Factors Impacting on Farmers' Willingness to Pay for Water in Temporary Water Markets

Water markets are increasingly being relied upon by international institutions and national governments to facilitate a reallocation of water from inefficient low value users to efficient high value users, and from rural to urban users, while minimizing the socio-economic and community impact of such reallocations within rural communities. This is a problem in both developed and developing countries. However, very few markets are actually in operation throughout the world. Australia is undoubtedly leading the world in this regard; and so there is a great interest in learning from Australian experiences. This paper analyzes factors which influence irrigators’ willingness to pay and accept prices for water in temporary markets. The analyses are based on ten years of data on monthly prices paid in the market and indicators of the hypothesized drivers of price. Correlation, regression and time series techniques are applied to the data. The analyses are clear in their findings: the major driver of price during the ten-year study period are (i) water scarcity determined by the annual availability of water (allocation levels) and (ii) demand factors determined by the level of natural precipitation and evaporation. Irrigators with significant investments in permanent plantings, pastures, dairy herds, and milking equipment are willing to pay prices in excess of water’s value in productive use in order to protect the production, and therefore the value, of their assets. Commodity prices and macro-economic indicators have only had a minor impact on prices.