With dams drying up and the skies remaining disappointingly blue, the national water market is an economic meeting place for farmers, speculators, regulators, and even horders. Henning Bjornlund, Associate Research Professor at the the Centre for Regulation and Market Analysis at the University of South Australia, tells Crikey about how farmers and others are managing their water for the best financial returns.

Water trading now features in the average farmer’s business plan. My research has shown that, at the end of 2003, around 90% of farm businesses in the Goulburn Murray Irrigation District had some exposure to water trading.

Farmers have entitlements, and based on those and given their location they receive their allocation. This year it’s around 10% for the Murray and 18% for the Goulburn, which means most farmers, depending on how they choose to run their farm, have to buy water to maintain production.

So, is it more profitable to sell your water or use it for growing grains or feeding livestock? It depends on how you are using your water. In the Murray Darling Basin you won’t find any cereals grown under irrigation. You’ll find very little pasture for sheep and cattle. You will probably still find some pasture irrigated for dairy. The only people who are buying water are those with permanent plantings, not necessarily because they can make a profit but because of the financial losses they’ll suffer should their plantings die.

What that means is, farmers are making a distinct business decision about whether to grow something or whether to sell their water. Around 20% of those who are selling their season’s water allocation do so every year, forgoing all irrigation, which in many cases means they can stay on the farm. Many are generating additional income with off-farm work. In my opinion, that’s one of the great benefits of water trading – it protects local communities. The alternative in the past has been to sell the farm and move away. Now these people stay in the community, which has obvious benefits for rural Australia.

Now, water is not only a commodity for farmers, with speculators entering the market. In South Australia you can buy water without even owning land. You buy it under a holding licence, which means you can own it but you can’t use it. There’s a great deal of concern over these sort of arrangements. Some fear that water barons are lurking around the water districts or sitting in an office in Hong Kong and buying up water rights. There’s very little evidence that this is a widespread problem now, but there’s definitely some water hording going on. A lot of the trust funds run by city lawyers and dentists are putting money into tax beneficial investments, such as almond groves, and they have been buying up water rights.

Yet the market in water rights has been very slow to emerge. I would say farmers are still under social pressure not to sell their water rights. It’s accepted in communities to sell your seasonal allocation, but selling your long-term entitlement, and selling it outside your own locality, is considered being a traitor within the community.

But it must be said, the decision is a complex and often difficult one. Each farmer applies their unique circumstances to it. It takes six years for an olive tree to become productive. Pulling out the old ones and replanting them is an astronomical investment, so you are better off to lose money for a number of years. Farmers and banks alike are hoping the drought breaks and things get back to normal, but we haven’t seen anything normal since 1997. That’s why this year might break quite a few people, because how long can you continue?