assessing the future impact of the australian government

Simon Hone, Adam Foster, Ahmed Hafi, Tim Goesch, Orion Sanders, Daniel Mackinnon and Brenda Dyack

ABARE research report 10.03

April 2010

Assessing the future impact of the Australian Government

environmental water purchase program

ii

© Commonwealth of Australia 2010

This work is copyright. The Copyright Act 1968 permits fair dealing for study, research, news reporting, criticism or review. Selected passages, tables or diagrams may be reproduced for such purposes provided acknowledgment of the source is included. Major extracts or the entire document may not be reproduced by any process without the written permission of the Executive Director, ABARE.

ISSN 1447-8358 ISBN 978-1-921192-97-5

Hone, S, Foster, A, Hafi, A, Goesch, T, Sanders, O, Mackinnon, D and Dyack, B 2010, Assessing the future impact of the Australian Government environmental water purchase program, ABARE research report 10.03, Canberra, April.

Australian Bureau of Agricultural and Resource Economics Postal address GPO Box 1563 Canberra ACT 2601 Australia Location 7B London Circuit Canberra ACT 2601 Switchboard +61 2 6272 2000 Facsimile +61 2 6272 2001

ABARE is a professionally independent government economic research agency.

ABARE project 3329

AcknowledgementsThe authors would like to acknowledge the assistance of colleagues including Alasebu Yainshet in running AusRegion, Dale Ashton in extracting data and Peter Gooday for his management of the project, as well as Mike Hinchy and Katarina Nossal for their referee comments and Chun Liang for generating maps and extracting the data used in the regional profiles. The authors would also like to acknowledge DEWHA staff for their comments on an earlier draft.

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Foreword

Under the Restoring the Balance in the Murray-Darling Basin program, the Australian Government has allocated $3.1 billion to purchasing water entitlements for the environment. The objective of the program is to secure a permanent re-balancing of water used for irrigated agriculture and that which is available for the environment.

A number of stakeholders have raised concerns over the regional and community impacts of the environmental water purchasing program. The Department of the Environment, Water, Heritage and the Arts responded to these concerns by commissioning ABARE to undertake an analysis of the future impact of the first $1.5 billion worth of purchases under the Restoring the Balance program on the water market, as well as on regional economies and communities. The results of this analysis are contained in this report.

Phillip Glyde Executive Director April 2010

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Contents

Summary 1

1 Introduction 6

2 Background 7

3 Methodology 19

4 Results 24

5 Community effects 37

6 Other factors 49

7 Conclusions and findings 59

Appendices A Buyback theory 63

B Models 70

C Water Trade model results 79

D Dairy model results 84

E Water price elasticity of demand estimation 87

F Discussion of relevant survey data for the buyback 92

G Region profiles 100

References 186

Figures1 Water use in the Murray-Darling Basin, by activity 2005-06 8

2 Methodology 21

3 Irrigated pasture response to change in water allocations, Goulburn Broken 28

4 Herd composition response to change in water allocations, Goulburn Broken 29

5 Supplementary feed grain response to change in water allocations, Goulburn Broken 29

6 Farm household expenditure per head 42

7 Farm expenditure on inputs per head 44

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The Australian Government environmental water purchase program abare.gov.au 10.03

Tables1 Entitlement classification 12

2 Buyback scenarios 20

3 Percentage change in GVIAP, by region 25

4 Percentage change in GVIAP, by industry 26

5 Percentage change in water use, by industry 27

6 Percentage change in water use, by region 27

7 Percentage change in irrigated land use, by region 30

8 Short run enterprise level demand elasticities 31

9 Regional aggregations used in the AusRegion model 33

10 Change in real GRP/GDP 33

11 Change in aggregate consumption 33

12 Change in annual expenditure on farm inputs - $ per head of regional population 34

13 Changes in GVIAP under different scenarios 35

14 Effect of drought on selected agricultural industries 36

15 Population change, Murray-Darling Basin 1996-2006 38

16 Population change, by remoteness, Murray-Darling Basin 1996-2006 39

17 Change in annual expenditure on farm inputs – $ per head of regional population 43

Maps1 Murray-Darling Basin, by NRM region 9

2 Distribution of perennial lakes, ephemeral wetlands and irrigation areas across the Basin 10

Boxes1 High and low reliability entitlements 15

2 Modelling payments for water entitlements 22

3 Estimating the effect of drought on irrigated output 23

4 Extension to multiple markets 50

5 Estimating environmental benefits 51

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Summary

The buybackThe Australian Government plans to spend $1.5 billion purchasing water entitlements for the environment over three years from 2008-09 to 2010-11. If the average yield adjusted price paid for these entitlements is similar to what was paid under the 2007-08 tender ($2300 a megalitre), the government can expect to acquire around 6 per cent of surface water entitlements in the Murray-Darling Basin. These entitlements would be expected to yield on average around 630 gigalitres of water a year when expressed in long-term cap equivalent (LTCE) terms.

Impact analysisABARE used its Water Trade Model to examine the effect of the buyback on the value of irrigated output, water use and land use by region and industry. The model is a long run comparative static model in which capital investments can vary.

The base scenario assumes water availability is affected by climate change and is based on the ‘C mid’ scenario from the CSIRO Sustainable Yields Report.

The market-based approach to acquiring water under the buyback will facilitate autonomous adjustment within the irrigation sector based on the opportunity cost of water use. As such, irrigators who have relatively lower value uses for their water will sell entitlements to the government. This approach would be expected to achieve adjustment within the irrigation sector at a lower cost than other, more interventionist approaches, such as directing irrigators to invest in more efficient water use technologies or through the compulsory acquisition of water entitlements.

Regional effects - irrigationThe results suggest that purchasing 6 per cent of surface water entitlements across the Basin will lead to a relatively modest 2.4 per cent decline in the gross value of irrigated agricultural production (GVIAP).

When considered in the context of broader water policy changes, the main effect of the buyback will be to bring forward reductions in irrigated activity that would have otherwise occurred when the new sustainable diversion limits come into effect under the Basin Plan. As such, the buyback will smooth the transition to the new sustainable diversion limits.

While the overall effects of the buyback are modest, the regional effects vary, with horticultural intensive regions in the southern Murray (Mallee and South Australia) experiencing smaller declines in GVIAP than more broadacre oriented regions further upstream, such as the NSW Murray and Murrumbidgee regions. This is reflected in changes in water use, with irrigators in the Mallee and South Australia only reducing water use by 3.3 and 4 per cent, respectively, compared with reductions of more than 6 per cent in the NSW Murray and Murrumbidgee regions.

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Industry effects - irrigationIndustry level GVIAP results tell a similar story, with GVIAP for horticulture only declining by around 1 per cent, compared with around 6 per cent for broadacre cropping (includes grains, rice, canola and lucerne crops). GVIAP for cotton declined by around 2 per cent, while dairy GVIAP declined by around 3 per cent. Changes in industry level water use followed a similar pattern to changes in GVIAP.

The buyback is also estimated to lead to a 1.6 per cent reduction in irrigated land use in the Basin, with this land moving into dryland production. The largest decline in irrigated land use in the northern Basin is estimated to occur in the Condamine, with the area of land irrigated declining by 4.8 per cent. In the southern Basin, the largest fall in the area of land irrigated is in the NSW Murray, where the area of land irrigated is expected to decline by 4.8 per cent. In contrast, the area of land irrigated in SA Murray is not expected to decline at all, whereas the area of land irrigated in the Goulburn Broken is estimated to decline by 0.3 per cent.

