» On 19 April 2007, Australia’s Prime Minister announced that it was unlikely that any water would be available for irrigation at the commencement of the upcoming water year (1 July 2007) because of the need to provide a critical minimum supply of water to urban communities within the Murray Darling Basin.

» Irrigators with large capital assets, such as perennial plants or core breeding stock, potentially face significant costs if they receive low water allocations in 2007-08.

» These potential losses suggest that irrigators may benefit from being able to manage production risk in a more flexible manner. Two possible options for improving flexibility include freeing up interregional trade in water and allowing irrigators to carry over part of their allocation to the next season.

The volume of water held in storage in the Murray Darling Basin is critically low, as inflows over the past few years have been historically low. In April this year, federal, state and territory leaders received a contingency planning report for the Murray Darling Basin stating that ‘unless there were very substantial early inflows, there will be insufficient water available to allow any allocation at the commencement of the 2007-08 water year for irrigation, the environment or any other purpose other than critical domestic supplies’ (Overview Contingency Planning Report 2007a).

On 19 April 2007, the Prime Minister announced that it was unlikely that any water would be available for irrigation at the commencement of the upcoming water year (1 July 2007) based on the need to provide a critical minimum supply of water to urban communities within the basin (Prime Minister of Australia 2007a). The Prime Minister noted that zero allocations could have a potentially devastating impact on irrigators, particularly those in the perennial horticulture and dairy industries (Prime Minister of Australia 2007a), and added that contingency measures would be modified if seasonal conditions improved (Prime Minister of Australia 2007b).

On 20 June 2007, a second contingency planning report was released, providing an update on the situation in the Murray Darling Basin (Overview Contingency Planning Report 2007b). The report states that, while rainfall across the basin returned to near average between January and May, inflows to the Murray system remained low. The report also states that it is still possible that allocations to entitlement holders will be zero or very small in the southern part of the basin at the beginning of 2007-08, with the states announcing final opening allocations for next season between mid-June and early July.

To date, the South Australian Government has announced that Murray River irrigators will receive at least 1 per cent of their allocations as well as some carryover water from 2006-07 at the start of the 2007-08 season. Goulburn-Murray Water has also announced that carryover water from 2006-07 will be available to irrigators in July, while the New South Wales Government has announced that 2 gigalitres of water will be available for permanent plantings and key industrial users along the Murray River. First Ministers also agreed to a recommendation in the report that ‘any water that becomes available to entitlement holders should be available for trading both within and between states, under normal circumstances, in order to facilitate the early development of a water market and ensure limited water supply is used to its highest value’ (Prime Minister 2007c).

While the probability of receiving inflows in 2007-08 similar to those in 2006-07 is very low (for the twelve months to March 2007, inflows were the lowest on record; MDBC 2007), the potential impact of reduced allocations on the major irrigated activities in the southern Murray Darling Basin needs to be assessed. Also, the management options available to irrigators to help mitigate such impacts need to be considered. The emphasis in this article is on the southern Murray Darling Basin (map 1). This is where most urban communities that are at risk of not receiving adequate water supplies for domestic use are located. Moreover, this is where the bulk of the perennial horticulture and dairy activities are located within the basin, and it is these industries that may find it difficult and costly to adjust to significant restrictions on access to water. The potential impact of reduced allocations on food prices is also considered.

The substantial potential economic effects on irrigators of high value crops if little or no water is allocated to irrigation highlight the potential benefits from removing restrictions on interregional trade in water in the event that some water is made available for irrigation. The potential benefits from providing irrigators with a carryover facility so that they can better manage their production risk in the future are also highlighted.

water storages in the basin
An extended period of severe drought has reduced inflows into the Murray Darling Basin. While storage capacity in the main water storages located in the basin is around 26 000 gigalitres, the total volume of water currently held in these storages is only 2230 gigalitres. Of particular concern has been the extremely low rainfall in the headwater catchments feeding the Murray River. These catchments normally generate around half of total inflows into the Murray River. Table 1 indicates that the volume of water held in storage in the southern Murray Darling Basin has fallen dramatically over the past year, with storage levels falling from 64 to 12 per cent in Dartmouth Dam, and from 43 to 13 per cent in Blowering Dam.

