Water recovery has added $72/megalitre to allocation prices

In its report, 'Economic Effects of Water Recovery in the Murray Darling Basin' ABARES separated the effects of water recovery on allocation prices from seasonal variations in supply and expanding perennial crops.

ABARES executive director Dr Steve Hatfield-Dodds said seasonal conditions were the primary driver of annual variation in water prices.

"Both direct water buybacks and on-farm infrastructure programs put upward pressure on water prices,' Dr Hatfield Dodds said.

"ABARES finds that total water recovery to date, on average, has added around $72 per megalitre to allocation prices."

So far, 1,230 gigalitres of these water rights have been bought from farmers through buyback programs, costing about $2.6 billion.

A further 255GL has been recovered through farm upgrades, where irrigators improve infrastructure in return for giving up water, at the cost of about $1billion.

Mr Hatfield-Dodds said on-farm infrastructure programs provided significant benefits to the farmers through better productivity and profitability.

"That means they want more water and will pay a higher price,' he said.

"This extra demand puts more upward pressure on allocation prices than an equivalent amount of water buybacks.

"ABARES finds the price effect of on-farm irrigation infrastructure projects is about double that of buybacks, per unit of water recovered.

"If the water recovered through on-farm programs had instead been recovered through buybacks, then the total price effect would be an increase of around $63 per megalitre, rather than $72 per megalitre.

"The study also found that off-farm infrastructure projects and rationalisation of irrigation networks are best placed to avoid price effects, but are typically more expensive than buybacks and may be difficult to negotiate."

Other factors putting pressure on water market prices include the expansion of high-value, water-intensive crops such as almonds.

"High-value crops are estimated to add $25 per megalitre to allocation prices - likely to increase a further $15 per megalitre as those plantings mature in coming years," Dr Hatfield-Dodds said.

"Estimated price effects are sensitive to assumptions about seasonal conditions and wider economic drivers."

But in the report's conclusion, the authors argued said it was clear more water would need to be recovered, "to put Basin industries on a sustainable footing."

ABARES found water recovered, through the Basin Plan, was already generating environmental benefits but would take time for the full extent of those changes to be realised

"The scale and complexity of the water recovery mean that achieving sustainable water use will always involve wider economic effects, including negative consequences for some farms and communities," the report found.

"Buybacks are the least expensive recovery mechanism but can have flow-on effects to regional economies as a result of reduced irrigated agricultural production."

Where participating farmers sold entitlements and continued irrigating, purchasing annual water allocations, there was upward pressure on prices.

Analysis of on-farm infrastructure projects found participants generated higher returns per megalitre, providing incentives to purchase and use additional water, and so recovering water through these mechanisms had a more considerable price effect than buybacks.

In contrast, off-farm infrastructure projects and rationalisation were more expensive but were more able to offset increasing water allocation prices.

They also meant regional flow-on effects were more easily compensated.

"While it is clear more water will need to be recovered to put Basin industries on a sustainable footing, there are no simple ways to recovery water,' the report authors found.

in an article on the Conversation website, Mr Hatfield-Dodds, ABARES senior economist, Neal Hughes and Natural Resources assistant secretary David Galeano said the study found upgraded farms have benefited in terms of profits and productivity.

"However, we also find large rebound effects, with upgraded farms increasing their water use by between 10 per cent and 50pc," they said.

To get the extra water, they needed to buy it from other farmers, putting pressure on prices.

"We find the resulting price impact to be much more than the impact of buying back water.

"Per unit of water recovered, it is about double that of buybacks,"

"These higher water prices increase the risk that irrigation assets - including some newly upgraded systems - could become stranded as price sensitive irrigation activities become less profitable."

Recovering water through off-farm infrastructure was one alternative.

However, the most significant projects had already been developed, leaving cost-effective water-saving schemes harder to find.

"Because buybacks are cheaper than farm infrastructure programs, there is more scope to combine them with regional development investments to help offset negative impacts on communities,' they found.

"The challenge is that in a connected water market the flow-on effects on water prices and farmers can be complex and difficult to predict, making it hard to know where to direct development investments."

Mr Hatfield-Dodds, Mr Hughes and Mr Galeano said a potential middle ground was rationalisation, where parts of the water supply network were decommissioned.

Those affected were then compensated both for their water rights and for being disconnected from the water supply.

"This approach has less effect on water prices and allows regional development initiatives to be targeted to the affected areas," they found.

"Rationalisation can be hard to implement given it requires negotiating with all affected farmers and all levels of government."

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