How Anyone Can Trade Water In Australia : Planet Money : The Indicator from Planet Money Economists often say we should put prices on scarce resources. So that's what Australia did with water. On today's show, how that turned out.

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This is THE INDICATOR FROM PLANET MONEY. I'm Stacey Vanek Smith.


And I'm Darian Woods. And Stacey, this week we are really digging into the economics of irrigation and droughts. We're going through this record drought year in the American West with some devastating consequences, like wildfires ravaging parts of the country right now. They've been so bad that in California, all of its national forests have been closed for safety. So we wondered, what can we learn here in the U.S. from the driest inhabited continent on Earth? And we thought Australia.

CARLY MARRIOTT: Come on over. We'll show you what not to do (laughter).

WOODS: This is Australian farmer Carly Marriott. She's wearing a white woolly jumper, of course.

MARRIOTT: My husband and I, we run a sheep and cropping farm. We've got three little kids. And, yeah, we spend most of our days either wrangling sheep or children or a combination of the two.

WOODS: Carly's family have been able to farm in the Australian state of New South Wales for generations thanks to her great-grandfather, actually. It was part of this massive project about 100 years ago building huge irrigation lines drawn from Australia's biggest river, the Murray River. It was built around the same time as developments on the Colorado River in the U.S., which is kind of the equivalent. These are both huge bodies of water that have dams and canals that keep farming going in what would otherwise be pretty drought-prone areas. And it works - until the droughts got worse.

VANEK SMITH: Now, if there's not enough of something to go around, like water, a lot of economists will just say put a price on it, right? Like, let the market decide where that water is best used. And that is what Australia has done. They have one of the most advanced water markets in the world, where anyone can buy and sell water.

WOODS: But putting that economic theory into practice has been a little bit more complicated. On today's show, learning from Australia's water markets - after the break.


WOODS: Australia's droughts are increasingly brutal. In the last 20 years, the flow of Australia's Murray River fell by half compared to last century. And that is a huge deal for the country. In response, the Australian government set up one of the most advanced markets in the world for trading water. Carly Marriott, the sheep farmer, she can easily log onto a website on her phone.

MARRIOTT: It's very exciting.

WOODS: Oh, yeah.

MARRIOTT: (Laughter) So you just go into the water exchange.

WOODS: Got it.

MARRIOTT: And you say, yes. And here's temporary water for sale.

VANEK SMITH: In Australia, it's as easy to trade water as it is to use, like, an app like Venmo or Robinhood.

MARRIOTT: You could do it.

WOODS: I could do it. I could start trading...

MARRIOTT: (Laughter).

WOODS: ...Trading New South Wales water rights.

MARRIOTT: (Laughter) I'm sure you're a good journalist, but you'd make more money...


MARRIOTT: You'd make far more money trading water.

WOODS: (Laughter) I got roasted, Stacey. The basic idea is this, though - the government sets aside water that it reckons can be sustainably taken from the dams, and it puts that water on the open market for the taking to the highest bidder.

VANEK SMITH: And the economic intuition behind this is that it allows trades that make everyone better off. Like, say I have an apple orchard in the middle of a drought. And Darian, you are a cotton farmer.

WOODS: I was born for this role.

VANEK SMITH: So if I don't get enough water for the year, my apple trees will die. And it will take me six years to grow them back. Of course, I would be willing to pay a lot of money for that not to happen and to get a little extra water. And let's say, Darian, that you have some extra water that I would like to buy, please.

WOODS: That is an intriguing offer, Stacey. OK, I'll look up water prices on the app. And I see water prices are very high. The value of cotton I could grow this year is less than that. And unlike those apple trees, if my cotton dies this year, that's OK. Like, no sweat. I can start again next season. So I think, well, this year it might make sense to sell that water to you, Stacey, and I won't grow cotton for now.

VANEK SMITH: Thank you, Darian - deal. The water has gone where it is best used - to me and my apples.

WOODS: And these kinds of trades, letting the water go to its highest value use, has been analyzed by Neal Hughes and his team at the Australian Bureau of Agriculture and Resource Economics and Sciences (ph). Neal says that allowing different regions to trade water has meant huge economic gains. For example, in the Southern Basin region, where much of the country's farmland is...

