Australia trades water like a financial asset

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Australia is the driest inhabited continent on the planet, but its approach to treating water as a tradeable asset can be confusing.

WHAT IS WATER RIGHTS TRADING?

* Water trading allows individuals, farms, corporations, federal agencies and environmental bodies to buy and sell water rights

* Under the "cap and trade" system, the Commonwealth government sets a hard cap on how much water can safely be extracted from a river system (Sustainable Diversion Limit), and within that cap, rights are distributed and traded

* People and organisations can sell some or all of their water rights on a temporary or permanent basis

* Australia has one of few markets where water rights can be separated from land ownership and traded

WHAT CAN BE TRADED?

* A water entitlement, or water license, is the perpetual, ongoing right to an exclusive share of water within a catchment. It can be traded once.

* A water allocation is the physical volume of water distributed to an entitlement holder, which is determined by state authorities based on water availability. They can be traded as they arise.

* Irrigation rights and water delivery rights are also tradeable in areas managed by an Irrigation Infrastructure Operator (IIO)

WHY TRADE WATER?

* Selling water rights can help farmers manage business risk or supplement income by selling unused allocations

* It provides balance sheet flexibility to upgrade farms, rest land, transition to higher value crops, or assist in succession planning

CAN THE COMMONWEALTH TRADE WATER?

* Australia's market allows non-landowners to take part in water markets, including financial investors, water brokers, and the federal government via the Commonwealth Environmental Water Holder (CEWH)

* The CEWH holds a significant proportion of total water entitlements

* In wet years or when ecosystems are stressed, the government can use its allocations to flood wetlands or revive river systems

* During droughts, the CEWH can sell its temporary allocations back to farmers

* Under government water buybacks, the Commonwealth purchases (permanent) entitlements from growers (voluntarily) to add to their pool of "environmental" water

WHY INVESTORS ARE INTERESTED

* The scarcity of Australia's water and intense climate cycles support price volatility

* Agriculture is considered a stable asset class, given its steady demand profile and the gradual appreciation of scarce arable land

* Water rights investing provides access to the value of soft commodities without the operational, environmental or production risks of farm ownership.