There is a vast amount of literature on Australia in this area that strongly suggests that water trading, especially on short-term markets, not only allows to substantially mitigate the impacts of droughts on agriculture, but is now considered by farmers as a useful and basic instrument in their risk management toolbox. The policy challenges for Australia in the area of water regulation in agriculture is more in the areas of how to fine-tune the existing system and robustness issues related to climate change. While the Australian example illustrates the potential efficiency gains arising from water trading, especially for managing water shortages in drought circumstances, the choice of an instrument must always consider the full range of costs and benefits.