Price effectsThe model results suggest that entitlement prices will be around 13 per cent higher in the northern Basin and 18 per cent higher in the southern Basin than would be the case in the absence of the buyback. The difference in these price estimates is primarily because of differences in the mix of irrigated activities (the southern Basin comprises a greater share of horticultural and dairy activities), and differences in groundwater access (groundwater is more accessible in the northern Basin). These price estimates suggest that the price elasticity of demand for irrigation water in the Basin is relatively inelastic over the long term (-0.3).

A brief review of other research indicates that the elasticity implied by the Water Trade model is at the low end of the range of elasticity estimates. As a result, the Water Trade model price estimates should be treated with caution, and may overstate the effect of the buyback on water prices.

Despite uncertainty over the magnitude of any price increases, the volume of water entitlements likely to be purchased under the buyback suggests that prices will be higher than they would have been without the buyback.

Actual price data indicate that entitlement prices increased in most regions between 2007-08 and 2008-09, although there were a few instances where prices remained static or decreased. There are a number of factors that have the potential to influence entitlement prices apart from the buyback, including commodity prices and expectations about the future reliability of entitlements.

Entitlement purchases by other environmental water buyers such as the Murray-Darling Basin Authority (MDBA) through its Living Murray program or the New South Wales Government through its Riverbank program will also have an effect on water prices in the Basin.


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As is the case with irrigated activity, when the buyback is considered in the context of broader water policy, its effect is likely to be limited to bringing forward increases in the price of entitlements that would have otherwise occurred with the introduction of new sustainable diversion limits.

Buyback in contextIt is important to consider the effects of the buyback in the context of other factors affecting irrigated agriculture. For instance, it is estimated that the recent drought reduced GVIAP for rice by around 70 per cent, compared with an estimate of around 8 per cent under the buyback, and by around 47 per cent for cotton, compared with an estimate of 1.9 per cent under the buyback.

Moreover, while there are no data available specific to the irrigation sector, total factor productivity (TFP) for broadacre agriculture grew at an average rate of 1.5 per cent a year between 1977-78 and 2006-07 (Nossal et al. 2009). If TFP grew at a similar rate in the irrigation sector, it would take around two years to offset the effect of the buyback on GVIAP.

The Australian Government’s $5.8 billion investment in upgrading irrigation systems under the Sustainable Rural Water Use and Infrastructure (SRWUI) Program is expected to reduce the volume of water required by irrigators to produce a given level of output, and will assist in offsetting the impact of the buyback on water availability for irrigation.

Broader regional effectsThe ABARE analysis also estimated the broader effects of the buyback on regional economies. This involved feeding the direct effects of the buyback on GVIAP into ABARE’s AusRegion model (a computable general equilibrium model). This analysis required the GVIAP results generated by the Water Trade model for the 18 Natural Resource Management (NRM) regions to be aggregated into seven regions.

The AusRegion results suggest that the broader economic effects of the buyback will be almost indistinguishable at the national level (less than 0.01 per cent of gross domestic product), and 0.1 per cent or less of gross regional product (GRP) for five of the seven aggregated regions in the Basin. The South Australian Murray-Darling Basin is most affected, experiencing a decline in GRP of around 0.33 per cent.

The AusRegion results do not take into account any benefits associated with improved water quality (e.g. lower river salinity) on agricultural productivity (since the Water Trade model estimates do not take these into account), nor do they take into account any market or non-market benefits associated with improved environmental amenity because of increased environmental flows.

While the AusRegion results suggest that the effect of the buyback will be modest at a broad regional level, many of these regions contain a mix of small and medium-sized towns, as well

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as large regional centres. The larger regional centres tend to have a broad economic base, which will act to cushion the effect of a decline in irrigated activity. Some of the smaller towns more dependent on irrigation could be less resilient to a decline in irrigated agricultural production.

Previous ABARE research using broadacre farm survey data indicated that smaller towns tend to be more dependent on farm household expenditure than larger regional centres. The survey also indicated that smaller towns were more dependent on expenditure on farm inputs than household items.

While the effect of the buyback on regional expenditure on household items is uncertain, a reduction in the amount of irrigation undertaken within a region, or the conversion of some previously irrigated land to dryland farming, is likely to lead to an overall decline in demand for farm inputs.

The Basin level effect of the buyback on feed stocks for downstream processing is likely to be small given the modest effect of the buyback on irrigated output. The potential for more significant effects will increase, the more concentrated purchases are in any one region.

Apart from the economic effects, discussions with community representatives revealed concerns that the buyback could lead to a decline in regional services, such as health and education. While these types of concerns are legitimate, it is unlikely that the volume of entitlements purchased under the buyback alone will trigger a significant reduction in service delivery for most Basin communities. However, there may be threshold issues for some communities related to the spatial distribution of the buyback.

Putting the buyback into perspective at a broader community level, ABS data on population and employment identify a significant decline in the number of people living in small towns and remote areas, and in the number of people employed as farmers in the Basin between 1996 and 2006. These changes have been driven by factors other than the buyback, and are likely to reflect autonomous adjustment within the agriculture sector as farmers respond to external factors such as changing world prices, new technologies and drought.

More detailed research can be undertaken to better understand the effects of the buyback at the community level. One possibility would be to analyse irrigators’ expenditure patterns using data collected in ABARE’s irrigation survey.

Factors influencing the cost of waterApart from conducting an impact analysis, the terms of reference for this study required ABARE to: analyse the effect of the Australian Government’s entry into the water market on the efficient operation of that market; discuss options for the design of purchase mechanisms that may minimise the effects of government purchases; and identify factors that could either limit participation in the buyback or impede autonomous adjustment within the irrigation sector.

The buyback is a more efficient method of reallocating water to the environment than regulation because it acquires water from irrigators with the lowest opportunity cost in terms


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of forgone income. Reducing access to irrigation water through regulation at a similar cost would require the government to have access to enterprise specific data on the costs and benefits of water use. This information is generally not available and would be expensive to acquire.

The amount of information necessary to make water purchasing decisions using full cost-benefit analysis will generally be unavailable. However, water purchases should be made with consideration to benefits and costs, even if some elements cannot be quantified.

It will be important to minimise the costs of acquiring water to achieve environmental goals. Several factors can influence these costs, including the mechanism used to purchase water, attempts to include externalities in purchasing decisions, trade barriers and asset fixity. It is uncertain whether administrative or budgetary costs are lower when using unsolicited offers or discriminatory tenders.

Given the amount of expenditure the government has committed to purchasing water for the environment, it may be worthwhile piloting a program whereby entitlements are acquired through unsolicited offers, and then comparing the administration and budgetary costs with those incurred under the current system of tenders.

The buyback is addressing an externality that arises because of a missing or incomplete market for environmental services provided by environmental assets. While it may be possible to address other externalities such as those associated with irrigation use (e.g. salinity) in purchasing decisions, this could increase the cost of the buyback. In most cases, the information needed to address this type of externality is either unavailable or expensive to acquire. Moreover, in the event that it is decided that it is worthwhile to address these externalities, there are likely to be more direct instruments available.

Barriers to inter-regional trade in entitlements can also influence the cost of environmental purchases, limit participation in the buyback and slow the pace of autonomous adjustment within the irrigation sector. Currently, there are limits on net trade in entitlements out of irrigation regions in Victoria and New South Wales. These limits were binding in a number of Victorian regions in both 2007-08 and 2008-09, including in the Pyramid-Boort, Rochester, Campaspe, Murray Valley, Robinvale, Red Cliffs and Merbein, Shepparton, Torrumbarry and Central Goulburn irrigation districts. In New South Wales, the limit for trade out of the Murrumbidgee irrigation region was binding in 2008-09.