seasonal conditions
The Bureau of Meteorology reported in June 2007 that autumn rainfall was average to above average over much of inland New South Wales, northern and western Victoria and southern South Australia. The bureau also advised that the El Niño event affecting Australia in 2006-07 has fully dissipated, and there are signs that the basin may receive average or above average rainfall in coming months. For instance, the bureau has forecast the probability of receiving above median rainfall over winter to be close to 50 per cent for much of the basin (map 2), and there is a large body of cool surface water located in the central to eastern Pacific, raising the potential for a La Niña event to develop in 2007. Moreover, the Southern Oscillation Index has been relatively neutral in recent months.

Despite the improved seasonal outlook, catchments remain extremely dry. The amount of water available for irrigation depends on inflows to storages, and the relationship between rainfall and inflows is poorly understood. There is a risk that a return closer to average seasonal conditions in catchments that are extremely dry will not generate significant runoff, at least initially. This risk was highlighted recently in the southern catchments of the Murray Darling Basin. While these catchments received near average rainfall in February and March this year, inflows into the Murray River system over this same period were the lowest on record (MDBC 2007).

1 selected major storages
			level of storage at May
	river	capacity	2006	2007
		GL	%	%
New South Wales
Hume dam	Murray	3 038	13	5
Menindee lakes	Darling	1 678	16	5
Blowering dam	Murrumbidgee	1 631	43	13
Copeton dam	Gwydir	1 362	24	11
Wyangla dam	Lachlan	1 220	23	4
Burrendong dam	Macquarie	1 188	29	5
Burrinjuck dam	Murrumbidgee	1 026	33	24
Keepit dam	Namoi	426	18	5
Pindari dam	Severn	312	67	20
Snowy	Snowy	5 307	25	8
Victoria
Dartmouth dam	Mitta Mitta	3 906	64	12
Lake Eildon	Goulburn	3 390	22	5
Warranga	Goulburn	411	27	11
Lake Mokoan	Broken	365	30	10
Eppalock	Campaspe	312	5	1
Queensland
Glenlyon dam	Dumaresq	254	29	13
Leslie dam	Condamine	106	15	8
Beardmore dam	Balonne	82	48	5
Murray Darling Basin	26 014	30	9
Sources: State Water; Goulburn Murray Water; Sun Water.

agricultural activity in the Murray Darling Basin
The Murray Darling Basin accounts for nearly 40 per cent of the gross value of agricultural production in Australia (table 2). More specifically, it accounts for over 50 per cent of the gross value of cropping activities, and around a third of the value of livestock activities (including slaughterings and livestock products). These values comprise revenue from both dryland and irrigated activities.

The focus in this article is irrigated activities carried out in the basin. Around three-quarters of Australia’s total area of irrigated cotton and all irrigated rice (all rice is irrigated in Australia) is located in the Murray Darling Basin (table 2). Unfortunately the ABS statistics do not distinguish between dryland and irrigated agriculture for other agricultural activities. This presents a problem for activities, such as horticulture and dairy, that include a mix of dryland and irrigated production. The Murray Darling Basin is an important region for these activities, accounting for around half of the total area devoted to perennial horticulture, and nearly a third of the total area devoted to dairy production.

2 crop and livestock production, 2004-05
	Australian total	Murray Darling Basin share
		%
crop areas	‘000 ha
cereals for all purposes	22 035	48
– rice for grain	51	100
other (noncereal) crops	4 232	38
– irrigated cotton	270	76
– nonirrigated cotton	34	81
– total cotton	304	77
vegetables
– for human consumption	123	28
– for seed	5	23
horticultural crops	473	44
– fruit (excl. grapes)	165	46
– grapes	163	58
– total fruit	329	52
pasture
– cut for hay and silage	1 021	42
– harvested for seed	161	54
livestock numbers	‘000
sheep and lambs	101 125	43
cattle – meat	22 997	31
cattle – dairy	3 056	31
pigs	2 538	61
chickens – meat	62 251	21
chickens – layers	13 175	35
value	$b
gross value of agriculture	36	39
crops	17.8	54
livestock slaughterings	12	36
livestock products	5.7	36

