In this extract from their new book Sold Down the River: How Robber Barons and Wall Street Traders Cornered Australia's Water Market, Scott Hamilton and Stuart Kells examine how the Murray-Darling Basin Plan has gone horribly wrong and how Australia's water market is now deeply compromised by the way rights are traded.
Buying and selling water is complex, much more so than buying consumer products or many other types of tradable commodity. Gold, for example, is the same wherever it comes from, and it is extremely easily to sell, whereas water rights are multi-dimensional-as is the whole water market. The Murray-Darling Basin water market straddles different valleys, zones, regions and water trading jurisdictions, each with its own rules. There are important differences in "carryover" rules, for instance, between Victoria and New South Wales.
In day-to-day trading of water rights, farmers' bids and offers vary according to price, quantity, place, type of right, type of water (such as surface water vs bore water) and the likelihood of receiving the water (aka the "yield"). Different types of water rights are associated with different legal rights. Posted prices, too, have hidden differences and hidden complexity. Additional imposts may include exchange costs and trade approval fees. Farmers in irrigation schemes and irrigation groups also face specific local costs and rules.
Ben Dal Broi grew up on the family farm in the Murrumbidgee Irrigation Area, to the west of Griffith. After completing his rural science degree at the University of New England, he worked for the federal Agriculture Department in a wide variety of policy areas at the executive level, including a secondment to the Department of Prime Minister and Cabinet during the Abbott government's development of the Northern Australia and agricultural white papers.
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Five years ago, Ben took his long service leave and moved with his wife to Griffith to help his parents on the farm while his dad recovered from a hip replacement. The intention was to return to Canberra, but something "clicked" and Ben suddenly realised farming was what he wanted to do. "The only person who wasn't really surprised was Mum. 'Farm boys are like salmon,' she said. 'They come home to breed'."
Ben told us, "When water is bought or sold, there is a plethora of fees tacked on to the transaction. There are the broker's fees of between 2.5 to 4 per cent, which, depending on the broker, falls on the seller or is split between the buyer and seller. There can be a fee from the irrigation companies managing the network you are on. There are any number of state government charges such as property securities register searches, land title searches, administration and compliance fees, and additional fees if you are transferring water within, into or out of valleys or irrigation districts. They mightn't look like much, with a couple of hundred bucks here and there, but before you know it you can be paying thousands a year in fees."
As a consequence of the constitutional power of the states over water, each Basin state has its own water legislation, and these create the differences in rights, along with differences in how those rights are traded, and how trades are settled and approved. Across the Basin states, as well as having different legal fine print, water rights have different names. Victorians, for example, speak of "access entitlements", "water shares" and "take and use" licences. In New South Wales, you will hear "water access licence"; in South Australia, "water access entitlement"; and in Queensland, "water allocation".
State and federal government bodies, plans and agreements add to the complexity. There is a gaggle of public entities and regulators -including the state water and primary industries departments - and a whole bookshelf of policies and plans, each with its own complexities and controversies.
Faced with a highly dispersed and extremely complex market, farmers were often at a loss. Many of them had minimal IT expertise. Typically they relied on off-the-shelf and obsolete hardware, such as cheap and fully depreciated laptops from Harvey Norman and Officeworks. Many farmers did not have reliable broadband-or any broadband. For time-sensitive water trades, they relied on 1980s and 1990s technologies such as landline phones and email.
"I remember," Shelley Scoullar said, "during the 2014 rice harvest, by then, Dad and I had realised we needed to get more active in the water market. We hadn't really purchased much water off the exchange, but we realised to ensure we could grow a rice crop the following year we should try to purchase temporary water to carry over into the following year. Bearing in mind we still didn't have a lot of capital on hand as, coming out of the Millennium Drought, we were keen to put a dent in some debt.
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"There must have been an allocation announcement at around the time, as we were watching the temporary water prices. I was on the chaser bin and in between loads I would stand on the top of the tractor roof to get better reception on my phone to check the prices. Then I would get on the UHF to discuss with Dad and decide what to do. For a young couple who had two small kids, just coming out of the Millennium Drought, without much cash behind them, even spending $5000 on water was a big decision. Then we had to race home to use the dial-up internet to print the forms to buy the water. It was stressful."
Laurie Beer traded water through an old laptop on his kitchen table, connected to the market via a WiFi connection that kept dropping out.
"When the hell are we going to fix the NBN!" he regularly exclaimed.
When the water market was first implemented, little consideration was paid to training farmers or equipping them with the tools they needed.
"Many older farmers struggle even to use a smartphone," Peter Burke said. "They simply can't use the water trading platforms." But other market participants certainly could use those platforms-and they would use this fact to their huge advantage.
The professional traders came to know a lot about the farmers, but the farmers knew next to nothing about the traders. And when farmers wanted to find out who was on the other side of their trades, typically they could not. The traders maintained a cloak of secrecy, and the water market regulatory requirements were little help in providing transparency.
There were few requirements on banks and other traders to disclose or account for their actions in the market. As Mick Keogh of the ACCC said, active traders could "transact millions of dollars of water without an ABN [Australian Business Number] or tax file number". In some states, there were no water registers at all, and in others the registers were incomplete and hard to access.
Hedge funds and other professional traders invested in communications infrastructure and powerful computers so they could be first in the queue for inter-valley transfer openings, and so they could vacuum up the highest bids and the lowest asks. Traders and farmers were locked in a permanent race. And most of the time, the traders won.
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One key trader we interviewed was entirely unapologetic about making money at farmers' expense. "It's their own damn fault," he said. "It is buyer and seller beware."
The onus was on farmers, he claimed, to better understand the market, and to protect themselves from the worst types of gouging, such as by splitting their sales and purchases across different brokers and exchanges, and by portioning them out, so as not to send such a strong signal, or create such a lucrative opportunity for traders and brokers to exploit.
"I'm not entirely mercenary," the trader said, "and I'm not entirely in agreement with those guys that you're talking about, but there's an element of, you know, 'You can't imagine it's still 1985 and think you're going to go places, guys. You've got to, you know, get with the times'."
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