Water policy reform in Australia: lessons from the Victorian seasonal water market

The nature of the seasonal water market is examined using a theoretical model andempirical evidence from the Victorian market. Drivers of the seasonal opportunitycost of water include the underlying nature of investment in the industry made in thecontext of risky entitlement yields; and the timing and nature of information regardingseasonal water availability and rainfall. Seasonal water markets facilitate the reallocationof water availability according to this short-run opportunity cost. Evidencefrom the market suggests that transactions costs are low and most of the existing constraintsto trade in seasonal allocations are the result of hydrological conditions. Analysisof market data suggests that the price response of the market to water availability ismuch more pronounced in years of low rainfall. The implications of the paper for widerpolicy reform are that attention should be paid to improving property rights for themanagement of intertemporal risk before other reforms, such as broadening of permanentwater markets and institutionalising environmental flows, are implemented.This is because these other reforms will change the spatial and temporal pattern ofwater use and thus affect reliability, which underpins the value of water in irrigatedagriculture.