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

6.4The irrigated dairy industry in the counterfactual

Milk production is expected to have been greater but for the water recovery for the Basin Plan which reduced the consumptive pool of water. Figure presents observed and counterfactual milk production for the GMID. The counterfactual is based on milk production maintaining the same milk/irrigation water relationship as observed, across the additional water volume of the counterfactual scenario. The difference between observed and counterfactual milk production would be less if it were assumed the additional water use was less efficient than the observed average.

Figure GMID milk production (observed and counterfactual)

RMCG (2016) estimated foregone milk production of a similar magnitude and equated this to a reduction in the annual farm-gate value of dairy production of $200 million per year. It is important to note that this value of output is not only attributable to the additional water volumes but also to the other inputs to production — it is not a measure of the economic value-add from the water.

This reduced supply has reduced throughput in dairy processing. Although milk processing is not reported by factory, milk manufacturers operate farm to factory milk pick-up and milk is generally processed in the region of production. For example, Murray-Goulburn Cooperative (MG) have milk processing sites in northern Victoria at Cobram (cheese, milk powders, infant formula) Kiewa (daily pasteurised milk, cream cheese, yoghurt, cream) and Rochester (cheese, milk powders), as well as elsewhere in Victoria (Koroit, Laverton, Leongatha and Maffra).

MG milk intake has fluctuated in line with variations in GMID milk production (Figure ). It would be expected that additional milk volumes under the counterfactual would be processed within the region at sites such as MG’s.

Figure GMID milk production and MG milk intake

Source: Devondale Murray Goulburn 2016.

6.5The Irrigated dairy industry today

In 2015/16, regional milk production in northern Victoria had settled at close to 2,000 million litres, down by 28% from pre-drought figures (Dairy Australia, 2016). The region had seen a 50% drop in farm numbers to 1,140 properties (Goulburn Broken CMA, unpublished) supporting a total regional herd of 306,832 cows (Dairy Australia, 2016). The number of rotary dairies has increased; they had the capacity to handle around 50% of total milk capacity (Goulburn Broken CMA, unpublished). Average Victorian dairy farm debt had increased to $806,000 in 2014/15 from $105,000 in 2009/10, and this was comparable with estimated figures for northern Victoria (ABARES, 2015).

Total 2015/16 water use by the dairy industry in the GMID was 740 GL – a drop of 30% from 2001/02 (Goulburn Broken CMA, unpublished). During the same period, there was a 44% drop in the ownership of high reliability water shares by dairy farmers from 819 GL to 465 GL. A survey of irrigation farms in the GMID in 2016 supported these figures with 28% of dairy farmers owning less than 200 ML of high reliability water shares and more than half of surveyed dairy farmers (55.3%) saying they had to rely heavily on the allocation market to meet their water needs (Goulburn Broken CMA, unpublished). A 44% drop in water use matched a 38% drop in production from 2001/02 to 2015/16.

Significant investment in on-farm and regional irrigation infrastructure has occurred with 68.9% of respondents to a Land Use Survey having undertaken irrigation upgrades over the last 5 years (Goulburn Broken CMA, unpublished). By 2014/15 the industry had lasered 85% of the irrigated area used for farming, installed 3,440 re-use systems and installed over 8,700 ha of automatic irrigation (GB CMA, 2014/15).

During the 2000s, in response to low water allocations, high allocation prices, and the vagaries of feed input costs and milk prices, interest in more diverse feed-base systems, incorporating annual crops, annual pastures and lucerne increased. Dairy farmers who had sold entitlements and had begun to rely on allocation purchases maintained that interest in the 2010s. During this time the use of different supplementary feeds has increased. This adds to the complexity of the system and to the challenge of maintaining profit margins – given the vagaries of feed input costs and milk prices (Lower Murray Darling, 2009). Relative to the situation where a dairy farmer, with 100% allocations against held water entitlements, has sufficient water to meet the feed requirements of an individual herd, the more complex feed-base systems involve more risk.

As the drought came to an end, dairy farmers debt had increased. The Victorian Dairy Industry Farm Monitor Project found that over 70% of participants in northern Victoria reported a negative return on equity during 2009/10 (DPI 2010). In addition, the relatively high milk prices during the early 2000s supported farmers to adapt their farming practices to cope with the drought and the predicted on-going increase in variability of extreme climatic conditions. In the process many not only increased their debt exposure but also, in some cases, their embedded cost of production (Dairy Moving Forward, 2009). The most recent assessment of MDB dairy farm performance (ABARES 2015) found that average farm debt had increased significantly (Figure ). However, increases in average farm debt over time were modest relative to dairy farmers’ capacity to service debt by generating income. Average debt relative to total farm cash receipts remained relatively steady over the period 2006/07 to 2013/14. It is very unlikely that things have improved since, given milk prices at the time of writing.

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Figure Farm business debt, dairy farms, Murray–Darling Basin

Note: Survey estimates for business debt are not available for 2014–15. Farm business debts are average per farm.

Source: ABARES 2015.12

There has also been a significant divergence in the performance of individual farms, and this spread has widened from the drought years to 2012/13 (Figure ).

Figure Distribution of dairy farms, by rate of return, Murray and Goulburn–Broken regions

Note: 75% of farms lie within the upper and lower bounds shown. The average shown is for the entire population of farms. Estimates for the Murray and Goulburn–Broken regions.

Source: ABARES 2014.10 from ABARES survey of irrigation farms in the Murray–Darling Basin.