These limits also have the potential to restrict the volume of entitlements the Australian Government can purchase from any one region, potentially forcing it to purchase entitlements in other, more expensive regions.

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Recently there has been much debate on the amount of water provided to the environment in the Murray-Darling Basin (MDB). Much of this debate has focussed on the potential for current water sharing rules to lead to environmental problems, such as the extinction of the Murray Cod and the death of the River Red Gum Forests (Bennett 2008). The environmental problems associated with the overallocation of water to irrigation under current water sharing plans are likely to be exacerbated with the onset of climate change.

In light of these concerns, the Australian Government is implementing a number of reforms designed to increase the amount of water available for environmental assets in the Basin. For this reason, the government is purchasing water entitlements from Basin irrigators. Under the Restoring the Balance in the Murray-Darling Basin Program, the Australian Government has committed $3.1 billion to buying back water entitlements from willing sellers (hence referred to as the buyback) (DEWHA 2008a). The government plans to use this water to maintain environmental assets which currently do not receive adequate water supplies (DEWHA 2009a).

This report focuses on the economic implications of the $1.5 billion allocated to buying back water for the environment, between 2008-09 and 2010-11. A number of quantitative and qualitative methods have been used to provide an indication of the socio-economic effects of the buyback. Issues examined include the effect of the buyback on irrigators and their supporting communities. This report should not be misconstrued as a cost-benefit analysis, as a number of benefits and costs cannot be explicitly measured. For example, while some of the benefits of environmental assets may be measured, there are likely to be unquantifiable non-market benefits.

Introduction

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2· The Australian Government has decided more water needs to be allocated to the

environment in light of substantial and ongoing damage to water dependent ecosystems, and the potential for climate change to exacerbate these effects.

· Compared with other more regulatory based alternatives, the buyback will tend to reduce the cost of this redistribution to the community.

· The current buyback involves the purchase of $3.1 billion of water for the environment. The Australian Government has also allocated $5.8 billion for investment in water saving infrastructure.

· The Australian Government has been primarily using competitive tenders to buy water to increase environmental flows since 2007-08.

· When considered in the context of broader water policy changes, the main effect of the buyback is to bring forward reductions in irrigated activity that would have otherwise occurred when the new sustainable diversion limits are introduced under the new Basin Plan.

· The buyback provides a mechanism for irrigators to adjust their business in light of likely future reductions in diversion limits, and the opportunity to achieve more immediate progress in the recovery of environmental water.

· While the buyback has received widespread support among economists, some commentators have raised concerns over the effects on the operation of water markets and the welfare of some regional communities.

· This assessment examines these concerns and factors influencing the cost effective acquisition of environmental water.

Murray-Darling Basin overview

Basin featuresThe Murray-Darling Basin is located in eastern Australia and accounts for around 14 per cent of Australia’s land mass and 10 per cent of its population. Agriculture dominates land use, accounting for nearly 90 million of the Basin’s 106 million hectares. These 90 million hectares produced around 39 per cent ($15 billion) of Australia’s gross value of agricultural production ($38.5 billion) in 2005-06 (ABS 2008).

The Basin accounts for 65 per cent of Australia’s irrigated land and 66 per cent of Australia’s agricultural water use (ABS 2008). The largest activities by irrigated land use were pasture (717 000 hectares), cereals (329 000 hectares) and cotton (247 000 hectares). This pattern is also

Background

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reflected in irrigation water use (figure 1), with most water being devoted to annual activities, including pasture and annual crops. Less than 15 per cent was allocated to perennial activities in 2005-06.

In 2005-06, the gross value of irrigated agricultural production (GVIAP) in the Basin was around $4.6 billion. This is around 44 per cent of the total value of irrigated agricultural production in Australia ($10.5 billion). The largest activities for GVIAP were dairy ($938 million), fruit ($898 million), cotton ($797 million) and grapes ($722 million) (ABS 2008). Recently released experimental estimates of GVIAP using new methodology by the ABS indicate that Basin GVIAP was $5.5 billion in 2005-06 and $4.9 billion in 2006-07 (ABS 2009). The methodology used to generate these estimates may be adopted for future ABS releases.

The distribution of irrigated activities in the Basin varies between the northern and southern regions. These differences are attributed to factors such as differences in soil type and climate, and differences in the reliability of irrigation water supplies, including the availability of groundwater. For example, around 80 per cent of horticultural activities are located in the southern Basin because its climate is suited to many varieties of horticultural crops and the regulated southern river system provides relatively more reliable access to water, which is essential for permanent plantings.

This report divides the Basin into 18 Natural Resource Management (NRM) regions, as classified by the Australian Government Land and Coasts team (map 1). They are similar to those used by the CSIRO in their Sustainable Yields project. Where some regions extend beyond the boundary of the Basin (such as Western), effects are only considered for those parts of the regions contained within the Basin. Furthermore, the Australian Capital Territory (ACT) has been excluded from the analysis.

Basin environmental assetsThere are some 30 000 wetlands in the Basin, with most located on private land (map 2). Sixteen of these wetlands are listed as internationally important under the Ramsar Convention on Wetlands and about 220 are listed in the Directory of Important Wetlands in Australia. Large wetlands systems occur along the Darling River and its tributaries, including the Paroo Overflow Lakes, Narran Lakes and the Gwydir Wetlands. There are also major floodplain forests along the Murray River including Barmah-Millewa and Gunbower. Many of the floodplain wetlands and forests have been degraded, with some suffering significant loss of area over recent decades because of changes in flooding and land use (CSIRO 2008). These assets may benefit from increased environmental flows. The environment may also benefit from increased end of system flows (at the Murray mouth in South Australia).

Water use in the Murray-Darling Basin, by activity 2005-061

Other 6%

Vegetables 2%

Fruit 5%

Grapes 7%

Cotton 20%

Cereals 10%

Rice 16%

Pasture (not incl. dairy) 17%

Dairy 17%

Source: ABS 2008.


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map Murray-Darling Basin, by NRM region1

0 300

kilometres

Source: ABS 2008.

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Existing system of environmental water flowsUnder the current system of environmental water provision, water for the environment is mainly provided under regional water sharing plans. These plans are often complex, with rules varying across regions. For example, in the Murrumbidgee, there is a minimum flow requirement of 300 megalitres a day at Balranald (located near the end of the Murrumbidgee River). In addition, there are daily release rules whereby inflow must be released up to some threshold (560 megalitres a day for Blowering Dam and 615 megalitres a day for Burrinjuck Dam), after which remaining inflow may be allocated to irrigation. There may be further releases from Burrinjuck Dam between April and October based on a rule that considers daily inflow, dam levels and climatic conditions. Another type of environmental provision in the Murrumbidgee is the Environmental Water Allowance (EWA). This water is released with the approval of the NSW Minister for Climate Change and the Environment – often for specific reasons, such as wetland inundation, fish or bird breeding, and water quality management. EWAs can be stored for a limited time, and accrue if the previous year’s provisions were low

Source: CSIRO 2008.


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or environmental releases were not carried out (Water Sharing Plan for the Murrumbidgee Regulated River Water Source 2003).

