Since the algae, efforts to save water run deep – Rural Finance – Business Surveys Series

REFORM

The precious value of the nation’s sometimes scarce water supplies is belatedly being recognised, reports Asa Wahlquist

THE way Australians see water is rapidly changing. Once water was cheap, subsidised and often wasted, and the rivers regarded as little more than delivery channels and sewers.

But that all changed when, in late 1991, more than 1000km of the Darling River was infested with toxic blue-green algae.

In 1994, the Council of Australian Governments introduced its water reform agenda, in which the states agreed to allocate water to the environment, to charge the full price for water, and to trade water separately from land.

toxic blue-green algae

The following year, the Murray Darling Basin Commission capped water extractions at 1993-94 levels. Under natural conditions, the Murray mouth experienced severe drought conditions one year in 20; at the time of the imposition of the cap it was headed for severe drought three years in four.

Now the basin community is considering increasing environmental flows by 350 gigalitres (one Gl is 1 billion litres), 750Gl or 1500Gl. Federal Opposition Leader Simon Crean has promised to return 1500 gigalitres over a 10-year period.

Dan Luscombe has watched the water trade from the beginning, first as a banker and now as a water broker. “What we have seen is prices move from around $250 (per megalitre or one million litres, the amount of water in an Olympic-sized pool) to $1500/Ml (in South Australia). In that period, we have seen a couple of significant jumps in price and we have also seen some quite spectacular drops over short periods of time.”

The water trade is complex, because each state has a different system, and water in the eastern states can be traded on both a temporary and permanent basis.

Allocations vary with the season. The 2002-03 drought saw some valleys with zero allocations. With many dams in the southern Murray-Darling basin at unprecedentedly low levels, the 2003-04 year has started out with low allocations.

The water authority, Goulburn Murray Water, has announced there will be no opening allocations for Goulburn system irrigators, while irrigators on the Murray system will receive just 16 per cent of their entitlement.

South Australia is going into the new water year with its first-ever cut in allocations — of 35 per cent.

Governments can also cut allocations, usually in favour of the environment. Compensation for such cuts is one of the most contentious issues in rural Australia today.

Luscombe said South Australian farmers were now coming to terms with the changes.

“What it means for the individual is this year they are going to have to pay a higher proportion of their cashflow, just to maintain their crop, than they have in the past. We are talking about growers in South Australia this year, determining whether they are going to irrigate, or simply turn the taps off. It is going to have a huge impact.”

He said bankers were now going to have to look at whether they were going to support farmers through the year. With water now being traded, choices facing farmers include purchasing water on a permanent or temporary basis; upgrading irrigation efficiency; or moving out of irrigation and selling their water into a strong market.

Mike Carroll, from the National Australia Bank, said: “In the past, we provided finance with a mortgage over the land because water was attached to the land, the security against which we lent money included the value of the water entitlement. As those two properties separated we now have to have a mortgage over both the land and the water.”

toxic-blue-green-algae-1

In many cases the water is worth more than the land. “In most of the drier irrigation areas, the land is worth very little without irrigation water,” he said.

Carroll said there were clear signals the water available to irrigators would be reduced.

“The biggest signal is the work being done by the Murray Darling Basin Commission, the Living Murray project, which is signalling the need for some quite large environmental flows to restore the Murray to some level of health. We are moving into an era where there is a lot more consciousness of the need for environmental flows.”

He said new legislation in NSW and Queensland would review water entitlements every 10 years. Lending against an asset with a 10-year security “is something we are thinking through very carefully and one we haven’t reached a firm position on yet”.

But, he concedes, “the 10-year time frame probably gives more certainty than we have in the past”.

The bottom line, according to Carroll, is that water, as a security against which the banks take a mortgage “is a minute proportion of our customer base where security is important. What is of far greater significance is cashflow and the ability of farmers to make a profit to service what loans they have got.

“The primary focus in lending money is to make sure that farmers can service their borrowings, rather than concentrating on the fallback position of, if everything collapses, what have we got left to cover the loan.”

Irrigation is farming’s greatest money spinner. According to the National Land and Water Resources Audit, 80 per cent of the profits in Australian agriculture come from 1 per cent of the area used, and that is irrigated.

A Victorian government publication, The Value of Water, reports that the permanent water trade has moved water away from low-return grazing (for example, beef returns just $14/ML) to higher-value horticulture (vegetables return $1295/ML followed by fruit returning $1276, according to the NLWRA).

Each year in Victoria, the ongoing return from irrigation is increasing by as much as $12 million, and Victorian farmers’ water entitlements are worth more than $2 billion.

Malcolm Sparrow, senior manager with Elders Rural Bank, said water was an important issue for all lenders.

“South Australia some years ago took steps to separate water titles from land and to allow water to be traded. Sometimes there are some restrictions on that, it can only be traded in specific areas. Queensland started on legislation in about 2000 to do the same thing. NSW followed suit, and Victoria has done nothing. They are sitting back watching what is happening in NSW.”

Water can be permanently traded in Victoria, but it must still be uncoupled from the first land title and then attached to land at its new location.

“The issue is that Victoria hasn’t separated land from water,” Sparrow said, “and they haven’t created any form of water access licence register, which Queensland and NSW are in the process of doing.

“In South Australia, by a lengthy process, you can search and work out ownership and you can get your interest noted if you have an interest in the water. Under the new act in NSW (to come into effect in January 2004), you will be able to get your interest noted on the register and you will be able to do the same in Queensland.

“There is a lot of activity going on in the area, certainly in Queensland, NSW and South Australia, and starting to happen in Victoria.”

Sparrow said the changes were being driven by a recognition that water was a very valuable commodity. “There is a recognition there has been a lot of water used inefficiently, and the driving force now is people are sitting back saying, `well water has got to have a value’. So, if you are a rice grower or you are a wheat grower growing a crop on irrigated country, you are going to put the water to the best value use, so you will sit down and do your numbers.”

Upgrading irrigation systems is not cheap — installation of a precision micro-drip irrigation system can cost up to $10,000 a hectare.

Sparrow said most irrigators “are taking steps now to be able to handle the cutback. Some of the people that are watering with overhead sprays have been moving towards installing dripper systems. That will save mega amounts of water in the river system.”

It is, he says,, something farmers and their financiers will have to live with. “If you look at the level of water being drawn out of the river system, compared to the level of water that was drawn out of it 15 or 20 years ago, there is a far higher demand on the river system,” he said.

Water wealth

  • Water reform begins in 1994 to set pricing signals on a scarce resource.
  • Murray Darling basin community sets a cap on water extractions in 1993-94 after a severe drought.
  • Price history shows several sharp movements up and down.
  • Irrigation becomes the biggest money-spinner for farmers.
  • Water rights can be traded in Victoria; other states are waiting to see community acceptance.
  • Irrigation costs can be substantial: up to $10,000 a hectare for a precision micro-drip system.

What the water’s used for

Land use – Water returns, in $/megalitres – Water use, in megalitres/ha – Percentage of total water used

Vegetables __ 1295 __ 3 __ 2.6

Fruit __ 1276 __ 7 __ 4.4

Grapes __ 600 __ 8 __ 5.2

Cotton __ 452 __ 7 __ 15.5

Coarse grains __ 116 __ 3 __ 3.5

Dairy __ 94 __ 7 __ 39.5

Rice __ 31 __ 11 __ 11.3

Sugar cane __ 21 __ 7 __ 8.0

Beef __ 14 __ 4 __ 7.2

Source: National Land and Water Resources Audit

Asa Wahlquist

 

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