NEAL HUGHES: Benefits are about 12% of the value of water rights, which is about $170 million a year.

WOODS: Basically, they modeled that water trading allowed an additional $170 million worth of stuff that could be grown. So you could think about that as, like, 12% more produce and meat and wool with the same amount of water. And Neal says that those benefits are even greater in the drought years when getting water to its most valued use matters the most.

So these are all the benefits, but it has not been all hugs and rainbows the way it's actually happened, right? Is that fair to say?

HUGHES: (Laughter) Yeah, I think that's right. So in 2019, at the height of the recent drought, there was a lot of bad press emerging around water markets. And a lot of that was because water prices were, you know, extremely high.

WOODS: Carly Marriott, the farmer, remembers this price spike well. She was thinking at the time she might grow some sheep feed over the summer. So she logged into the website, and there it was.

MARRIOTT: From a hundred dollars a mega liter to a thousand dollars a mega liter - and we just felt like, yeah, the rug had been pulled out from under our feet.

VANEK SMITH: And Carly started digging into how the water market worked. And she was particularly frustrated that she was being offered really expensive water from people who were not even farmers themselves. This is the major difference between the U.S. and Australia. Yes, the U.S. has water markets, but they are generally tied to land. But in Australia, you do not need to own land to trade water.

WOODS: And when, say, each month when water first comes onto the website...

MARRIOTT: Within an instant, you know, whatever the water availability becomes, these investors can swoop in and just buy up every possible mega liter and just hold it.

VANEK SMITH: Carly and her family got really riled up. They felt like these people were water flippers, so they helped organize a convoy to Australia's capital city of Canberra.


MARRIOTT: We dragged our kids five hours in the middle of summer to protest. And we actually stormed - like, not America-style - but we stormed to the front of parliament.

WOODS: Right.

MARRIOTT: And we were shouting out.


UNIDENTIFIED PROTESTER: (Shouting, unintelligible).

MARRIOTT: Like, we were shouting the name of the water minister. And my 3-year-old, she had the megaphone, and she was into him. She had it up. And you just think, is this what we've become? Like, we were just flat out, you know, growing crops and chasing sheep. And here we are, you know, demanding to be heard and seen by the nation.

VANEK SMITH: This economic theory, the idea of just letting the markets decide, it was colliding with reality. Stories like Carly's kick-started the government into commissioning a massive review of the water market.

WOODS: Neal Hughes, the economist from earlier, he was very positive about the whole system. He said that having those outside investors was a good thing for the proper functioning of the market. It meant that those trades of water were likely to actually happen. If there aren't that many people using the water trading website, then farmers might just hold on to water that they don't need.

VANEK SMITH: But that view is by no means the consensus in water policy circles. In fact, Carly's concern that outsider investors are totally distorting the market is part of that debate.

WOODS: But putting aside that controversy, you know, coming out of that big report - it has basically three main lessons for water markets. Lesson No. 1 is regulation. Water markets are serious markets. And according to this report, regulation should be just as vigilant as you would have in other industries, like finance. The same way that you might have rules around conflicts of interest or insider trading, you'd also, by that logic, need those rules in the water market. And lesson No. 2 coming out of that report - make sure the rules reflect a rapidly changing climate.

VANEK SMITH: And finally, lesson No. 3 - share information widely. At the moment, the institutional investors can be at an advantage with forecasts, models and, like, really fast internet connections. If that information is better shared, there might be less of a sense of grievance from farmers working from a slow internet connection who never signed up to be rapid day traders of water.

WOODS: Have you tried to beat them at their own game, sitting at the computer right on the dot of the hour?

MARRIOTT: (Laughter) We got better things to do. We grow grass when we can. We feed them grain when we can. We destock when it's not viable. And we no longer have that security that our dads and grandfathers had a couple of generations ago.


WOODS: On tomorrow's show, we will continue to look at water prices, this time in American homes and communities.

This episode of THE INDICATOR was produced by Jamila Huxtable. It was fact-checked by Kaitlyn Nicholas. Kate Concannon edits the show. And THE INDICATOR is a production of NPR News.


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