In addition to the allowances set out in regional water sharing plans, the environment also receives water from dam spills and in some regions the environment also has conventional water rights. For example, the New South Wales Government has been buying water entitlements for the environment through the Riverbank program. Private groups have also been established to buy water, including the Waterfind Environment Fund, which is associated with the Waterfind water market exchange, and the Nature Conservation Water Trust, which is associated with the NSW Nature Conservation Council (Bennett 2008). These groups are similar in function to a number of non-profit private organisations that acquire environmental water in the United States, such as Oregon Water Trust and Washington Water Trust (Landry 1998). This analysis will only focus on the Australian Government’s environmental water purchasing program.

Consumptive water managementWhile environmental water is mainly allocated under regional water sharing plans, water use by irrigators is managed through the use of water access entitlements and temporary water allocations (hereafter referred to as allocations). Irrigators hold water entitlements, which are ongoing rights to exclusively access a portion of water from a specified consumptive pool, as defined under the relevant water plan. In any given year, irrigators who own entitlements receive an allocation which is specified as a percentage of an irrigator’s entitlement. For example, if an irrigator has a 1000 megalitre entitlement, a 70 per cent allocation would allow the irrigator to physically access 700 megalitres of water in that year. Hence, allocations provide temporary access to physical water, while entitlements provide permanent access to a share of consumptive water.

There are many different types of entitlements, which often differ in their reliability and location. Annual or seasonal allocations are determined based on the availability of water in the current season, and are often updated as the year progresses. There are two main classes of entitlement in the Basin: high and low reliability entitlements. Priority is given to high reliability entitlements over low reliability entitlements. In general, water is allocated to high reliability entitlements first, with remaining water allocated to low reliability entitlements. In each Basin state, high and low reliability entitlements are named differently, as indicated in table 1. In South Australia, there is only one class of entitlement, which is considered to be of high reliability.

Water markets currently exist for both entitlements (permanent trade) and allocations (temporary trade). These rights can be traded via a number of mechanisms including through a public water exchange, through a water broker, through an irrigation authority, or privately between water users. The Australian Government has primarily used a tender mechanism to purchase entitlements for the environment under the buyback to date.

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A case for government interventionWhile regional water sharing plans are currently providing some water to the environment, there is evidence to suggest that there may be significant benefits from providing additional water to the environment. Some of the more significant environmental problems threatening the Basin include the potential extinction of the Murray Cod, closures of the mouth of the River Murray, blue-green algal outbreaks in the Darling River, shrinkage of the Macquarie Marshes, and the death of River Red Gum Forests along the Murray (Bennett 2008).

Given the nature of environmental water, there may be an economic rationale for the government to intervene to acquire this water. Many of the environmental assets in the Basin are on public land and therefore the government has a responsibility to ensure they are appropriately watered. For those environmental assets on private land, in the absence of any government intervention, there could be insufficient water allocated to these assets. This is because many of the benefits from watering environmental assets are often public in nature. As a result, it is difficult to identify or exclude any third parties from benefiting from these assets. Where payment for environmental flows is voluntary, individuals will have an incentive to free ride on the payments of others as some of the benefits are non-excludable (for instance, individuals may benefit simply from knowing the wetland is receiving some water). As such, relying on private entities to provide environmental water is likely to lead to the under provision of environmental water.

A case for the buybackThe buyback involves irrigators voluntarily selling water entitlements to the Australian Government for environmental use, but is not the only means of acquiring water for the environment. Other potential options include administratively reducing each irrigator’s entitlement or directing farmers to apply less water per hectare. The difficulty with these approaches is that the large volume of information (on enterprise-specific benefits and costs) required by the government to make these directions is usually not available, and would need to be continually updated.

In contrast, the buyback leaves the decision of whether to use, sell or conserve water by investing in water savings technologies to irrigators, who best know their individual circumstances. Given the Australian Government is likely to be a significant buyer in most water markets, the buyback is likely to reduce the volume of water available for irrigation. This will lead to an increase in the price of water entitlements, which will in turn create an incentive for irrigators to sell water or to invest in more efficient irrigation technologies. This

1 Entitlement classification

high reliability low reliability

QLD High priority Medium priorityNSW High security General securityVIC High reliability Low reliability


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market-based approach to acquiring additional environmental water will facilitate autonomous adjustment within the irrigation sector based on the opportunity cost of water. This will minimise the costs incurred by the irrigation sector by allowing irrigators who can make water available to the government at least cost to do so. This means that the buyback, if well run, will tend to reduce the cost of sourcing environmental water compared with other, more regulatory-based alternatives. The theory underpinning the buyback is discussed in detail in appendix A.

Buyback in the context of broader water policyThe buyback is not the only avenue being pursued to acquire additional environmental water. The buyback forms part of a larger program to acquire additional water through a mix of purchases and water savings from investments in irrigation infrastructure. Moreover, a new body has been created to identify new diversion limits for consumptive water.

Basin PlanOn 15 December 2008, amendments to the Water Act 2007 commenced, giving effect to the Intergovernmental Agreement (IGA) on Murray-Darling Basin reform. The IGA provides for the establishment of the Murray-Darling Basin Authority (MDBA) as the agency responsible for developing a Basin Plan that will establish sustainable diversion limits and an Environmental Watering Plan by 2011. Currently, surface water diversions for irrigation are limited by ‘the Cap’, which was determined on the basis of historic use rather than sustainability (MDBA 2009). The new sustainable diversion limits will come into effect as existing water sharing plans expire (beginning in 2014 in Queensland, New South Wales and South Australia, and in 2019 in Victoria). The new sustainable diversion limits are to take into account the potential effects of climate change and overallocation (Wong 2008).

Water for the Future PlanTo assist in the transition to the new sustainable diversion limits, the Australian Government, under the Water for the Future Plan (WFF) (DEWHA 2008a), has committed to a number of options for increasing environmental provisions, most importantly:

· investing in rural water projects that save water by upgrading irrigation systems under the $5.8 billion Sustainable Rural Water Use and Infrastructure (SRWUI) Program

· buying back water entitlements from willing sellers under the $3.1 billion Restoring the Balance in the Murray-Darling Basin Program.

More than $3.5 billion of SRWUI funding has been committed to Australian Government water infrastructure initiatives, and for priority water infrastructure projects in South Australia, New South Wales, Victoria, Queensland and the ACT. Water savings from these infrastructure initiatives will be shared between irrigators and the government. This includes $650 million of SRWUI funding committed to projects put forward by private irrigation infrastructure operators. In addition, the Australian Government recently announced that $300 million of the SRWUI

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funding will be used to fund investments in on-farm irrigation efficiency improvements in the Lachlan and southern connected Basin (Wong 2009). Water savings from these investments will be shared between the environment and irrigated agriculture. Similarly, savings from private irrigation infrastructure projects will be shared between irrigators and the government. The SRWUI and buyback programs will reduce the gap between current extraction levels and the new sustainable diversion limits. These new limits start to come into effect in 2014 in all Basin states except Victoria (2019), as existing water sharing plans expire. This project focuses on the buyback component of the WFF plan, and only on the first $1.5 billion of expenditure on entitlements.