impact of reduced water allocations on irrigated agriculture
The impact of reduced water allocations on irrigated agriculture in the basin will differ depending on the nature of the irrigated activity in question. For example, losses incurred by irrigators who irrigate annual crops on the basis of annual water availability will be confined largely to 2007-08. Also, these losses may be mitigated to some extent by the pursuit of dryland farming activities on land that would otherwise have been used for irrigation. In contrast, reduced allocations may have short, intermediate and longer term impacts on perennial horticulture industries and the dairy industry. The short term impacts will include lower production in 2007-08, whereas intermediate impacts will include any production losses incurred beyond the current year. The longer term impacts include the potential loss of capital assets, such as permanent plantings and dairy breeding stock, if reduced water availability continues over the coming seasons.

There are a number of management strategies that irrigators can adopt to help preserve capital assets. Key to implementing any management strategy is timing. As discussed below for specific agricultural activities, if action is taken too early, unnecessary yield and production losses may be incurred for the next few seasons. Alternatively, if action is taken too late, or the action taken is inadequate, the survival of permanent plantings may be threatened or the culling of core breeding stock required.

The following analysis begins with an analysis of the impact of reduced water allocations on rice production, the main annual irrigated cropping activity carried out in the southern Murray Darling Basin. This is followed by a discussion on the impact of reduced allocations on dairying and perennial horticulture activities.

rice
Australian rice is produced exclusively in the Murray Darling Basin, with production being concentrated in the Murray and Murrumbidgee Valleys of south western New South Wales and northern Victoria (map 1). The requirement for plants to be flooded for extended periods means that rice is critically dependent on irrigation water.

In 2001-02, a year when irrigators received allocations closer to the longer term average, around 1.2 million tonnes of rice was produced, with a gross value of around $375 million (in 2006-07 dollars). Low water allocations in recent years have resulted in a decline in the area planted to rice, and consequently a fall in production. Low water allocations in 2006-07 resulted in only 16 000 hectares of rice being planted in that year, with total production falling to around 167 000 tonnes, the lowest production in at least twenty years. If rice farmers have no access to groundwater, zero surface water allocations would mean that no rice would be produced next season. However, some producers may be able to mitigate the impact of reduced surface water allocations if they have access to groundwater.

There is also a possibility that rice growers may receive access to carryover water in 2007-08 if there are sufficient inflows. The New South Wales Government suspended general security irrigators’ access to carryover water in 2006-07, but has indicated that it will reinstate access to this water if seasonal conditions allow.

Most rice farmers who expect that there is little chance of receiving water allocations for next season appear to have planted alternative winter crops, such as wheat or barley. If such growers receive a water allocation following the planting of winter crops, they are likely to have other options available. For instance, they could sell their water allocation and maintain existing winter crops until harvest, or they could use some of their allocation to finish existing crops. Alternatively, they could spray out existing crops and plant rice or cut existing winter crops for hay in spring and plant quick maturing rice varieties.
dairy
Around a third of Australia’s dairy cattle are located in the Murray Darling Basin. The major characteristics of the main dairying activities carried out in the southern Murray Darling Basin are described in table 3. While these activities are spread across the southern catchments, they are heavily concentrated in the Victorian catchments (map 1), which account for around 90 per cent of dairy farms and dairy cattle located in the southern part of the basin.

The 2006-07 drought severely affected pasture availability in the parts of the Murray Darling Basin that rely on rainfall. Even where dairy producers have been able to use irrigation to supplement local rainfall, pasture growth was below par because of lower than average water allocations. Results from ABARE’s Australian dairy industry survey for 2006-07 indicate that dairy farmers have responded to the drought in a variety of ways, including increasing their use of purchased feed and reducing herd size.

As the drought worsened and pasture production proved to be considerably below average in 2006-07, some dairy farmers increased the amount of concentrated rations (including grain, supplements and hay) fed to their milking herds in order to maintain milk production. At the same time, feedgrain prices rose as the impact of drought on winter and summer grain production became more apparent.
Even though farmgate milk prices were reasonably attractive for producers, some farmers chose to reduce cow numbers rather than pay the higher grain and fodder costs. Consequently, there was widespread destocking in the industry in 2006-07 as many dairy farmers reduced herd sizes in order to reduce feed costs.

