On Tuesday, the Australian Competition and Consumer Commission handed its interim report on Murray–Darling Basin water markets to the treasurer, Josh Frydenberg. It has not been released – something a cynic might think unsurprising, given the Eden-Monaro byelection this weekend.

Bushfire recovery has got all the attention in Eden-Monaro, but water politics is also an issue. The electorate overlaps the Murray–Darling Basin, and neighbours the seats of Riverina and Farrer, where at the last federal election independent candidate Kevin Mack took votes from the Liberal Party’s Sussan Ley, largely thanks to water politics.

The Shooters, Fishers and Farmers Party was able to seize two Murray–Darling Basin seats from the Nationals in the 2019 New South Wales state election. The minor party had water at the top of its priority list, calling for “properly measuring all water use [and] eliminating corruption”.

Against this backdrop, the ACCC report could prove political dynamite. Many submissions to the inquiry from irrigators, agricultural industry bodies and water market participants have suggested something is seriously wrong.

Meanwhile, analysis of water trading data by natural resource management consultancy Auricht Projects and the University of Adelaide suggests the market is wide open to unethical manipulation, and is potentially being used for tax minimisation and avoidance.

At best, inconsistencies and questionable data make it difficult for farmers to plan. At worst, submissions say, they leave farmers at the mercy of unregulated water brokers.

Meanwhile the Commonwealth Environmental Water Holder – who leads the agency that manages environmental water clawed back at taxpayer expense – has told the ACCC market data is so unreliable that its water portfolio cannot be properly valued.

Whether widespread market manipulation is taking place is the subject of much speculation. But Auricht Projects and Dr Adam Loch of the Centre for Global Food and Resources at the University of Adelaide have identified a troubling pattern of trade behaviour, including frequent sales at up to 1000 times the median market price. At the same time, as previous government reports have declared, half to three-quarters of all trades in these water markets are entered with the value of the transaction declared as zero.

“When you’ve got 60 or 70 per cent of the activity in that market with prices that are zero or non-commercial, then you know that technically the market isn’t real,” says Loch. “I’ve spent years studying water prices and I came home after reflecting on all this and said to my wife last night, ‘Ask me how much the price of water is’, and when she did, I responded, ‘What do you want it to be?’”

Water trading is a huge industry, with water entitlement trades worth $3.74 billion in the Murray–Darling Basin in 2019-20. It underpins about 9200 irrigated agricultural businesses in the basin, and has implications for food security. In the submissions to the ACCC inquiry, concerns about the integrity of the market were universal.

Webster Limited, a big corporate nut grower and water holder, painted a picture of a “grey” market riddled with information asymmetries, where the only information available about water trades is what brokers declare. “This inevitably places the brokers in an environment of potential moral hazard. It is clear that some of these market participants have found the temptations enticing.”

These brokers aren’t registered or licensed.

The Ricegrowers’ Association of Australia said in its submission: “Irrigators have no recourse if they suspect unconscionable conduct; indeed, there are no rules against insider trading and other behaviours that can potential [sic] manipulate supply and price on the temporary water market.”

The Australian Water Brokers Association told the ACCC that it has a code of conduct covering market manipulation and insider trading, but most brokers are not members. The association recommended audits of brokers and broker licensing to avoid people guilty of “serious misconduct” changing employers and continuing to operate.

Water brokers have told The Saturday Paper there is nothing to prevent the entering of fictitious trades or the falsifying of prices. Most states either do not require the value of a trade to be entered, or do not enforce these rules.

Australia leads the world in commodifying water.

The Murray–Darling Basin markets were created by a series of reforms from the 1980s and ’90s in which water licences were separated from the ownership of land. Today the market is a cap and trade system. Irrigators in the southern basin own licences and are allocated a percentage of their entitlement in each growing season.

Both the licence itself and the allocation can be traded.

Water trading, in theory, allows a scarce resource to travel to its highest-value use. As most submitters to the ACCC inquiry assert, this has worked. The value of irrigated agricultural production in the basin has gone up and held steady even in drought.