In assessing the potential effect of the buyback, it is important to understand what would be likely to happen without the buyback. In the absence of the Water For the Future program, irrigators and governments would have shared any reductions in water availability under the new Basin Plan at the time those reductions came into effect. This would occur according to the risk framework set out in the National Water Initiative (2004) and amendments under the Intergovernmental Agreement on Murray-Darling Basin Reform (2008). Under these risk sharing arrangements, the risk of a reduction in the size or reliability of water allocations will be distributed such that:

· water entitlement holders are liable for reductions because of climate change· government is liable for reductions because of policy change· water entitlement holders and government are liable for reductions because of

improvements in knowledge as to what is an environmentally sustainable level of extraction (government only becomes liable for reductions that occur on or after 1 January 2015).

Under the buyback, irrigators will enter into a market transaction whereby they receive an agreed price for any entitlements they sell to the Australian Government. Moreover, the buyback will provide water for environmental use earlier than would have otherwise been the case.

In assessing the potential effect of the first $1.5 billion of expenditure under the buyback, it is important to understand what would happen in the absence of this expenditure. Assuming the volume of water acquired for the environment for $1.5 billion plus investments in irrigation infrastructure is less than the reduction required to reduce current levels of extraction under the new Basin Plan, the buyback will bring forward reductions in access to irrigation water, and hence irrigated activity, from the date at which these new sustainable diversion limits (SDLs) come into effect. Under these circumstances, the buyback would therefore have no effect on irrigated activity beyond the date the new sustainable diversion limits are to come into effect.

While there is a risk that the buyback could lead to purchases in excess of what is needed to meet new SDLs in some regions under the new Basin Plan, this risk is mitigated by provisions of the Water Act 2007, which allow the Commonwealth Environmental Water Holder to sell water entitlements, though under very strict conditions. Restrictions on the trading of Commonwealth Environmental Water Holdings are set out in Section 106 of the Act.


15

Implementation of the buybackThe initial round of tenders was announced in February 2008, with a $50 million budget for the 2007-08 financial year. Entitlement owners were invited to submit an Expression of Interest (EOI) in selling entitlements, specifying among other things, a quantity and price. The government’s reserve price was not made public. These EOIs were not legally binding, so irrigators could withdraw their EOI up until the contracts were exchanged. The focus of the tender was on surface water entitlements, rather than groundwater entitlements or temporary surface water allocations. DEWHA assessed the offers according to their cost, the capacity to deliver the water to targeted environmental assets, as well as the priority of these assets and their water requirements.

Across the Basin, around 360 gigalitres of entitlements were offered for sale in the first round. While not all of the $50 million budget was spent in 2007-08 (because of withdrawn offers and other factors preventing trade), around 25 gigalitres of entitlements were purchased, accounting for 0.4 per cent of issued entitlements in the regions where water was purchased. High reliability entitlements accounted for around one-quarter of purchases (see box 1). After adjusting for the average yield of entitlements, the long-term cap equivalent (LTCE) of these purchases is around 16 gigalitres (see appendix B for a discussion of LTCEs). The average cost of high reliability entitlements was $2200 a megalitre, while the average cost of low reliability entitlements was $1100 a megalitre. Taken together and using cap factors to adjust for differences in average yield, the average cost of entitlements acquired in 2007-08 was $2300 per LTCE megalitre. Of the $37 million spent on the tender, approximately 56 per cent was spent in New South Wales and 41 per cent in Victoria. By contrast, only $1 million (3 per cent) was spent in South Australia (DEWHA 2008b).

A second round of water entitlement purchases began in September 2008 and closed in June 2009, with tenders running concurrently in the northern and southern Basin, and the Australian Government purchasing entitlements in both regulated and unregulated systems. Regulated systems are those in which stream flows are controlled by managed releases from a water storage, such as a dam or weir. In unregulated systems, stream flows are uncontrolled. Rather than waiting until the closing date, the government advised participants in the southern Basin of outcomes throughout the duration of the tender process. By the completion of the 2008-09 tender round, most Basin water purchasing districts had been included in the tender process.

box 1 High and low reliability entitlements

In the first round of the buyback, three-quarters of entitlements purchased (in the southern Basin) were low reliability entitlements while the remainder were high reliability entitlements. High reliability entitlements are more expensive, but provide more water in dry seasons per megalitre of entitlement than low reliability entitlements. In comparison, low reliability entitlements are likely to be a cheaper option to satisfy environmental needs that require sporadic flooding than high reliability entitlements, sometimes piggybacking on natural flood events. The optimal mix of high and low reliability entitlements will be determined by the marginal benefits and costs of these entitlements. The optimal mix will differ between regions if these benefits and costs vary.

16


To date, the only exception to using tenders to purchase entitlements occurred in September 2008, when the NSW Government purchased Toorale Station with substantial funding assistance from the Australian Government. Toorale had a mix of water entitlements and floodplain harvesting rights. While the Australian Government made a contribution toward the NSW Government’s purchase of the station, the entitlements are currently owned by the NSW Government, which will hold them in trust for the Australian Government until the relevant water sharing plan is finalised. The purchase will return an average of 20 gigalitres of water to the Darling River (DEWHA 2008c).

The Water for the Future Plan allows groups of irrigators to work with their water provider to develop proposals to sell their water entitlements and decommission shared irrigation supply infrastructure. This is intended for situations where water providers are looking to sell water and obtain water savings from decommissioning infrastructure.

In time, the water acquired through the tenders will be managed by the Commonwealth Environmental Water Holder in accordance with the Environmental Watering Plan, which will be developed by the Murray-Darling Basin Authority in consultation with state governments and stakeholders. Until this plan is developed, the water will be delivered ‘to protect and restore key environmental sites in the Basin that need water, such as internationally significant wetlands’ based on advice from the Environmental Water Scientific Advisory Committee – a panel of scientific experts appointed to advise on the use of environmental water (DEWHA 2008d).

MotivationWhile the buyback has received widespread support among economists, a number of concerns have been raised over the effects on water markets and the welfare of some regional communities.

Before examining some of the concerns, it should be noted that the buyback is considered by many water experts and economists to be central to increasing environmental provisions. For example, Quiggin (2008) argues that:

‘At least since the National Water Initiative in 2004, it has been clear that the problems arising from overallocation of water in the Basin could be addressed only if governments were willing to buy water rights back from irrigators’.

Other commentators have made similar arguments. In his discussion of the precursor to the current program, Watson (2007) noted that:

‘By accepting the case for limited buyback of irrigation licences following decades of political infatuation with irrigation, the plan advanced by the Commonwealth represents a decisive and overdue shift in the overall direction of irrigation policy’.

Conversely, some commentators have been critical of the buyback. For example, Young and McColl (2008) argue that increases in water prices could damage the water market:


17

‘Buying water for the environment to achieve the volume proposed threatens the viability of the entire water market … The result would be an increase in water prices to the extent that no irrigator would be able to compete with the environment’s water purchaser. The entitlement market would be wrecked and any structural adjustment that required the purchase of a water entitlement financially impossible.’

In response to Young and McColl’s argument that the buyback will price irrigators out of the market, there is some evidence that entitlement prices did increase in many regions between 2007-08 and 2008-09, which coincides with the Australian Government’s first major entry into the entitlement market. However, there are many factors affecting entitlement prices, so it is difficult to identify any specific contribution the buyback made to these increases, especially over such a short period.

The risk that the buyback will lead to a substantial increase in entitlement prices needs to be considered in the context of the time frame over which these purchases are made and asset fixity. The risk of a blowout in prices will increase the shorter the time frame over which these purchases are made and the higher the level of asset fixity encountered when buying water. The 10 year time frame over which these purchases are being made should help mitigate this risk. Moreover, the allocation of water between different activities in the Basin (see figure 1 in chapter 2) suggests that asset fixity should not be a major problem, with most water being allocated to annual activities such as cereals and pasture, where asset fixity is likely to be relatively low.

