Australian farmers manage the most variable rainfall and seasonal conditions in the world, impacting output volumes and key inputs, including the price of irrigation water. This article provides an overview of the economic effects of water recovery on water prices and the irrigation sector in the southern Murray–Darling Basin (MDB). The analysis uses economic modelling to separate the effects of water recovery from seasonal variations in rainfall and water supply, along with structural changes including shifts in water use to new tree crops and perennial plantings.

It also summarises water recovery progress to date, and summarises available evidence on the relative advantages and disadvantages of different recovery mechanisms such as buybacks, on and off-farm infrastructure upgrades, and rationalisation of irrigation districts.

Key findings include that seasonal conditions are the primary driver of annual variation in water prices, and more frequent dry years are the main cause of the higher water prices observed in recent years. Increases in water demand from high-value perennial plantings have also contributed to trend increases in prices. Direct water buybacks and on-farm infrastructure programs both put upward pressure on water prices, to different degrees, and price effects have grown larger as the total volume of water recovery has increased. Off-farm infrastructure projects and rationalisation are best placed to avoid price effects, but are typically more expensive, and may be difficult to negotiate.

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ABARES Insights Issue 7, 2020