With an El Niño looming, Australia has new laws to stop water market manipulation

It might feel strange to talk about being able to trade water as a financial asset, in the same way as company shares or bonds. But water is big business.

Australia leads the world on the size, extent and adoption of formal water markets, especially in our largest river system, the Murray-Darling Basin.

The impacts of climate change are already being felt, and water security is one of the world’s biggest vulnerabilities.

Australia is facing predictions of a strong El Niño event this year , meaning hotter, drier conditions are more likely. Water markets play an important rule in helping farmers’ share water.

Yet they have also been the subject of criticism. This month, stronger rules on Basin-wide market manipulation and insider trading came into effect, enforced by the Australian Competition and Consumer Commission (ACCC).

Here’s a refresher on how water markets work, what the new laws mean – and why despite their flaws, well-designed water markets remain one of our best tools for managing drought.

A liquid asset

Around the world, water markets exist in two forms: informal (think unregulated “handshake deals” between neighbours) and formal (heavily regulated with oversight).

Formal water markets have been around for decades in Australia. They began state-by-state, but were supercharged by the Council of Australian Government (COAG) reforms in the 1990s and the implementation of the National Water Initiative in 2004.

The Millennium Drought of the 2000s and the buyback of water entitlements for environmental purposes also hastened adoption .

How water markets work

Most farmers who irrigate crops own a certain amount of water, known as their “entitlements” or “shares”, which is their ongoing right to water. Depending on water availability, each water season they receive a percentage of this water – known as their allocation – depending on the type of entitlement they have.

For example, a farmer in South Australia’s Riverland who owns 100 megalitres (one megalitre equals one million litres) of ” high security ” water, will in high rainfall and good years receive their full allocation.

However, in times of drought, they might only receive 30% of their allocation by the end of the water year. Other farmers in the Murray-Darling Basin who own “low security” entitlements, might receive nothing.

What happens if farmers don’t have enough water from what they own, or if they have water they are not using? This is where water markets come in.

Such markets allow those who have surplus water (and there are many who do) to sell water, either in the permanent entitlement or temporary allocation market.

Prices are not fixed; they fluctuate freely depending on how much water is available each year. But they are far more volatile in the temporary allocation market, which farmers’ use more often .

Separating water from land ownership

These price signals provide the biggest advantage of markets in promoting adaptation.

However, when water was separated from land , this also allowed other stakeholders to buy and hold water – such as superannuation companies, retired farmers, institutional investors, and so on.

In 2025, foreign investors held 13% of the freshwater entitlements in the Murray-Darling Basin.

The high water prices seen in the Tinderbox drought (from 2017 to 2019) and the increasing ownership of water by non-farmers led to demands for a government review of water markets.

In 2021, the ACCC handed down a report from the largest ever review of water markets in the Basin. The regulator had considerable powers to investigate and requested and analysed the water trade records from 20 of the largest non-landholders.

Overall, the ACCC found no evidence that investors exercised market power or manipulated markets.

Previous research suggests insider trading may have happened prior to 2014 (when the first insider trading rules were introduced), but no real evidence after this.

Nevertheless, the ACCC recommended the implementation of stronger market manipulation rules, which are now in force.

For the first time, as of July 1 this year, there are now Basin-wide insider trading laws. It is now illegal for any participant to engage in any conduct to artificially influence water prices, create a false or misleading impression of market activity, or to distort the efficient operations of the market.

The ACCC is now an official market conduct regulator, and there are significant civil penalties for those who breach rules.

Where we are today

Water markets – including the involvement of large, non-farmer investors – are a popular punching bag. Most of this criticism is over-hyped and incorrect .

However, some criticism is warranted. Some stakeholders, including First Nations people, have historically been excluded from markets, and there is action to change this.

In addition, setting up water markets requires substantial institutional investment, regulation and water extraction caps. Not all countries have the resources and institutions developed enough to do so.

Continual improvement of water governance issues in Australian water markets is a good thing. This year, it is possible we will see prices rise again to Tinderbox drought levels, and water market prices will again be one of the main topics of conversation for many farmers.

Society needs to have confidence water markets are operating fairly, and that they are being continually improved for the good of everyone. Doing so reinforces one of the best mechanisms we have for sharing water in the Basin.