Asset fixity is a more significant issue for irrigators engaged in activities that require large fixed investments with little or no salvage value. While all irrigators are likely to experience asset fixity to some extent (e.g. an irrigation channel traversing an irrigators property is likely to have little alternative use other than to deliver water), irrigators engaged in perennial activities may experience significant levels of asset fixity (e.g. trees and vines). Figure 1 indicates that less than 15 per cent of water in the Basin is allocated to perennial acivities.

In addition to the effects that are transmitted through the water market, there may be negative effects on rural communities, especially if the buyback results in reduced agricultural production. These concerns were expressed by Ray Stubbs, Executive Officer RAMROC (2009 pers. comm.):

‘Acquisition and removal of water entitlements from the region, coupled with the predicted climate change water shortages in the southern Murray-Darling Basin, are likely to adversely impact on food production capacity, with consequent impacts on businesses, population, services etc in communities already suffering from prolonged drought conditions, removal of government services and consequent population decline trends.’

This assessment will examine these concerns and discuss options for the design and implementation of purchase mechanisms. Hyder Consulting (2008) has already conducted a review of the initial round of tenders. That assessment found that:

· the short-term effects of water availability on prices were taken into account in the implementation of the pricing strategy

18


· water purchase decisions were appropriate within the context of the first year, and gave due consideration of value for money

· the offer price and the value of each purchase for priority environmental assets were the main drivers in the decision-making process.

The Hyder review concluded that the program had been efficient in its purchases. The current assessment looks forward at the next $1.5 billion of expenditure, so the effects are likely to be more substantial.

Organisation of the reportChapter 3 contains the methodology used to estimate the effect of the buyback. Interested readers can refer to appendix A for an outline of the economic theory underlying the buyback (including a discussion on both pricing theory and auction theory), while a more detailed description of the methodology is presented in appendix B. General results are presented in chapter 4, with full results presented in appendices C, D and E. Community effects of the buyback are discussed in chapter 5, with factors that could potentially influence the cost of the buyback being discussed in chapter 6. Chapter 7 contains a conclusion and a summary of key findings. Appendix F presents a discussion of possible factors influencing the likelihood of irrigators to participate in the market, and how this may vary between regions, based on ABARE irrigation survey data. Regional profiles for all 18 NRM regions are presented in appendix G.

19

3· This assessment is primarily a quantitative analysis. Where the data required for a

quantitative analysis are unavailable, the assessment is complemented by qualitative analysis.

· In addition to the baseline scenario in which no policy intervention is implemented, three buyback scenarios are examined which involve purchasing 5, 6 and 7 per cent of surface water entitlements across the Basin.

· Three further scenarios are also included to place the buyback in perspective. These include identifying: the one-off across the board increase in productivity that would be necessary to fully offset the effect of the buyback on agricultural production; the across the board increase in commodity prices necessary to fully offset the effect of the buyback on agricultural production; and changes in agricultural production associated with the recent drought.

· The main model used in this assessment was the Water Trade model, which gives a stylised representation of irrigated agriculture and water markets in the Basin. The Water Trade model was used to estimate changes in agricultural output. These changes were then used in AusRegion (a model of the Australian economy) to estimate the resulting changes in regional and national output. Subsidiary models were used to complement the analysis.

· There are a number of limitations with the models used in this assessment, which need to be taken into consideration.

ScenariosThe scenarios examined in this report are outlined in table 2. Scenario 1 is the baseline against which other scenarios are compared. It is the ‘no policy intervention’ scenario, and assumes no change to current water sharing rules and no environmental water purchasing program. However, this scenario does simulate moderate climate change to reflect the environment in which the Australian Government is buying water. The extent to which climate change affects water availability is based on the ‘C mid’ scenario from the CSIRO Sustainable Yields Report. The CSIRO ‘C mid’ scenario assumes a medium level of global warming by 2030 (based on CSIRO modelling) and current development (see CSIRO 2009). Water use is also constrained by institutional arrangements, such as water sharing rules. Land constraints are based on ABS data. Scenario 2 is the main buyback scenario, which corresponds to the Australian Government purchasing 6 per cent of surface water entitlements from each region in the Basin (except South West QLD). South West QLD has been excluded from the analysis as the Paroo and Warrego river systems comprising this region have been identified by the CSIRO Sustainable Yields Project (2008) as not significantly affected by water resource development.

While this assessment is not intended to forecast the level and pattern of purchases under the buyback, it is important that any scenarios examined are broadly realistic. Therefore, the scenarios were based on results from the first round of the tender conducted in 2007-08,

Methodology

20


where the average yield adjusted cost of water was $2300 a megalitre (see appendix B for an explanation of how yield adjusted prices are derived). This assessment examines the effects of the first three years (from 2008-09 inclusive) of spending under the buyback, which is approximately $1.5 billion of purchases. Using the average yield adjusted cost of entitlements from the first round of the tender and the net present value of budgeted expenditure, the Australian Government would be able to buy entitlements that would yield around 627 gigalitres of long-term cap equivalent (LTCE) water each year. This is equivalent to purchasing around 6 per cent of surface water entitlements from each region in the Basin (with the exception of South West QLD) and would appear to be a plausible scenario under the Australian Government buyback program. The actual yield in any given year will depend on how many entitlements the Australian Government holds and the mix of entitlements, as allocations vary by region and level of reliability. Scenarios 3 and 4 are intended to represent lower and upper bounds. Scenario 3 is equivalent to the Australian Government purchasing 5 per cent of entitlements in each region (523 gigalitres LTCE) at an average price of $2760 a megalitre. Scenario 4, in turn, is equivalent to the government purchasing 7 per cent of entitlements in each region (732 gigalitres LTCE) at an average price of $1970 a megalitre.

Scenarios 5, 6 and 7 are intended to place the buyback in perspective. Scenario 5 identifies the one-off across the board increase in total factor productivity (TFP) necessary to offset the reduction in GVIAP that is estimated to occur under the main buyback scenario (scenario 2). Total factor productivity (TFP) is defined as a ratio of a volume of total output to a volume of total input use. TFP growth measures changes in total output that are not accounted for (or cannot be explained) by changes in total inputs. The purpose of scenario 6 is to identify the across the board increase in commodity prices that would be needed to offset the reduction in GVIAP that is estimated to occur under the same buyback scenario (scenario 2).

Scenario 7 is included in the analysis to identify the effect of the current drought on irrigated agricultural production. Annual diversions were used to define the recent period of drought in the Basin. According to data from MDBC Water Audit Monitoring Reports (1997-2008), annual irrigation diversions have fallen substantially since 2002. Average annual diversions were around 11 000 gigalitres between 1985 and 2001, falling to around 7800 gigalitres between 2002 and 2006. In 2007-08, diversions fell to 4500 gigalitres.

2 Buyback scenarios

% of entitlements irrigation increase in total increase inScenario purchased drought factor productivity commodity prices

1 baseline 0 N N N2 buyback 6 N N N3 lower bound 5 N N N4 upper bound 7 N N N5 productivity 6 N Y N6 commodity prices 6 N N Y7 irrigation drought 0 Y N N


21

FrameworkThis section outlines the analytical framework used to investigate scenarios 1 (the baseline) and 2 (the main buyback scenario). The methodology used to evaluate the other scenarios is discussed at the conclusion of this section.

