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

Impacts for horticultural industries

The structural adjustment issues associated with the 35% drop in wine grape plantings in the Victorian Mallee between 2006 and 2015 (Argus, 2015), 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.

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.

As explained in Chapter 5, total horticultural water use is unaffected by the Basin Plan. However, because the Basin Plan reduced the size of the consumptive pool, Victorian horticultural demands as a proportion of full allocations against Victorian High Reliability Water Shares have risen from 32% without the Basin Plan to 40% with the Basin Plan. The Basin Plan has therefore constrained further investment and increased the risk of horticultural land being dried off in the next drought. As explained in Chapter 11, this risk would increase further in the other water recovery scenarios. Horticultural demands would rise to 46% in the 2750 GL and 51% in the 3200 GL water recovery scenarios.
The dry year water availability may also be considered a ceiling to horticultural investment. By reducing the consumptive pool of available water in years of extreme drought — when it is required to meet the fixed water requirements of horticultural biological assets (trees and vines) — the Basin Plan water recovery can be considered to have limited the expansion of horticultural investment. If further water recovery is pursued then this may put at risk the water requirements for current investment. The table below presents potential impacts on Victorian horticultural investment (it should be noted that this is an estimate of investment dollars, not production or value-added dollars).

Scenario	Potential impact on Victorian horticultural investment
2100 GL recovery scenario	At current levels of water recovery, in a repeat of 2008-09 allocation levels there would be 16 GL more water available than it takes to meet the full irrigation requirements for horticulture. When the existing plantings mature however, there would be a shortfall (-110 GL). Without water recovery, there would still have been a small shortfall as existing planting mature of 8 GL of High Reliability Water Shares. Developers need to be aware of this risk, but based on the historical record they may judge that the risk is worth taking. At 12ML/ha the additional shortfall of 103GL could have developed another 8550ha. At $19,000/ha this is $162 million of total investment that has hypothetically already been forgone.^2 An alternative way of considering is that, when the existing plantings mature, the additional shortfall of -103GL puts 8850 ha of existing horticultural development at risk, which represents $162 million of existing investment.
2750 GL recovery scenario	Under medium future water recovery, there would be an additional shortfall of -193GL in a repeat of 2008-09 allocation levels. This puts 16000ha of existing plantings at risk, which represents $306 million of existing investment.
3200 GL recovery scenario	Under high future water recovery, there would be an additional shortfall of -241GL. This puts 20000ha of existing plantings, at risk, which represents $381 million of existing investment.

Impacts on the dairy industry

As explained in Chapter 6, in the absence of the Basin Plan, water use by GMID and by GMW diverters would have been higher (Figure ). Dairying is the mainstay of the GMID. As the consumptive pool is reduced under the various water recovery scenarios, and as the perennial demands of horticulturalists goes up, it is left to dairying, as the most exposed industry, to soak up more of the variability in available water supplies. Additionally, many dairy farmers sold entitlements during the buybacks, and they are now relying on allocation purchases to support their businesses.

Figure : Water use in GMW irrigation districts with and without the Basin Plan

As explained in Chapter 6, the net result of all this is to push dairy farmers towards the more complex feeding systems they adopted as a loss minimisation strategy during the drought. Because those alternative feeding strategies are more complex than pasture grazing, they carry more risk. Dairy farmers’ indebtedness increased during the drought. This suggests that if dairy farmers are to adopt these strategies for the long term, they will need to increase their skills in managing these production systems.

Milk production would have been expected to have been greater but for the water recovery under the Basin Plan. Figure presents milk production in the GMID as it was with the Basin Plan and as it might reasonably have been expected to be without the Basin Plan – assuming that the ratio of milk production to irrigation water use remained the same. The difference between the two would be less if it were assumed the additional water use was less efficient than the observed average.

Figure : GMID milk production (with and without the Basin Plan)

RMCG (2016) estimated a similar reduction and equated this to a reduction in an annual farm-gate value of $200 million per year. It is important to note however that output value is not just attributable to the additional water volumes; it is also attributable to the other inputs to production — and therefore is not a measure of the economic value added by the water. It is also important to note that despite high allocation levels and low allocation prices at the time of writing, milk production was being strongly influenced by low milk prices with dairy farmers reducing inputs of purchased feed and fertiliser in the short-term.

This reduced supply has reduced throughput in dairy processing. Although milk processing is not reported by factory, 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).

Commonwealth buybacks undoubtedly helped dairy farmers to adjust to the combined effects of the high cost of feed and the high cost of allocations during the drought. Many farmers took the opportunity to exit the industry with better financial resources than they would have done without the Basin Plan. Others managed to keep operating their businesses based on allocation purchases. Buyback also helped many dairy farmers reduce their debts.

More than half of all dairy farmers are now net purchasers of allocations, with 60% purchasing allocations in 2013/14. However, as discussed in Chapter 4, the limits to this strategy were revealed in 2015/16 once the extraordinary levels of carryover built up during the La Niña years were finally run down to lower level, and the return to dry conditions led to higher allocation prices. Many of the irrigators that pursued this strategy are still coming to terms with the risk to which this has exposed them.

On-farm improvements in irrigation layouts and irrigation management strategies over the past 30 years have helped dairy farmers adapt to the changes. Dairy farmers whose business models depend on allocation purchases are now confronting decisions about their willingness and ability to adopt the more complex feeding strategies associated with further improvements in irrigation technology.

Irrigated dairying has in the past relied on access to abundant, cheap water. Water has become more scarce as a result of horticultural expansion and the Basin Plan. Further sources of scarcity include climate change and continued horticultural expansion and the potential for further water to be recovered for the environment under the Basin Plan. For example, the Socioeconomic Analysis that accompanied the Regulatory Impact Statement for the Basin Plan (MDBA, 2011c) warned at page 78 that “for the Goulburn Broken Region GVIAP (gross value of irrigated agricultural production) will be reduced by 12.9 per cent ($88.2 million) with the largest reductions experienced by dairy, meat cattle and hay”. The net result of these changes has been increased farming risk in Victoria’s irrigated dairy industry.

The levels of indebtedness outlined above, and the experience with the Campaspe Irrigation District, highlight that irrigated dairying is semi-interruptible only for so long. The limits to the strategy of substituting feed for water were revealed in the Campaspe Irrigation District in 2010. After four out five years with 0% water allocations, that district’s irrigators agreed to close down the irrigation district and sell all of their entitlements.