Centre for Global Food & Resources Research Seminar Series
Speculation and hoarding in water markets: a factual analysis
There is a long history of concern about speculation and hoarding in water markets and potential adverse impacts on agricultural water users from external (i.e. non-farming) participants. However, applications of traditional analysis into price increase drivers in water markets to test such claims are challenging.
To address this, we use speculation theory, most notably Hirshleifer’s four fundamentals for speculative trade, to examine whether speculation or hoarding price increase drivers are evident in Australia’s largest water market, the southern Murray - Darling Basin. While speculation is likely, and with good reason given the gains possible, we find no evidence of hoarding behaviour in market price or volume trends. It is more plausible that agricultural sectors - notably horticultural users - have driven price increases given their requirements to access water at any cost during periods of low supply.
These findings conform to theoretical expectations and help inform badly needed insights into water market fundamentals which are required for future analysis. Overall, calls for stricter market controls on non-farming water users are not supported by our findings. However, greater transparency in water market and broker activity, arising from substantial improvements in the underlying data and trade regulations associated with water markets, would be an ideal outcome from any public policy extension.
Adam Loch is an Associate Professor in the Centre for Global Food and Resources at The University of Adelaide. His research spans topics including water reform and governance, water markets and trade, and the transaction costs of exchange, risk and uncertainty and institutional design.
More recently, Adam has turned his attentions to modelling decision-making in response to state of nature outcomes; especially with respect to investment choices in Australia water markets.
This work, coupled with large-scale data analysis is providing some useful insights into climate change outcomes at lower levels of impact, drought resilience and adaptation work with regional communities, and an interest in compliance at various levels generally.