Fundamentals Determining Prices and Activities in the Market for Water Allocations

This paper analyses prices paid and volumes traded in the market for water allocations to provide insight into which factors drive activities in that market. While factors such as commodity prices, supply and demand as well as macroeconomic indicators have had an influence on price and volume traded, the main determinants during the study period have been the level of seasonal allocation, rainfall and evaporation. During this period of relative water scarcity, irrigators with water-dependent capital assets such as dairy and horticultural farmers have been willing to pay increasing water prices relative to commodity prices in order to protect these long-term investments and stay in business.