The strategies used by individual dairy farmers to manage drought will have an important bearing on their net financial returns. Strategies will focus on substituting grains and fodder for pasture and reducing overall demand for feed. The latter will be achieved by drying cows off, agisting or leasing cattle off farm, or culling and selling cattle. Ultimately, the strategy followed by individual producers will depend on factors such as the availability of feed on their property, the cost and availability of purchased feed, herd composition, livestock and milk prices, their financial reserves, and attitudes toward risk.

3 number of dairy farms, area irrigated and total water requirement, 2005-06
				average
	dairy farms a	dairy cows	area irrigated	water application	water requirement b
	no.	no.	ha/farm	ML/ha	GL
Murrumbidgee	15	5 000	143	9	19
Murray
– New South Wales	130	52 500	143	9	167
– Victoria	800	255 200	57	9	410
– Victorian tributaries	1 470	468 900	57	9	754
– South Australia	106	41 200	133	9	127
total	2 521	822 800	65	9	1 477
a Number of registered dairy farms. b Number of farms multiplied by area irrigated multiplied by water application. Sources: ABARE farm surveys; Dairy Australia; state agencies.

horticulture
The Murray Darling Basin is an important horticultural region, accounting for around half of the total area devoted to perennial horticultural crops in Australia and around 30 per cent of the total area devoted to annual horticultural crops (ABS 2005). The focus of discussion here is on perennial horticulture because of the potential for large capital costs to be incurred in the event that tree and vine crops are denied access to water for an extended period. These high costs are reflected in data supplied by the various state government agriculture agencies that suggest that the costs of establishing perennial horticulture can exceed $20 000 per hectare for some crops.

Data supplied by various state agriculture departments indicate that around 140 000 hectares of land located in the southern Murray Darling Basin is planted to the main perennial horticulture crops, which include almonds, citrus, vines, stone fruit and pome fruit. The largest areas are devoted to vine (about 57 per cent of total planted area) and citrus plantings (around 16 per cent).

The major grape growing areas are located in the Riverland regions of South Australia and north western Victoria, which account for over 60 per cent of total vine area in the southern basin. Most almond plantings are also situated in these two regions, as well as around half of total citrus plantings. A further 38 per cent of citrus plantings are located in the Murrumbidgee Valley. The majority of pome and stonefruit plantings are concentrated in north western Victoria and the Victorian Goulburn irrigation system.

The impact of reduced water availability on orchards and vineyards depends on the severity of the reduction. Generally, impacts on production can be grouped into three broad scenarios of increasing severity:
» yield losses in the short term — when reduced allocations result in a yield reduction for just the 2007-08 irrigation year
» yield losses in the intermediate term — when reduced allocations result in yield reductions extending beyond the 2007-08 irrigation year
» plant losses — when allocations are sufficiently low to result in tree/vine death.

In the short term, growers have a number of management actions that can be taken to reduce water demand in orchards and vineyards. The actions taken will depend on water availability, and include controlling and prioritising water use where water is available, weed growth control/mulching, pruning, flower suppression/fruit thinning, severe pruning (skeletonising) and sacrificing less productive trees. Some of these options will result in forgone production in order to reduce the risk of tree and vine death. In situations where severe pruning is undertaken it may take several years for plants to return to full productivity under normal seasonal and irrigation conditions. Hence, it is a crucial planning decision if plants are to be severely pruned. If rains are forthcoming, and irrigation water is available, those who severely prune may not produce any crop even though conditions are favourable.

options for dealing with a loss of water allocations
Irrigators with large capital assets, such as perennial plants or core breeding stock, potentially face a range of costs if they receive low water allocations next season. These losses suggest that there may be significant benefits from providing irrigators with more flexibility to deal with production risk. For example, if seasonal conditions allow some water to be allocated to entitlements next season, interregional trade has the potential to significantly reduce the overall cost of reduced access to water.

