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

4.6An analysis of the assumptions implicit in the vendors’ acceptance of the prices at which buyback occurred

The decision to sell water entitlements and rely instead on water allocation purchases introduces the farm enterprise to water price risk — which will benefit the business if water allocation can be purchased cheaply but will reduce profitability if water must be secured at high allocation prices. A simple comparison can be made between:

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  The interest saved by selling entitlement and retiring farm debt.
  
  • 
    For example, if the Victorian HRWS was sold for $2400 per ML during the buyback and the interest rate on the business loan is 6%, then the interest saving is $144 per ML sold.⁹
    
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  The water allocation price.
  
  • 
    From the water allocation prices presented in the figure below, the strategy to generate interest savings of $144 per ML could have been profitable in every year after buyback until 2015/16. In 2015/16, prices were generally in excess of $200 per ML (Figure ).
    

Figure : Water allocation prices in the southern-connected Basin

Source: Aither 2016c.

The relative benefits and costs would be different for those that participated in the 2013/14 buyback tender where the average price for Goulburn HRWS was $1600 per ML (DAWR, 2016a). At a business loan interest rate of 6%, this would imply a cut off price of $96 per ML. It is important to remember that interruptible and semi-interruptible production systems do have significant scope to vary their water use, and this will be influenced by the prevailing price of water allocations.

Given that many farm enterprises have chosen to pursue the strategy of selling water entitlements and increasing reliance on water allocation purchases, and that the water recovery has reduced the consumptive pool of water available for use, the water market price will be higher than it otherwise would be. A discussion of the price effects of water recovery on water allocation markets is presented in Appendix 15. A key finding is that allocation prices are expected to be higher, for given seasonal conditions, as a result of buyback. Those irrigators that have chosen to increase their reliance on water allocation markets will be worse off than if the water allocation price remained unaffected. For example, a dairy farmer who made the decision to sell water entitlements and rely on water allocation purchases might still expect to use the same volume of water in an average year with medium allocations. However the water price impacts of water recovery (and associated changes in industry water demand) are estimated to have led to a $17-47/ML increase ¹⁰ in the price of water allocations under these conditions. This corresponds to increased water costs of 0.9-2.5 cents per litre of milk produced¹¹, as compared to the average milk price in northern Victoria of 46 cents per litre¹².

What is unclear from this type of analysis is whether the sale of entitlement to the Commonwealth and continued water use relying on water allocations was a default strategy, or an adaptation strategy and informed risk decision, or somewhere in-between.

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  Buyback occurred when many farmers had accumulated high levels of debt during the drought. The sale of entitlement provided a mechanism to retire some of this debt and continue business.
  
• 
  Given that large numbers of farmers were all seeking to increase reliance on water allocation purchases, it was foreseeable that competition for water allocations would increase prices. The same level of irrigated water demand could not be supported under a reduced consumptive pool.
  
• 
  As discussed in the later dairy section, adaptation opportunities exist that may allow water users to be more flexible and therefore benefit from water allocation purchases in abundant years when the price of allocations is lower while reducing reliance on allocation purchases under drier years when prices are higher.
  

ABARES (2015) also provides insights on farms that did not continue water use, which are not picked up in the water register analysis. ABARES identified that some irrigators sold entitlements and ceased irrigating or farming altogether, while others continued irrigated farming by purchasing seasonal water allocations or entitlements.

4.7Trends in water use per hectare for different industries

ABARES (2015) reported on the on-farm water use efficiency of dairy farms in the MDB. This included a comparison of different types of irrigation technologies including flood irrigation using border-check irrigations systems and ‘travelling irrigators’ such as centre pivot and lateral move systems. They found water use per hectare had increased in recent years:

Water use and application rates declined from 2006–07 to 2008–09 as irrigators modified their irrigation practices to accommodate reduced water allocations. An improvement in water availability in 2009–10 resulted in increased water use on farms and higher application rates per hectare as many dairy farms returned to using pre-drought irrigation management practices. (p. 14)

Figure Water application rates by technology, dairy farms, Murray–Darling Basin, 2006–07 to 2014–15

Note: 2014–15 data are provisional estimates. Water application rates are average per farm.
Source: ABARES 2015

ABARES (2016) reports similar information for horticultural farms in the MDB. Water use per hectare remained broadly steady or increased since the end of the drought.

Figure Water applied by farm type, Murray–Darling Basin, 2006–07 to 2014–15

Note: Data for 2014–15 are provisional estimates. Water application rates are average per farm.

Source: ABARES 2016