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

7.2Implications for future viablity and growth

Over the past decade, dairy farmers in the GMID have responded to major challenges. Despite climate variability, the lowest ever recorded inflows, drastically reduced irrigation water allocations, and increased farm debt, some dairy farmers in the region have generated competitive rates of return.

Seven years ago, Dairy Australia (2009) advised the Productivity Commission that with regards to the Lower Murray-Darling Basin a “primary risk faced by the dairy industry remains water availability”. Referencing the Northern Region Sustainable Water Strategy (DSE, 2009), they advised that the “best estimate for average water availability for dairy farming in the Goulburn-Murray Irrigation District is 767 GL in 10 years time. This level of water availability can underpin a sizeable dairy industry but necessitates continued improvement in water use efficiency. Experience shows there will be variation around this average water availability and having the capacity to manage this variation is critical to the dairy industry’s future in the region.”

The dairy industry has continued with many of the substitution options used to respond to low water availability during the Millennium Drought. A large number of dairy farms have moved to systems that rely more on annual pastures, rather than perennial pastures and on “cut and carry” fodder crops grown away from the milking area. Land Use Mapping figures indicate that a large number of dairy farms have adopted this strategy; the area of land associated with dairying (127,000ha) is now larger than the area of the properties with dairies (103,000 ha). It is not yet clear whether this option has been fully adopted for those farms where this is a viable alternative. The skills necessary to manage the increased complexity of a diverse feeding system to consistently provide the energy and nutritional requirements of a dairy herd will limit the ability of some farmers to adopt this option (Dairy Australia, 2009 and Murray Dairy, 2001).

Doyle, Gibb and Ho, (2009) summarised the results of their review of relevant information on potential productivity gains from on ‐ farm irrigation technology in the following terms:

“Adoption of alternative irrigation technologies to border-check (flood) irrigation has the potential to improve forage production, to save irrigation water and labour and, hence, to increase farm profit. At farm scale, these benefits will only be achieved under high levels of management, where the technologies are used on appropriate soil types and where operators can utilise any additional (or different) forage in efficient feeding systems. It is inevitable that there will be time delays in optimising the management of new irrigation systems and that not all farmers will obtain the necessary benefits to offset capital costs. On this basis we conclude that while profit may increase on some farms adopting different irrigation technologies, the impact at regional scale will be negligible in the short to medium term (1 to 10 years). Significant risk is involved in investment in additional capital in businesses that have an uncertain future.”

The open question now is whether we are approaching the 10-year time scale they referred to, and, if so, whether the remaining dairy farmers in the GMID, operating at larger scales, have the requisite high levels of management to take advantage of those technologies?

There are also limits to the efficiencies to be achieved by increasing economies of scale – given the high variable costs associated with each additional cow in the herd (e.g. variable costs are about 60% of total costs for dairy farms in the three regions of Victoria)¹³. Finally, the other key options such as improving herd genetics to improve feed conversion to milk have also already been widely adopted and are now facing limits due to issues with reduced fertility and the precision of feeding strategies needed to match the energy requirements of cows (Dairy Australia, 2009b).

The water market enables individual dairy farmers to obtain new supplies of water, but in dry years, competition from horticulturalists will drive allocation prices up to the point where other strategies must be explored. In a recent survey designed to support a land use mapping project for Goulburn Broken CMA, 78% of dairy farmers indicated that they could not pay more than $200/ML (Goulburn Broken CMA, unpublished). Alternative groundwater supplies have now largely been exploited, following the widespread installation of groundwater pumps since the late 1980s to control salinity. Pumping has now stabilised at the volume that can sustainably be pumped and used on dairy farms.

Given that many of the substitution, efficiency and alternative supply options have already been widely adopted across the industry, it is likely that some dairy farmers will need to adopt exit options from their current farming systems. These could include increasing their holdings of high reliability water shares. The appropriate holding would depend on the individual circumstances on the farm but indications are that the current on-farm mix is not appropriate for many dairy farms. In the recent survey referred to above, 60% of dairy farmers indicated that although allocation trade is currently a part of their long-term business plan, their reliance on allocation trade is negatively affecting their ability to plan, their ability to implement a water budget and their ease of operation. For other dairy farmers less reliant on allocation purchases, the water market gives them flexibility.

Ostensibly another option would be to increase the income from other sources than dairying. Dairy farming is labour intensive, operates seven days a week with very few managed part time and this naturally limits the opportunities for off-farm income. ¹⁴

A common exit option used in the later years of the Millennium Drought was to reduce the size of the herd. Although all farms annually sell poor performing cows with the aim of improving productivity, beyond that selling cows will have a direct impact on income and is unlikely to be implemented outside an extended drought.