The benefits from water trade arise from differences in the marginal value of water use between irrigators. The marginal value of water use is the net return that irrigators earn from the use of an additional megalitre of water. These marginal values vary according to differences in the irrigated activities undertaken, regional biophysical attributes, and water availability. Trade will facilitate the transfer of water to its highest value use. For example, irrigators with a marginal value of water use lower than the market price may sell water, in which case the income from selling water will be greater than the loss of not irrigating. Conversely, for irrigators with a marginal value of water use higher than the market price, the cost of purchasing water will be less than the loss from not irrigating. Thus, the overall loss is reduced in a mutually beneficial way. Governments have the capacity to reduce the costs of limited access to water by removing any barriers to interregional trade that are not based on physical limitations or environmental concerns. First Ministers recently agreed that any water that becomes available to entitlement holders should be available for both intrastate and interstate trade.

Irrigators may also benefit from the increased flexibility that a carryover facility would provide. A carryover facility would allow irrigators to carry some of their current year allocation into the following year. Such a facility would offer an additional level of protection to irrigators, especially those with high value assets such as permanent plantings. A carryover facility is already available to New South Wales general security irrigators, while Victorian irrigators in the Murray and Goulburn systems and South Australian irrigators in the Murray system will be able to carry over a portion of any unused water allocated in 2006-07 to the 2007-08 season. Access to carryover water in Victoria and South Australia in 2007-08 is at this stage a one-off drought response measure (Cago 2007; Goulburn-Murray Water 2007). The New South Wales Government also announced late last year that any unused high security water allocated in 2006-07 could be carried over into 2007-08 (DNR 2007a,b).

There are likely to be additional benefits from extending the coverage of carryover facilities beyond 2007-08 for Victorian and South Australian irrigators, and for New South Wales high security irrigators. The effectiveness of a carryover facility in mitigating the risk of low or zero allocations for individual irrigators will also depend on jurisdictions honouring obligations to deliver water under such a facility. As stated earlier, the New South Wales Government suspended general security irrigators’ access to carryover water in 2006-07, although it has indicated that it will reinstate access to this water if seasonal conditions allow.

When used in tandem, a carryover facility and free interregional trade have the potential to significantly reduce irrigators’ exposure to production risk.

effects on food prices
There is some concern that reduced water allocations in the Murray Darling Basin in 2007-08 could lead to significant increases in food prices. While reduced irrigated output would put upward pressure on food prices, the extent of these increases would vary between commodities, and be offset to some extent by several mitigating factors.

For instance, it may be possible to offset reduced production in the basin in the short term by diverting Australian produce from export markets to the domestic market, and through increased imports. The capacity for agricultural regions located outside of the basin to cover production shortfalls will depend on the productive capacity of these regions, the prevailing seasonal conditions in these regions, and relative domestic prices versus export prices. The potential for increased imports will depend on quarantine restrictions, tariffs or other restrictions on imports and the prices that overseas producers receive for exports relative to what they receive for the domestic product.
By commodity, rice is totally irrigation dependent and grown entirely in the basin. While over 50 per cent of production is usually exported, Australia also imports rice. Recent imports have equated to around 15 per cent of domestic production. While there is no capacity for other regions in Australia to make up any shortfall in domestic production in the basin, higher rice imports have the potential to satisfy domestic consumption if required.

Fruit and vegetable crops grown in the Murray Darling Basin are also highly dependent on irrigation water. Roughly half of the area devoted to fruit production in Australia is located in the basin, and around 30 per cent of the area devoted to vegetable production. With relatively short crop production cycles, vegetable growers outside the basin may be able to increase domestic production, which would be likely to constrain price increases. Moreover, a significant amount of Australia’s processed vegetable requirements are imported, and any expansion in these imports would act to limit price rises.

Around two-thirds of Australia’s dairy cattle are located outside of the Murray Darling Basin. Australia is also a major exporter of processed dairy products, such as cheese and butter, with exports of these two products accounting for around 50–60 per cent of domestic cheese and butter production. There may therefore be scope to divert some milk from the manufacture of products to the fresh milk market if reduced milk output contributed to higher prices of fresh milk. There is also potential to import more processed dairy products from New Zealand and other countries.

