The Murray-Darling Basin (MDB) water market is complex and influenced by a range of factors, including weather, commodity markets and water policy. The objective of this report is to shed some light on changes in water markets (water prices and water trade flows) in the MDB over the past 15 to 20 years, and to explain the main factors driving these changes.

A key feature of the MDB water market is that the total volume of water available for use is capped, with changes in the supply and demand for water reflected in the price of water and movements in water between farms, industries and regions.

Historical data shows that water allocation prices are mainly driven by changes in water supply, and that the main factor influencing water supply in the MDB is rainfall. Rainfall was around 17% lower than the long run average in the southern MDB (sMDB) during the Millennium drought, and has been 5% lower since 2000. This has led to significantly lower inflows into rivers and dams. Allocation prices increased to unprecedented highs during the peak of the Millennium drought before declining to near zero following the 2011, 2012 and 2016 floods. Prices have risen substantially again during the latest drought.

The other factors influencing supply tend to be institutional, and include recovering water for the environment, restrictions on interregional trade, changes in allocation rules in state water sharing plans and increased access to carryover. Commonwealth environmental recovery contributes to higher prices by reducing the volume of water available for irrigation, while trade restrictions can lead to differences in prices between regions in connected systems. Changes in the way water is allocated in state water sharing plans can change the timing of supply. For example, new water storage policies and more conservative forecasts for future inflows can change the timing of allocations, both within and between years.

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