Examining the importance of spatial influences on irrigators’ water trading behaviour in the Southern Murray-Darling Basin

Water trading is increasingly becoming an important farm management tool for irrigators to manage changing environmental conditions. Studies have found that water trading increases farmers’ flexibility in water use and moves water from lower value (or less efficient) uses to higher value (or more efficient) uses. Many countries that regularly suffer periods of droughts and have over-allocated water resources face a growing challenge to allocate water to competing water uses. Some of these countries have introduced water markets as a response to help enable an efficient allocation of a scarce resource. This is especially so in Australia’s Murray-Darling Basin (MDB), which has had water markets in place for decades. The southern MDB is one of the most active water trading region worldwide, and hence, provides an ideal case study for examining water trading behaviour. The MDB faced the Millennium Drought in the 2000s which caused intensive distress for all alike: irrigators, tourists, rural communities and especially the environment. During the midst of this drought the Federal government introduced a water buyback program that purchased water entitlements from willing irrigators to return to environmental use. To date, a number of studies have investigated irrigators’ determinants to trade water. This literature has primarily focused on farmers’ socio-economic and farm specific characteristics. But there is evidence that water trading is also affected by spatial factors, especially water entitlement trading. Thus, this thesis explores the relevance of spatial influences on irrigators’ water trade decision-making. Traditional economic models of water trading behaviour are expanded with several spatially explicit variables, such as biophysical and distance factors. The influence of neighbours’ water trading decision-making (‘neighbourhood effect’) is also tested, as anecdotal evidence shows that in the past irrigators experienced considerable social pressure if they sold or were willing to sell water entitlements. Furthermore, this thesis also examines the influence of spatial factors on irrigators’ price choices for selling and buying water entitlements. The results show that a number of spatial influences significantly affect water trading behaviour, especially water entitlement selling behaviour. Irrigators located in poorer resource areas (e.g. regarding soil degradation), in more rural areas and regions that suffer a socioeconomic decline (e.g. population decline) are more likely to sell water entitlements. There is evidence of a substitution effect between surface-water and groundwater (where viable groundwater resources exist). Irrigators in more rural areas tend to sell larger volumes of water entitlements and buy larger volumes of water allocations. Furthermore, a positive neighbourhood effect is confirmed, where irrigators’ decisions to sell water entitlements was influenced by their neighbours. Over time, it became more socially acceptable to sell water entitlements. Finally, spatial influences also affect irrigators’ valuation of their water, which is reflected in their price choices for water entitlement selling. Overall, the results of this thesis support some existing policy measures and programs (e.g. salinity impact zones) and lead to several other policy implications. One such conclusion is the need to focus policy on water entitlement buybacks rather than on water irrigation infrastructure. This thesis concludes that current and future polices (e.g. related to the water buyback) could be more spatially targeted while also considering the externalities and wider irrigator behaviour in policy development. Spatially refined policies have the potential to improve the outcome of water markets (and related environmental programs) and alleviate the pressure on socio-economic and environmental systems.Thesis (Ph.D.) (Research by Publication) -- University of Adelaide, Centre for Global Food and Resources, 2017