The extent of any price increases for fruit and vegetables (and other commodities) will also depend on how consumers respond to rising prices of individual products, and the availability and prices of substitute foods. As was evident from the impact of Cyclone Larry on banana supply and prices, consumers readily adjust their expenditure patterns (including cutting back on consumption) to reflect changing price relativities.

conclusion
The Southern Oscillation Index has been relatively neutral in recent months, and there is a possibility that a La Niña event may develop in 2007. Despite this promising outlook, there is a risk that rainfall in 2007-08 may not deliver sufficient inflows to allow anything other than minimal surface water allocations to irrigation in the southern Murray Darling Basin.

The impact of reduced allocations on irrigated agriculture will differ depending on the nature of the irrigated activity. For example, any losses incurred by irrigators who irrigate annual crops will be largely confined to 2007-08, and may be mitigated to some extent by expansion of dryland activities on land that would otherwise have been used for irrigation. In contrast, reduced water allocations may have short, intermediate and longer term impacts on the perennial horticulture and dairy industries. The short term and intermediate impacts are confined to production losses, whereas the longer term impacts include the loss of capital assets, such as permanent plantings and dairy breeding stock.

There are management strategies that irrigators can adopt to preserve capital assets. Key to any management strategy is timing. If action is taken too early, unnecessary yield and production losses may be incurred for the next few seasons. Alternatively, if action is taken too late or the action taken is inadequate, the survival of permanent plantings may be threatened or the culling of core breeding stock required.

The significant costs that dairy and perennial horticulture farmers could face in the event that little or no water is allocated to irrigation next season highlight the need to provide irrigators with increased flexibility to manage their own risk. For example, if seasonal conditions allow some water to be allocated to entitlements next season, interregional trade has the potential to significantly reduce the overall cost of reduced access to water in a way that is mutually beneficial to both buyer and seller. A carryover facility also has the potential to provide irrigators with an additional level of protection, especially to those with high value assets, such as permanent plantings.

references
ABS (Australian Bureau of Statistics) 2005, Agricultural Commodity Survey 2004-05, Canberra.
DNR (New South Wales Department of Natural Resources) 2007a, ‘Trade and carryover rules for NSW Murray irrigators’, Media Release, Murray Murrumbidgee Regional Office, Deniliquin, 8 March (www.dnr.nsw.gov.au/mediarelnr/mm20070308_3619.html).
—— 2007b, ‘Trade and carryover rules for NSW Murrumbidgee irrigators’, Media Release, Murray Murrumbidgee Regional Office, Deniliquin, 8 March (www.dnr.nsw.gov.au/mediarelnr/mm20070308_3620.html).
Gago, C. 2007, ‘New measures to help secure water supplies for 2007-08’, Media Release, Premier and Cabinet of South Australia, Adelaide, 22 March (www.ministers.sa.gov.au/news.php?id=1392)
Goulburn-Murray Water 2007, Carryover information sheet for G-MW irrigators (www.g-mwater.com.au/downloads/Carryover_Information_Sheet.pdf).
MDBC (Murray Darling Basin Commission) 2007, E-letter no 66, Canberra, May.
Overview Contingency Planning Report 2007, Murray Darling Basin Dry Inflow Contingency Planning, Overview Report to First Ministers, Canberra, April (www.environment.gov.au/water/publications/mdb/pubs/dry-inflow-planning.pdf).
—— 2007b, Murray Darling Basin Dry Inflow Contingency Planning, Overview Report to First Ministers, Canberra, May (www.environment.gov.au/water/publications/mdb/pubs/dry-inflow-planning-may07.pdf)
Prime Minister of Australia 2007a, ‘Murray-Darling Basin irrigation allocations’, Media Release, Parliament House, Canberra, 19 April.
—— 2007b, ‘Water contingency planning in the southern Murray Darling Basin’, Joint Statement by the Prime Minister and the Premiers of New South Wales, Victoria and South Australia, April 2007, Media Release, Parliament House, Canberra, 20 April.
—— 2007c, ‘Dry inflow contingency planning in the Murray Darling Basin’, Joint Statement by the Prime Minister and the Premiers of New South Wales, Victoria and South Australia and the Chief Minister of the Australian Capital Territory, June 2007, Media Release, Parliament House, Canberra, 20 June.