How Robber Barons and Wall Street Traders Cornered Australia’s Water Market
Authors: Scott Hamilton and Stuart Kells
Publisher: Text Publishing, Melbourne, 2021
ISBN: 9781922458124 (paperback)
ISBN: 9781922459459 (ebook)
Buy through Booktopia
In the prologue to this excellent, timely and well-written book – really a text book on water trading for the uninitiated – there is a quotation from Lachlan Marshall, a Riverina farmer, which pretty well sums up the tragedy of the Murray-Darling created by successive governments of all persuasions and at all levels – local, state and federal – over many years:
I remember all the people who’ve gone. This region was created as an irrigation region. Before irrigation it was all massive sheep stations. And then, post-war, it was a nation-building thing to bring everyone here, through the Depression. Then we had settlement and it became the foodbowl to the nation.
That is being undone. Water has gone from hundreds of dollars per megalitre to thousands of dollars. The amount of irrigation that happens is probably less than half of what it was. Someone is making a killing, but not the farmers. Water trading has destroyed our community. It’s gutted it. Shelled it.
Lachlan Marshall is right. The unregulated water market in Australia is a diabolical shambles. Something which could have been avoided. Instead, arrogant and distant idealogues sitting in remote, well-watered and comfortable locations, aided by ever happy to increase their power bureaucrats and naive or stupid or corrupt – or a combination of all three – politicians have effectively destroyed in a few years the work of generations.
As a young man, Kookaburra spent some time in the byzantine corridors of power in Canberra. It was a different age back then. There were still some politicians which one could respect and permanent heads of department with integrity and concern for the well-being of the nation. Yet, even they struggled to make federalism work when it came to the Murray-Darling. Sitting in a cold committee room in Old Parliament House in 1979 during a back bench Committee meeting Kookaburra heard a visiting Minister of the Crown state ‘During this term of Government we must resolve the Murray-Darling problems’. That turned out about as well as another Minister on another cold night declaring ‘During this term of Government we must determine the location of Sydney’s second airport’.
It has been downhill ever since for the Murray-Darling, with the introduction of unregulated water trading being the final nail in the coffin of what remained of Australia’s independent irrigation industry in south-east Australia.
Kookaburra can conclude only that this forms part of an overall theme, if not an organised plan, to force small and medium landholders off the land. To gradually wind down and to make virtually unliveable the many towns and villages which serve the farms, through the removal of services on the basis that it is not cost effective to provide those services to small populations.
After all, bureaucrats and many politicians prefer people to live where they live. In cities, under control and, most importantly, dependent on government. Large corporations prey upon the smaller farmers as they struggle under increasing charges for water which they may never receive, ready to finish them off like so many crows fighting over the eyes of a fallen sheep.
So, to the book which is the subject of this review. The book is very easy to read despite the many facts and technical aspects of water trading which are discussed. Complex issues are presented in a well-written enticing style.
The book provides illuminating insights into indigenous history, legends and, very importantly, archeology. The discoveries and commentaries of the early white explorers are referenced.
The fundamental failures of politicians, culminating in the nation destroying Water Act, championed through Parliament by Malcolm Turnbull, are described. As are the machiavellian manoeuvrings in the water market by foreign corporations, fund managers and hedge funds, such as Turnbull’s old employer, Goldman Sachs.
The ‘gaming’ of the water market through methodologies such as forced arbitrage, water bots, front-running, fake trades, fake identities, fake prices, and fake announcements are described.
The giant, money-centre institutions that had conquered global finance were agile, high-tech, predatory enterprises, making money and taking risks in the dark, at the expense of customers and also of taxpayers, who unwittingly gave the banks an unlimited gambling licence in the form of a generous public guarantee. The banks had made huge investments in advanced predictive models, trading software, exotic securities, super-fast computers, quantitative geniuses and automated ‘bots’. They were always 20 steps ahead of the governments that sought to regulate them. This, we thought ominously, is who the Basin governments had let into the water market.
…traders routinely lied about what they were doing and why. How they traded, how often they traded, who they traded for, and the impact they were having on the market. Falsity became as much a routine feature of the market as the mind-straining complexity, the lack of transparency, the arbitrage and the bots.
The complete lack of regulation and transparency of the ‘design’ of the water market meant that for many farmers the water market would never deliver for them:
The Australian water market had become a financial market, but it was not regulated as one. And nor did the Basin water exchanges apply trading rules comparable to those in other markets. Tactics strictly prohibited elsewhere—such as in the markets for stocks, bonds, commodities, electricity and real estate—were permitted in the water market. The water market rules did not, for example, prohibit market manipulation—an extraordinary fact. With the crucial protections established under the Corporations Act and the ASIC Act not available to farmers and other participants, the water market was primed for tactics that, if perpetrated elsewhere, would send the perpetrators to prison.
