selling them off for scrap to the highest bidder.

Many farmers grabbed the opportunities with both hands. Many farm businesses fell by the wayside. We largely bought into the economic theory that we behave as Farmer economicus—rational little human units who always act in our own economic self-interest.

Governments convinced voters that the political leaders’ role was to get out of the way of business and support it to do its job, maximising profit.  Water markets soon followed. The Murray–Darling Basin plan was designed to determine, based on scientific evidence, how much water was saved for the environment and how much was used for humans. Then, the water in the human bucket would be traded.

Historically, in order to own water, you had to own land. Then land and water were split asunder, opening the market for non-landholders.

The idea behind it was that, in a free market, water would ‘naturally’ flow to the highest value use. That is, the farmer who gets the highest return on their crop has the capacity to pay the highest price for water.  

That is how water trading works now. Once you have a water licence (the bucket) and an annual allocation (the water in the bucket), you can grow whatever crop you like.

The first problem is transparency. The water market reforms were not finished properly. In its original conception in the noughties, then water minister Malcolm Turnbull wanted registers of water entitlements and trades to be compatible across the nation. He also wanted nationally consistent water accounting to ensure that water accounting methods and the measurement of water across Australia met common standards.

In his 2017 review, the former Australian Federal Police chief Mick Keelty found there was ‘no single point of truth’ between the federal, state and regional authorities on water.

For markets to work according to the textbooks, they need perfect information. But the water market is not even as transparent as, say, the real estate or the share market. That makes it harder for everybody to see and trust what is going on. It also leads to crazy conspiracies and lack of facts.

The second problem is the complexity of humans. Water management models make assumptions about how much water will be available.

For example, if a rice farmer is willing to pay $150 a megalitre, while the dairy farmer next door might pay $300 a megalitre, economists assume that if the price goes over $300 a megalitre, everyone in dairy and rice will sell their water to the almond growers who can pay a lot more.

The problem is that Farmer economicus does not always behave like the textbooks suggest. Some irrigators might be prepared to spend more to save a herd, or to keep a mix of pastures. Or they might just love farming.

That’s where things get tricky for perfect markets. It makes it very hard to predict what water will be available. The free market approach has led to other perverse results.

Putting a value on water has meant more water is being used. Once water became tradeable, more holders used or sold it for other people to use.
The third problem is that there is less water overall. We can fight over the spoils of highly variable river and groundwater systems, but climate change is shortening the supply.

Still, our water markets continue to warp and change our landscapes and our communities apace. The fickle metric of investment capital, combined with changing consumer tastes, rewards certain foods over others.

‘Highest returns’ doctrine means that the almighty market is choosing almonds over milk, pistachios over rice and table grapes over oats. Water reformers predicted that the flexibility of annual crops would trump permanent plantings that require water every year, whether in drought or flood. Yet the exact reverse has happened.

The highest return doctrine has also led to a geographical lottery. If your region is suited to a high-return crop, happy days for your town. If not: too bad, so sad.
In 2021, places that can grow nuts, like the lower Murray, are kicking goals. Bad luck though, if you are a dairy farmer in Deniliquin. Best to make a career change.  
Still, we continue to bow to the mighty market. Big global capital, large corporatised families and a range of traders are making a motza. Perhaps that is survival of the fittest.

But do we want profit to be the sole arbiter of survival in our communities and ecosystems?

The market isn’t carved in stone, handed down by God on the tablets. We determine the rules through our political representatives and they are ours to change. Is this the way we want to organise our regional communities, based on the global hunger for an almond latte?

The French have a saying: It works in practice, but does it work in theory?

So if we were to write the rules again, for the sake of healthy ecosystems and healthy human communities, would the market be the only theory on which they would rest?

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This article was first published in Galah issue 04. Gabrielle Chan is the rural and regional editor for Guardian Australia and her new book, Why You Should Give a F*ck About Farming, is out now.

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