Since the peak of the Millennium drought in 2008, the southern Murray-Darling Basin (sMDB) has seen large increases in nut and cotton plantings, decreases in water supply due to environmental water recovery and tighter limits on water trade between regions. These changes have raised concerns about how the water market might cope under drought conditions.

In this study, the ABARES water trade model is used to simulate what would happen to the water market under a repeat of the Millennium drought, with current water demand, environmental water recovery, trade limits and carryover rules. These scenarios indicate future water price levels and trade patterns across the sMDB under a repeat of historical climate conditions (for the period 2002–03 to 2016–17).

Key findings:

Modelling results suggest that, under a repeat of historical conditions, allocation water prices in the sMDB would rise no higher than the peaks observed during the previous drought.

Although demand for water has increased for cotton in southern New South Wales and almonds in the lower Victorian Murray, this has been offset by general decreases in demand for water from other sectors, including grazing (dairy), rice and other broadacre crops. Modelling results show a slight net decrease in total demand for water in the sMDB at most price levels (comparing 2002–03 and 2016–17). At a regional level, water demand has increased significantly in the lower Victorian Murray due to almond plantings, but has decreased in most other regions especially the Murrumbidgee.

Improvements in carryover rules also help to limit price rises under a repeat of the drought. Under the current carryover rules, much larger volumes of water are being stored between years. These reserves leave the region better placed to withstand future droughts. Carryover helps to smooth fluctuations in prices, resulting in slightly higher prices in wet to average years, in turn for significantly lower prices in dry years.

However, the results also suggest that key limits on inter-regional water trade (such as the Murrumbidgee export limit and the Barmah choke) are likely to affect the market more often in the future, due mostly to the expansion in water demand in the lower Victorian Murray. As a result, modelled allocation prices are frequently higher in the Murray below Barmah trading zones compared with other regions in the sMDB.

These results are consistent with recent experience in the market with binding Murrumbidgee export limits in 2015–16 and 2016–17 and a binding Goulburn export limit in 2017–18. Murrumbidgee trade flows reversed in 2017–18, but modelling results suggest this may be a temporary situation reflecting water supply conditions (low allocations in the Murrumbidgee).

Finally, although water price peaks are simulated to be no higher under a repeat of extreme drought conditions, they are higher on average xdue in part to environmental water recovery. The modelled scenarios also suggest a change in the distribution of prices, with fewer years of low prices.