Figure 2 shows the overarching methodology (see appendix B for more detailed explanations of the various models). To better understand the agricultural effects of the buyback, scenario 2 was introduced to the Water Trade model as a 6 per cent reduction in surface water availability in every region (except South West QLD), relative to scenario 1. Groundwater availability was assumed to be unchanged and as such, to the extent that irrigators can substitute groundwater use for surface water use, the effect of the buyback will be overstated by the model. The capacity for irrigators to substitute groundwater for surface water is not currently known and is a potential area for future research. In many Basin regions there is an embargo on issuing new groundwater licences. For instance, in the Upper Murray Alluvium an embargo on new licences has been in place since 2000, and the Mid Murrumbidgee Alluvium has

been similarly embargoed since 2002 (DWE 2008a, 2008b). However, even in these regions there may be some capacity for irrigators to increase their use of water from licensed bores, where groundwater allocations are in excess of current usage. The Water Trade model was used to estimate the change in agricultural output, change in land and water use, and change in water prices.

The adjustments in the Water Trade model are limited. There are only three inputs and no alternative technologies. Given this lack of flexibility, ABARE used an enterprise level dairy model to illustrate some of the more detailed adjustments that an enterprise may undertake to mitigate the effects of the buyback. These adjustments included changes in pasture mix, feed regime and herd size. The dairy model was run with different levels of water availability, to identify conditions under which these adaptations become viable.

As mentioned above, the Water Trade model was used to estimate the change in water prices as a result of the buyback. Preliminary simulations revealed that market demand for water was relatively unresponsive to water prices, implying that the buyback could have a significant effect on water prices. An econometric analysis of survey data was used in conjunction with a literature review to evaluate these findings (see appendix B).

Agric

ultu

ral e

�ect

sCo

mm

unity

e�e

cts

Water Trade model• agricultural output• resource use

AusRegion model• gross regional product• gross domestic product

• resource prices

Dairy model• pasture mix• feed mix

Input demand model

demand

• disaggregated agricultural input

Econometrics• water demand elasticities

Regional case studies • economic and social analysis

Methodology2

22


The effects on regional communities are also relevant. The AusRegion computable general equilibrium (CGE) model was used to estimate changes in regional and national output (environmental benefits were not taken into account). The estimated changes in agricultural output derived from the Water Trade model were used as inputs into AusRegion. In a sense, this is not an ideal way to examine the regional effects. With changes in agricultural production as exogenous in the simulation, AusRegion cannot account for feedbacks between agriculture and the rest of the economy. However, it does capture the first round (flow-on) effects of a contraction in agricultural production on the rest of the economy. The other challenge is how to treat the payment to irrigators who sell their water entitlements in the CGE modelling process (see box 2 for assumptions).

ABARE also developed an input demand model to obtain a more disaggregated understanding of the community effects which could occur under the buyback. Like AusRegion, the simulation was based on changes in agricultural output estimated by the Water Trade model, which were then used to examine changes in expenditure on inputs by farm businesses. The extent to which farm business inputs were locally sourced was briefly examined.

There will inevitably be community effects that cannot be modelled. To address this limitation, ABARE visited industry representatives and local councils to gather information on the economic linkages between agriculture and regional communities (such as downstream processing activities) and the potential social implications of changes in economic conditions as a result of the buyback.

The methodology discussed above was used to estimate the effects of scenario 2, relative to the baseline, scenario 1. The other scenarios were not modelled in as much detail. For example, the direct economic effects of scenarios 3, 4, 5 and 6 were evaluated using the Water Trade model, whereas the flow-on effects were not. Scenarios 3 and 4 were modelled as reductions

box 2 Modelling payments for water entitlements

It is assumed that the Australian Government’s payment for water entitlements in each region is equal to the quantity of entitlements sold multiplied by the average cost of water. Hence, the yield adjusted price of entitlements is assumed to be uniform across the Basin. This payment is assumed to be made to households in the region. As there is no distinction in AusRegion between farming and non-farming households, it is assumed that the payment is spread across all households in the region. To the extent that farm households selling their entitlements have different saving or spending behaviour from other households on average, or the responses from a small number of large payments differ from a large number of small payments (because of income effects and so on), this assumption could bias the results.

Alternatively, the payments could be invested by irrigators in their farm business. This is assumed not to be the case for most irrigators who have access to capital markets. That is, these farmers will have an incentive to invest as long as they can cover the opportunity cost of capital (the market rate of interest). However, some farmers may have problems accessing capital markets and may resort to selling entitlements to raise capital.

Finally, it is assumed that households receiving payments stay in the region, either on their properties or in regional towns.


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in surface water availability of 5 and 7 per cent, respectively. Scenario 5 was modelled by taking a 6 per cent reduction in surface water availability and gradually increasing farm total factor productivity across all activities until the effect of the initial reduction in surface water availability on GVIAP was offset. Scenario 6 was modelled by taking the same reduction in surface water availability and gradually increasing commodity prices across the board until the effect of the initial reduction in surface water availability on GVIAP was offset. Scenario 7 was not modelled, with changes in agricultural output as a result of drought being estimated using econometric methods instead (see box 3 for details).

box 3 Estimating the effect of drought on irrigated output

Unfortunately, only national production data were available. Accordingly, the analysis was restricted to industries in which irrigated production in the Basin contributes a large percentage of total Australian production: rice and cotton.

For the relevant industries, ABARE’s annual national production data (1985 to 2006) were used to run regressions which included a linear trend and a dummy variable for the 2002 to 2006 drought. The estimated coefficient on the dummy variable was then used to estimate the recent shortfall in agricultural production from the long-term trend. Although other factors, such as falling cotton prices, may also have influenced agricultural production, the entire shortfall was attributed to drought.

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4· Water Trade modelling results suggest that the buyback will lead to a 2.4 per cent decline in

the gross value of irrigated agricultural production (GVIAP) across the Basin.· Regional effects vary, with GVIAP in horticultural-intensive regions in the southern Murray

(Mallee and South Australia) declining less than in more broadacre orientated regions further upstream, such as the Murrumbidgee and NSW Murray.

· Industry level results indicate that the largest reductions in GVIAP occur in broadacre cropping (includes grains, rice, canola and lucerne crops), whereas there is a modest decline in the value of irrigated horticulture.

· The buyback is estimated to lead to a 1.6 per cent reduction in irrigated land use in the Basin, with this land moving into dryland production.

· The largest declines in irrigated land use are estimated to occur in the northern Basin and the NSW Murray region.

· The model results suggest that, as a result of the buyback, entitlement prices could be around 13 per cent higher in the northern Basin and around 18 per cent higher in the southern Basin than they would have been in the absence of the buyback.

· AusRegion modelling suggests that the effects of the buyback will be almost indistinguishable at the national level and 0.1 per cent or less of gross regional product (GRP) for five of the seven aggregated regions in the Basin.

· It is important to put the buyback into perspective, and not confuse its likely effect with other factors affecting irrigators, such as drought and ongoing rural adjustment pressures.

· It is estimated that the recent drought reduced GVIAP for rice by around 70 per cent, compared with an estimate of around 8 per cent under the buyback. GVIAP for cotton is estimated to have fallen by around 47 per cent as a result of the drought, compared with an estimate of 1.9 per cent under the buyback.

· Moreover, total factor productivity (TFP) for broadacre agriculture grew at an average rate of 1.5 per cent a year between 1977-78 and 2006-07. If productivity in the irrigation sector grew at this rate, it would take around two years to offset the effect of the buyback on GVIAP.

