This report presents recent economic modelling undertaken by ABARES to support the Independent Assessment of Social and Economic Conditions in the Basin. In particular, this report presents a series of forward looking scenarios for the southern Murray-Darling Basin water market, examining potential future water prices, trade flows and irrigation sector outcomes, taking into account recent and expected trends for water supply and demand. These results are generated using the ABARES Water Trade Model: a data-driven economic model of the southern Murray-Darling Basin water market.

Key findings:

• Higher water prices: a significant increase in average water allocation market prices is estimated across the southern Murray Darling Basin. Compared to the current market scenario, allocation prices are estimated to be 28 per cent higher in the future market scenario and 50 per cent higher in the future market (dry) scenario. In the future market scenario prices are estimated to remain above $200 per ML in 8 out of 10 years. While water prices in 2018–19 (around $445 per ML) would be considered high relative to historically observed prices, the same price would be considered an average price in the future, occurring much more frequently. Larger price increases are modelled in dry years under both the future market (up to $116/ML higher) and future market (dry) (up to $192/ML higher) scenarios.
   
• Inter-regional trade limits having a larger effect: growth in water demand in the lower Murray due to maturing Almonds trees (particularly in NSW and SA Murray), leads to greater pressure for inter-regional water trade, more frequently binding trade limits and large differences in prices between regions. Particularly in dry years, trade limits lead to significantly higher prices in the Murray below Barmah region (between $955/ML and $1075/ML) compared to the Murrumbidgee (between $665/ML and $712/ML).
   
• Just enough water to maintain horticultural plantings in dry years: While water supply (including both surface water and other sources such as groundwater) is sufficient to meet estimated demand from horticultural plantings (fruits, nuts and grapevines) in all scenarios, in practice there remains some risk of supply shortfalls within each water year, particularly if future conditions are drier than modelled or trade constraints are tightened. Horticultural plantings are estimated to use around 1276 GL on average each year in the ‘future scenarios’.
   
• Reductions in water use in some traditional irrigation sectors and regions: water use in the dairy and rice sectors is modelled to decrease on average by 14 per cent and 15 per cent respectively in the future market scenario (relative to the current market scenario). In dry years, more significant decreases are predicted for these sectors in order to meet horticultural water demand, with dairy and rice decreasing by up to 55 per cent and 32 per cent respectively. Average water use declines by around 18% in the Goulburn-Broken region and around 7% in the Murrumbidgee in the future market scenario.
   
• Decrease in GVIAP for traditional irrigation sectors: gross value of irrigated agricultural production (GVIAP) is modelled to decrease for the dairy and rice sectors on average by 9 per cent and 13 per cent respectively in the future market scenario (relative to the current market scenario). In contrast, existing almond plantings, assumed to be fully mature in the future, drive a substantial increase in production and gross value (around 23 per cent for both) for the almond sector. The decrease in other sectors is partially offset by an increase in farm productivity, through on-farm infrastructure upgrades. The dairy sector is also able to reduce the effect of high water prices by substituting water for fodder. Overall, the total GVIAP across all sectors is modelled to increase on average by 0.8 per cent in the future market scenario and decrease by 4.1 per cent in the future market (dry) scenario.