In a full-throated defence of the trade, the Sunraysia branch of the Victorian Farmers Federation slammed those who have used drought and difficult times to engage in special pleading. Experienced irrigators, it said, have learnt to use the markets.

Most water traders are farmers. Some, when they retire, sell their land but hold on to their valuable water, often in self-managed superannuation funds. This can be “the only real reward they can hope to realise for their years of effort producing low value commodities”, wrote the Sunraysia farmers.

But as the ACCC inquiry began late last year – in the teeth of the drought, with many businesses under strain – conspiracy theories about market manipulation and water hoarding took off.

Low water allocations and high prices meant that little rice was grown in the basin, and the dairy industry suffered.

Water instead flowed to high-value crops, such as cotton and new almond plantations near the South Australian border. Deep-pocketed corporate nut growers are prepared to pay whatever it takes to keep trees alive and protect their investment.

Nearly all submissions to the ACCC called for greater transparency, better regulation and better data, but calls by some lobby groups to end water trading, binding it back to land, were not supported.

It’s impossible for ordinary citizens to find out who owns water, or who has made a trade. Trading data is collected by the states, with variations and inconsistencies between jurisdictions, and then is aggregated by the Bureau of Meteorology – which “cleanses” the data, excluding low- and high-priced trades before calculating average water prices.

H20X, which runs an electronic water trading exchange, told the ACCC that agencies report different numbers for the same things – including storage levels in the big public dams. “Data can also take a long time to be released which makes it difficult for market participants to make informed decisions.”

Even more worryingly, though, analysis of the data suggests market manipulation.

One issue is the trades registered as having zero value. There are good reasons for much of this, such as irrigators moving water between different properties, or within a family. Environmental water is also moved at zero value to reach its destination.

But in a 2019 report, the Murray–Darling Basin Authority noted that once environmental water trades were removed, almost half of what remained was priced at zero. This was “implausible … it seems common practice for sellers to deliberately misreport the price of trades as zero dollars, and for states to accept this deliberate misreporting”.

Something murky is going on, it seems, at considerable scale.

“Very few people look at this type of data beyond the high-level stats,” says Chris Auricht, managing director of Auricht Projects.

But, by unpacking the data by region and sometimes by day, Auricht has found trades registered at more than $270,000 a megalitre when the market average prices were about $200 a megalitre.

It could be an aberration, or for good reason – but in some months and regions, trades well over median market price made up 20 per cent of the market, according to Auricht. “In December 2010 there were trades at $1800 a megalitre at a time when we were technically in flood.” The average market price at that time was about $100 a megalitre.

It could be that the data is simply faulty, suggesting carelessness and lack of scrutiny. But market manipulation is possible, and many of the submissions to the ACCC suggest it is happening.

The Saturday Paper has been told a broker might enter a “phantom” trade to drive the market up, for example, even when there is no genuine sale.

H2OX’s submission said that in the 2018-19 water year, in one irrigation zone more than 750 trades were recorded for a price below $100 a megalitre, and 18 trades were at more than $1000 a megalitre. “We do not believe any of these prices reflect real trades,” it said.

The Saturday Paper understands another explanation may be tax minimisation, with irrigators buying water through their self-managed superannuation funds at low prices, then on-selling – perhaps to their own businesses – at high prices, creating a tax benefit.

This may be legal if laws requiring transactions to be “at arm’s length” are followed – but the system’s opacity means there is no way of checking.

Illegal tax avoidance is also possible if a buyer declares a high price to the Australian Tax Office and the seller understates the income. Again, if the price has not been logged with the trade, there is no way to be sure.

What the ACCC has made of all this remains to be seen. If it heeds concerns, it may suggest further inquiries – eventually perhaps even criminal investigations.

The ACCC effort is one of two key reports on the Murray–Darling Basin now with the government but not yet released. The other is a report from an independent panel assessing the social and economic effects of the Murray–Darling Basin Plan on rural communities.

The treasurer’s office did not respond to inquiries from The Saturday Paper about when the ACCC interim report would be released. The final report is due in November.

This article is supported by the Judith Neilson Institute for Journalism and Ideas.

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