The opportunities provided by an unregulated water market are little different to those provided in the stock market, a geography well known to the professional water traders:
The water market was designed on the premise that no participant would have market power—that the water market as a whole would set prices, and every individual participant would be a ‘price taker’ rather than a ‘price maker’. But in practice, cashed-up (and leveraged-up) traders were able to influence prices for their own gain. And they could do this without owning most or all of the Basin water rights.
Ultimately, the professional traders, focused on the water market, and the pension funds and others focused on large scale agribusiness, came together in a devilish strategy which the authors describe as the Holy Grail – essentially using manipulation of the water market, and making substantial profits whilst doing so, to force smaller landholders off their farms, which are then absorbed, along with their remaining water entitlements, into the large scale agribusiness properties, which then have more power again in the water market to use against their next set of victims:
The researchers found that the traders primarily used the forward market for intertemporal arbitrage. The Holy Grail strategy was aided by tactics that sent false price signals into the market, and tools that gave the traders a speed advantage and an information advantage. For players with deep pockets, executing this blended strategy was surprisingly easy. When the water price was low, buying cheap water was straightforward. And when the price was high, water was typically scarce, the market was as shallow as the Choke, and small interventions could have a big impact.
A small number of active players, therefore, could have an impact out of proportion to their total market share. And they could play the market with minimal cost and minimal risk. This was an alluring prospect, and it explained Wall Street’s water enthusiasm. Through an evolutionary process, water traders had arrived at a dominant strategy: a lazy portfolio of industrial, pension-funded, mass agriculture; plus fast-paced, high-octane, high-return water trading. The equation was compelling. Slow money plus fast money created long-term, stable returns, plus supernormal, low-risk payoffs. Definitely worth getting out of bed for.
The result:
‘One of the things that I really have a beef about,’ an agribusiness consultant said, ‘is this talk about sending water to a more efficient use. Who’s buying the water? Almonds, olives and grapes? What are we going to do next?…All we’ve done is shifted water from basically productive family farming to tax-driven enterprises creating gluts for worthless products. I don’t see any sensible planning in the system that allows that to happen. Is that good management? It certainly goes under the guise of good management, but it’s ridiculous.’
The conclusion:
This is our central finding. Policymakers had made a critical assumption that both of those things would be the same—that the highest and best economic use would also provide the highest financial return—but they are emphatically not. This is the basic, catastrophic mistake at the heart of our water market.
and
There is another important disconnect here, too. The water market was meant to be about place and country. The market, so the policy alchemists said, would move water from one farm or region to another, where the water would be best used. But the reality of today’s water market is very different. The people who drive the market do not have a state or region or even a country. Their interest in water is estranged from place.
and
‘When I was growing up, Deni was a thriving town. There were ten netball courts playing all day on a Saturday, the soccer fields going flat out. Now, there’s not even a netball competition on a Saturday. So that’s what’s happened to our particular town.’
and
When we spoke to David Crew of the Yarkuwa Indigenous Knowledge Centre, he told us how the water had been so high in the Werai Forest that his community had to exhume graves there. He feared the water was eroding the ground and was going to disturb the bodies.
‘The natural landscape is one [in which] the rivers dried out and so the banks solidified by being dried out. Now, there’s so much water going through, they’ve just become basically river channels. We have deaths in Deniliquin where people think it’s just a river but the currents pushing the water through can pull people under. People have forgotten what the river actually looked like. And we’ve got scar trees that can fall into the river or climbing trees have fallen into the river. So places that are important and tell a good story are being lost. And then the issue around the protection of burial sites. It sort of scales up. You’re talking about the remains where people have been rested and that really upsets a lot of people.’
The authors offer some ingenious solutions which I will leave to the reader of the book to discover.
The authors recommend also an inquiry, but one rather different to the myriad which remain unread and gathering dust in bureaucrats’ and politicians’ offices:
But we believe a different kind of inquiry is now needed: one with open hearings and strong powers to ‘follow the money’, to fully understand the extent and impact of the policy failure. We have made the discoveries in this book just by talking to people, listening, and joining the dots. We did not have any formal powers to discover or seize commercial documents or to delve into the management accounts of major traders. A suitably constituted body with those powers needs to follow the trail we have described, and to do what can be done to unwind the catastrophic errors.
In following the money, the inquirers could use some of the water traders’ own data-heavy, IT-savvy methods, such as by using big-data techniques to sort through all the historical trades and the metadata held by exchanges and irrigation bodies. That way, we would have a clearer picture of all the different types of transactions; the relationships and arrangements between traders and agribusinesses; where all the money went; and to whose benefit.
Indeed! However, given the reluctance of politicians to confront the bald realities of the water trading market, Kookaburra’s mind turns once again to those cold winter nights in Canberra many years ago…
Highly recommended reading
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