Economics of Reduced Water Allocations: Estimating Impacts on the Northern Victorian Dairy Industry

Water use efficiency data was used to estimate the impact of reducing sales water allocations on a range of irrigated dairy farms categorised according to intensity of water right. The expected deficiency in available water was estimated for each farm category on the basis of historical demand for sales and the potential production loss estimated. The cost of substitution through management options of purchasing 1) water right (with associated sales), 2) temporary sales water, or 3) feed supplements as grain or hay and silage was calculated. Purchase of water right was found to be the cheapest option and the regional transfer volume required estimated at 93 GL of water right valued at A$ 60.7 million. The average transfer requirement was estimated at 31 ML per property, or A$ 20,000 in capital expenditure. The estimated cost of the transfer requirement for a large low security farm was A$ 240,000. Current water policy activity is seeking instruments to reduce industry impacts. Given the operation of a market since 1991/92, options which redefine water property rights and enable reallocation of sales entitlement have potential to be inequitable for irrigators already using prudent risk management strategies for water security.