Social and economic impacts of the Basin Plan in Victoria February 2017

8.6NSW structural adjustment pressures arising from water recovery

Many irrigators who sold water entitlement to the Commonwealth retained their land in anticipation of being able to purchase allocations to secure their annual water requirements. Others who sold their land as well, sold it to irrigators with similar expectations. The net result was that while Government purchases reduced seasonal water availability, the demand for allocations was not reduced to the same extent.

In dry years, this adds pressure to the allocation market resulting in higher prices. In 2015/16 water prices exceeded the unit returns per ML, at district average yields, for most summer and winter crops in NSW. As a result many NSW irrigators sold their water, with flow-on effects for the regional economy.

At the time of writing, in November 2016, at 100% allocations, water was selling for approximately $80/ML in the NSW Murray and $100/ML in the Murrumbidgee. Historically, when allocations were 100% water prices were expected to be in the order of $30-50/ML. The increase has meant profits have been reduced for those irrigators dependent on allocation purchases, at a time when they would traditionally have expected to build up their financial reserves to carry them through the years of low allocations.

Structurally, individual farm businesses have increased in size, there is greater reliance on allocation trade, irrigators are striving to diversify their production systems to include higher value crops, there is less rice being grown and rice processing infrastructure is being underutilised while cotton processing infrastructure is being expanded. With less water being used, water delivery charges inside the irrigation areas serviced by the larger water delivery companies are expected to increase as those companies strive to meet their predominantly fixed costs. Similarly, regional service industries have experienced a decline in sales as a result of the reduction in the consumptive pool and the associated reduction in plantings, and they are now more exposed to seasonal variations in actual water use as a result of market prices.

The water market in the southern-connected Basin is now more active and more ‘global’. This combined with the strong incentive for irrigators and industries to adopt strategies to increase their returns per ML of water used in NSW, may ultimately reduce the volume of water traded into Victoria, particularly in medium and medium-wet water availability years.

8.7Summing up

Government purchases of General Security entitlements equate to 21% of the Murray total and 14% of the Murrumbidgee total. Small volumes of high security entitlements have been purchased from both valleys. Annual water use has declined in southern NSW by a volume similar to the annual allocation for the water entitlements purchased by Government, indicating that net trade from Victoria and South Australia has not changed.

The reduction in the consumptive pool has driven structural adjustment at the farm, industry and regional scales. Irrigators have gradually responded by shifting water away from rice towards other summer crops and winter crops. Corn and cotton plantings have increased, initially in the Murrumbidgee valley where cotton gins have been built at Darlington Point and Hay. NSW irrigators are increasingly using forward markets to reduce season-to-season business variability.

Annual water use is evolving in southern NSW as irrigators consider how best to respond to the changed business environment. The large volumes of carryover suggest a level of uncertainty as irrigators contemplate future management strategies. Plantings of higher return annual crops and perennial crops are likely to expand as irrigators become more confident in the production and marketing of these crops.

Irrigators and industries will seek to increase the returns per ML through improved management and through research and development. Recent developments in the rice industry are an example. These structural adjustments may result in less water being traded into Victoria in the future especially if the marginal returns per ML approach those for dairying and horticulture.

In the short to medium term water is likely to trade into Victoria in low allocation years when allocation prices exceed $200 per ML. In medium to high availability years there will be greater demand for allocation trade within NSW valleys as demonstrated in 2013/14, 2014/15 and 2016/17. The future demand for allocations in NSW will be determined by the relative profitability of the enterprises adopted by irrigators, irrespective of regional boundaries. As an example, the expansion of horticulture in the Murrumbidgee valley is likely to compete for water currently traded from the Murrumbidgee valley to the horticultural sector in northern Victoria, in years of low water availability.

9The impacts of the Basin Plan at the regional scale

9.1Overview

The analysis in this report has mostly compared the impact of the Basin Plan in Victoria in four broadly defined regions; LMW districts, LMW diverters, GMW districts and GMW diverters. The analysis of the counterfactual in Chapter 3 shows LMW’s districts and diverters using the same volume of water with the Basin Plan as they do in the counterfactual. The impacts of the Basin Plan in Victoria are concentrated on GMW’s districts and diverters.

Chapter 2 showed that there are significant pockets of horticulture amongst GMW’s districts and diverters and that the Basin Plan had to date not affected the total volume of their water use. Chapter 6 showed that the impacts of the Basin Plan are felt most strongly in the irrigated dairy industry where the necessary adjustments add complexity and risk to farming.

We have not examined detailed impacts on mixed farming systems which RMCG’s (2016) analysis of ABARES data suggests now accounts for around 10% of water use in the GMID. Nor have we examined in detail the impact on GMW’s diverters. Both populations are more divergent than can be done justice in a high-level, short timeframe report such as this. Importantly both types of irrigators also have more flexibility than GMID dairy farmers. Mixed farmers can use water more opportunistically than dairy farmers, and GMW diverters are free of the fixed costs associated with the upkeep of GMW’s delivery system.

Irrigated dairying is the mainstay of GMID. Dairying can be outcompeted by irrigated industries that can pay more for water, and it can by outlasted by industries better adapted to variable water availability. Thus if irrigated pasture is a prerequisite underpinning the irrigated dairy industry, that industry must shrink. Concerns about the future of dairy are a major contributor to doubts about the business model in the GMID. This contrasts with the growing confidence in the future of LMW’s districts based on recent horticultural rejuvenation.

This chapter is focused on the future of the GMID. It is concerned primarily with the impact of the Basin Plan on how the fixed costs of running the GMID can be met given the reduction in total water use. It is also concerned with the lack of integration between the Basin Plan’s water recovery efforts through buy back and through off-farm infrastructure projects.