A model of water trade and irrigation activity in the southern Murray-Darling Basin

Overview
This paper presents a new econometric partial equilibrium model of water trade and irrigation activity within the southern Murray-Darling Basin (sMDB). The model exploits a unique data set detailing water availability, water market outcomes, irrigation activity, climate conditions and commodity prices for the sMDB annually over the period 2002-03 to 2016-17. This data is used to econometrically estimate a set of demand functions for water by region and irrigation activity. These demand functions are placed within a spatial equilibrium framework taking into account constraints on inter-regional water trade across the basin. The model is able to simulate the market prices of water allocations and entitlements by region and inter-regional water trade flows along with water and land use by irrigation activity and region. The performance of the model is demonstrated with in and out-of-sample validation tests. The model provides a basis for separating the effects of historical climate, market and policy shocks on the region and for simulating the effects of potential future shocks.

Key Issues

• This is a technical report describing a new ABARES water trade mode, focusing on the robustness and validity of the model. • The model builds on previous work to provide robust analysis of water market use and market outcomes in the sMDB. It is suitable for both historical analysis and generating future scenarios. • The structure of the model allows assessment of the effects of climate, water market and policy changes, including separating out the effect of each on: ◦ water prices for each region ◦ inter-regional water trade flows ◦ water and land use by irrigation activity and region.

• Future uses of the model are under development but could include, for example, examining the: ◦ changes in water demand as a result of investment in perennial plantings ◦ implications of changes in water availability associated with climate variability and change ◦ effects of historical water policy changes on water markets ◦ water market implications of changes to inter-regional water trade constraints ◦ projections of future allocation prices and water trade flows.

• The model uses a unique data set detailing water availability, water market outcomes, irrigation activity, climate conditions and commodity prices for the sMDB annually over the period 2002-03 to 2016-17.