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

5.3Irrigated horticulture in the counterfactual

As outlined in Chapter 3, we assume that horticultural water use in Victoria would be the same without the Basin Plan as it is with the Basin Plan. We assume that this would also be true for horticulture in NSW and South Australia.

5.4Overall implications of the Basin Plan for horticulture

The structural adjustment issues associated with the 35% drop in wine grape plantings in the Victorian Mallee, and similar reductions in other parts of the Basin, were undoubtedly smoothed by the ability of wine grape growers to raise money by selling their water entitlements to the Commonwealth. Similarly, it is possible that by further limiting the total volume of high reliability water shares that can be used to support perennial horticulture development below the Barmah Choke, the Basin Plan may have helped maintain the risk of congestion in the Choke at existing levels, when in the absence of the Basin Plan it may otherwise have increased.

However, because it significantly reduced the consumptive pool available for irrigation, the Basin Plan has increased the risk of horticultural land being dried-off during the next drought (although horticultural enterprises may outbid other water users, the risk is that there would be not water available beyond that required to meet horticultural demands). As outlined in Chapter 3, total water use for horticulture is the same with the Basin Plan as it would have been for the counterfactual. This means that horticultural demands now account for a higher proportion of the total consumptive pool.

To put this in stark relief:

1. 
   Before the Basin Plan horticultural demands accounted for 32% of the consumptive pool of high reliability entitlements.
   
2. 
   Under the 2100 GL water recovery scenario (which is equivalent to the current situation) it now accounts for 40% of high reliability entitlements.
   

Put differently, if allocations in a future drought were to drop to 32% one fifth of current horticultural plantings may need to be dried off assuming that no water was used for dairying or rice production. As discussed in Chapter 11, the risk of horticultural land being dried off during periods of low allocations increases further for the 2750 and 3200 GL water recovery scenarios.

5.5Implications for LMW diverters

Horticultural development by LMW diverters was initially supported by entitlement purchase, but the total volume of entitlement linked to land for greenfield developments peaked at 323 GL at 30 June 2009 – just before the Commonwealth began purchasing water for the environment. Their entitlement holdings declined to 216 GL at 30 June 2015. In the same period their use rose from 236 to 397 GL (DELWP, 2016a).

A former director of a managed investment scheme, who was interviewed for this report, suggested that the collapse of Timbercorp in April 2009 so affected the investment climate that his firm judged that the only way to secure their business continuity, in the period after the collapse, was to raise capital by selling the majority of their water entitlement holdings to the Commonwealth. They were successful in that strategy.

Similarly, he suggested that some of the firms who purchased individual Timbercorp and Great Southern orchards did so for not much more than the value of the associated water entitlements. In some cases those entitlements were then sold, in part at least, to the Commonwealth to help finance the purchase. Alternatively, the water entitlements were sold to superannuation companies with lease-back arrangements that benefitted the ongoing management of the orchard.

In effect, it is likely that buyback helped avoid a serious disruption to the development of horticultural industries in the Basin. Collectively, those orchards and vineyards employ thousands of people with most jobs occurring during the development phase.

While the irrigable area LMW diverters continued to expand during the drought, the older parts of those developments, such as the Nangiloc-Colignan region and the areas fringing the pumped districts were affected in ways similar to the pumped irrigation districts. Land there was dried-off during the drought. The area of vacant land in Nangiloc-Colignan remained at 16% in 2015 (Argus, 2016). Though, as with the pumped districts, personal communication with LMW and DELWP regional staff suggests that redevelopment has accelerated this financial year.

5.6Implications for the pumped districts

Commonwealth purchase of water entitlements undoubtedly helped wine grape growers to adjust to the combined effects of the collapse of the wine boom and the high cost of purchasing allocations during the drought. Many growers took the opportunity to exit the industry in a better financial situation than they would have been without the Basin Plan.

Other irrigators, including one interviewed for this report took the opportunity to diversify their portfolios of water entitlements after having sold to the Commonwealth. This irrigator purchased some NSW high security entitlements because their opening seasonal allocations were close to 100% while Victorian HRWS allocations started the season at low levels and typically built during the course of the year – making it more difficult to plan a water budget. Other irrigators purchased Victorian low reliability water shares for the advantages they provided in terms of carryover.

Other drought response measures such as the Small Block Irrigators Exit Grant also played a role in the adjustment process. The average proportion of vacant land in the pumped districts went from 4% in 2003 to a peak of 29% in 2012, with Merbein peaking at 39% in 2015.

5.7Implications for the gravity districts

Horticulture in the GMID has changed rapidly and radically over the last 15 years. It has a history of fluctuations in the dominance of different types of tree crops depending on the relative dominance of processed versus fresh production and on differences in the preference for particular commodities. Historically fresh fruit production in the GMID was for the domestic market, but increasingly it is being grown for export. Revenue from fruit growing in the Goulburn Valley has increased over time although production volumes have reduced (RMCG, 2013).

Like the other horticultural areas the Goulburn Valley has been largely unaffected by the Basin Plan to date. But since it is dependent on allocations from Victorian High Reliability Water Shares, it will be affected by the system-scale change of the reduction in the consumptive pool. RMCG (2016) estimate total horticultural demand at 97 GL. We were unable to generate a demand figure based on detailed assessments of actual plantings in the GMID, but we accept RMCG’s figure as being broadly consistent with the likely demands of the reported planted area.