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

7.1The dairy industry’s options in responding to low water availability

Irrigated dairying has in the past relied on access to abundant, cheap water. Water has become scarcer as a result of horticultural expansion to date 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 Socio-economic 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 discussed below, highlight that irrigated dairying is semi-interruptible only for so long. The dairy industry is therefore currently considering its options for the future. The water market, enables dairy farmers to pursue a range of strategies.

Tietenberg and Lewis (2009) identify four key strategies for any business to mitigate the scarcity of a key input; these are substitution, increased efficiency, alternative supplies or exit. During the drought, when water was very scarce, dairy farmers in northern Victoria employed all four of these strategies with the particular mix used by individual farmers being driven by their individual circumstances, their farm set-up and their expectations regarding future water supplies (ABARES, 2010).

Substitution for irrigated dairying involves replacing water with another more abundant resource. As already discussed, for individual farms, substitution can be complicated. This is because changing one input such as water is likely to have implications for other components of the farming system. For example, managing the implications for animal health associated with the adoption of more complex feeding systems may also require additional investments in infrastructure and management skills (Productivity Commission, 2005).

The limits to the strategy of substitution were revealed in the Campaspe Irrigation District, when in 2010 after four out of five years with 0% water allocations, that district’s irrigators agreed to close down the irrigation district and sell all of their entitlements.

Efficiency can be achieved by minimising the amount of water required to produce milk, recycling drainage water or identifying methods of using lower quality water sources (Tietenberg and Lewis, 2009).

Dairy farmers increased their efficiency during the drought, and before, by laser-levelling, installing drainage re-use systems and installing automated irrigation systems. Consequently, irrigation application rates for pasture for dairying were reduced by 17% from 4.2 ML/ha to 3.5 ML/ha between 2000/01 and 2005/06 (Dairy Australia, 2009). In the eastern GMID, shallow groundwater pumps helped to make use of saline water in shallow groundwater systems built up by accumulated leaching fractions and water that had seeped from supply channels into shallow groundwater systems. Notably, both of these sources of shallow groundwater will decrease as a result of the Commonwealth’s investment in both on-farm and off-farm infrastructure savings.

Seeking alternative supplies: dairy farmers during the drought pumped more water from deep-lead groundwater systems (up to the permissible consumptive volume). They also purchased additional allocations from the water market (ABARE, 2010). In 2006/07 an estimated 31% of dairy farms participated in allocation trade (Dairy Australia, 2009).

Exiting is the last of the four scarcity mitigation strategies to be used. It is used when the other three have already been exhausted or when their costs exceed the benefits (Field, 2001). Dairy farmers during the drought pursued a range of partial exiting options that included: selling assets (such as cows or water entitlements), ‘mothballing’ the dairy business until conditions improved, pursuing off-farm income, and changing the focus of the business (e.g. from dairy to grain). In the absence of viable options for a partial exit, many dairy farmers sold their farms or ceased to farm.

Dairy farmers increasingly pursued exit strategies as the drought continued. Between 2006 and 2010 there was a 47.5% drop in land area used for dairy across the GMID (Goulburn Broken CMA, unpublished). Many farmers sold off cows with a 47% reduction in the herd size in the GMID between 2006 and 2010. This is compared to the more modest 12% reduction in herd sizes between 2001 and 2006 elsewhere in Australia (Dairy Australia 2016).

The Commonwealth’s entry into the water market in 2007 coincided with the majority of dairy farmers having already pursued their affordable options in terms of their substitution, efficiency, alternative supply and exit strategies. This led to a 75% increase in farmers selling their high reliability shares between 2007/08 and 2008/09 in the southern-connected Basin (NWC, 2009). Similar rates continued until the end of the drought (NWC, 2009).

The Commonwealth purchase of water entitlements 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 after pursuing partial exit strategies when, in the absence of the Commonwealth purchases, they may otherwise have been forced to cease farming altogether. At the very least, buyback helped many dairy farmers to reduce their debts (ABARES 2014.10).

Many dairy farmers who sold entitlements ultimately stayed on in dairy farming using a business model that relied upon future purchases of allocations rather than a replacement of their entitlements. Some dairy farms now rely completely on water allocation purchases to meet their full irrigation requirements. These farmers are purchasing water as part of routine farm business activities using various trading strategies (ABARES 2014.10).

This is a widely used strategy with more than half of all dairy farmers being net purchasers of allocations in recent years (Figure ), with 60% doing so in 2013/14. However, as discussed in Chapter 4, in 2015/16 declining water availability due to the return of dry conditions and the run down of the extraordinary levels of carryover built up in the La Niña years led to higher allocation prices. Many of the irrigators that pursued this strategy are still coming to terms with the risk that this has exposed them to.

Figure : Proportion of dairy farms trading temporary water allocations

Note: Net buyers/sellers are farms that bought/sold more water than they sold/bought.

Source: ABARES 2015.13 from Murray–Darling Basin Irrigation Survey