The results presented below are based on several ABARE models. Some models, such as AusRegion and the Water Trade model, have been developed over a number of years, and therefore are relatively sophisticated, whereas other models are less complex in nature. The benefits and limitations of these models are discussed in detail in appendix B.

In general, the results generated in this analysis should be interpreted with caution, as the modelling involves a number of simplifying assumptions. Moreover, the benefits from increased environmental provisions have not been considered in this analysis. Hence, this assessment should not be misinterpreted as a cost-benefit analysis of the buyback.

This chapter examines the effects of the Australian Government purchasing 6 per cent of surface water entitlements from all regions within the Basin, except South West QLD. Unless

Results


25

stated otherwise, all estimates are deviations from the baseline (scenario 1), in which no water is purchased. As stated earlier, the baseline assumes that water availability is affected by climate change and is based on the ‘C mid’ scenario from the CSIRO Sustainable Yields Report. The results presented here are for adjustments over the medium to long term and compare one equilibrium (before the buyback) with another (after the buyback). Moreover, the model results presented in this chapter are aggregated for each region and industry (disaggregated results are reported in appendix C).

Irrigated agricultural outputThe reduction in GVIAP in the Basin as a result of the Australian Government purchasing 6 per cent of surface water entitlements (scenario 2) is estimated to be around 2.4 per cent (table 3). This measure of GVIAP includes the value of agricultural production from land shifting into dryland production as a result of the buyback scenario. The overall percentage change in GVIAP is less than the change in surface water availability associated with the buyback (6 per cent) because of the assumption that irrigators can trade water from lower to higher value uses, and that irrigators’ access to groundwater remains unchanged.

The estimated reductions in GVIAP were highest in the Murrumbidgee and NSW Murray regions, with reductions of around 3.1 and 3.8 per cent, respectively. The smallest reduction was in the Lachlan, with an estimated fall of approximately 1.3 per cent. The composition of activities in these regions was a major factor in these changes, with horticultural-intensive

regions such as the Mallee and South Australian MDB sourcing water from upstream regions, thus reducing the impact on agricultural production. Overall, water trade reduced the total effect on irrigated production. The availability of groundwater also influenced the results. For example, the Lachlan region, for which groundwater accounts for a substantial proportion of water use, was less sensitive to reduced surface water availability because of the buyback than other regions.

The Wimmera region shows a decline in GVIAP of 3 per cent. This result is based on the assumption that the initial area of land irrigated in the Wimmera was consistent with 2001 and 2006 agricultural census data (the Water Trade model uses these data as baseline data for land use). However, since 2006 irrigation in the regulated Wimmera irrigation system has effectively ceased, with irrigators receiving no water allocations in recent seasons.

3 Percentage change in gross value of irrigated agricultural production, by region (6 per cent scenario)

change %RegionMaranoa–Balonne –1.8Condamine –1.7Border Rivers Qld –1.6Border Rivers–Gwydir –1.7Namoi –2.1Central West –2.4Western –2.3Lachlan –1.3Lower Murray–Darling –1.8Murrumbidgee –3.1Murray –3.8North East –2.3Goulburn Broken –2.3North Central –2.6Mallee –1.9Wimmera –3.0SA MDB –1.7

Total –2.4

Source: Water Trade model.

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In May 2009, it was announced that the Wimmera irrigation system would permanently close (Beilharz 2009). This event, which is unrelated to the buyback, is likely to substantially reduce the level of irrigated agricultural production in the Wimmera. As such, the Water Trade model results recorded for the Wimmera region in this report should be interpreted as results indicative of the effect of the buyback if irrigators had continued to receive water from the regulated irrigation system.

At the industry level, irrigated cropping was estimated to experience the largest reductions in GVIAP, with GVIAP for the rice industry declining by 7.9 per cent (table 4). Cotton was the exception among irrigated cropping industries, with a relatively modest 1.9 per cent decline in GVIAP. The dairy industry was estimated to be moderately affected, experiencing a 3.2 per cent reduction. By contrast, horticultural industries were relatively unaffected, with GVIAP estimated to decline by around 1.2 per cent for perennial horticulture, 1.1 per cent for grapes and by 0.3 per cent for vegetables.

At the industry level, GVIAP effects are driven by changes in production costs. These costs tend to increase as a result of the buyback,

causing some enterprises to cut back production or shut down entirely. In the model, changes in the costs of production are driven by: changes in regional land and water prices; the initial shares of those resources in total cost, and the potential to substitute between land and water. For example, rice production (the activity with the largest reduction in GVIAP) tends to use substantial volumes of water relative to other inputs and there is little opportunity to substitute away from water in the production process.

Water useDespite the Australian Government’s purchase of 6 per cent of surface water entitlements, the overall reduction in total water use (i.e. surface and groundwater) was only 5.1 per cent (table 5). This is because of some irrigators having access to groundwater, which was assumed to remain unchanged, and the ability of some irrigators to trade water between regions. While it is assumed that water cannot be traded between the northern and southern Basin, it is assumed that water can be traded within regions, and between regions in the north and south where these regions are physically connected. Unfortunately it was not possible to reflect, within the project timeframe, the reality that northern catchments are largely disconnected from a water trading perspective. Consequently, the results that are presented for the northern Basin can be thought of as representing an example of a targeted buyback where more water is purchased in some regions and less in others (with a total 6 per cent reduction in availability across the northern Basin).

4 Percentage change in gross value of irrigated agricultural production, by industry (6 per cent scenario)

change %IndustryCotton –1.9Dairy –3.2Grains –5.0Grapes –1.1Canola and lucerne –5.7Perennial horticulture –1.2Rice –7.9Vegetables –0.3

Total –2.4



27

At the industry level, the changes in water use were broadly consistent with changes in GVIAP, with relatively large reductions in water use for those crops with the largest reductions in GVIAP (table 5). For instance, the estimated reduction in water use for irrigated grains was approximately 9.4 per cent, while the estimated reduction for irrigated rice was around 8.2 per cent. In contrast, water use for cotton and dairy fell by 3.3 and 4.5 per cent, respectively, while water use for perennial horticulture fell by around 2 per cent.

These changes in water use are driven by higher water prices. All activities within a region are exposed to the same changes in water prices, but some activities are more sensitive to higher water prices. The price elasticity of demand for irrigation water measures the percentage change in water use associated with a 1 per cent increase in water prices. These elasticities are expected to differ between activities, with the main determinants being the extent to which water can be substituted for other inputs and the share of water in total costs (Appels et al. 2004). A review of these elasticities is provided in subsequent sections.

In terms of regional effects, the modelling suggests that in the northern Basin water use will decline most heavily in regions where substantial quantities of canola and lucerne are grown, such as Maranoa–Balonne and Condamine, where water use falls by more than 7 per cent (table 6). Water is traded from these regions into regions that are more orientated towards cotton and horticulture production, such as Border Rivers-Gwydir and Namoi. In the southern Basin, the modelling suggests that water

use and irrigated activity are likely to decline more heavily in the upstream regions as water is traded downstream to the horticultural-intensive regions in the lower southern Basin. Broadly speaking, it tends to be less expensive (in terms of foregone income) for irrigated broadacre enterprises to reduce water use than for irrigated horticultural enterprises. As a result, there is a tendency for water to trade from regions heavily engaged in annual cropping activities to horticultural-intensive regions.

5 Percentage change in water use, by industry (6 per cent scenario)

change %IndustryCotton –3.3Dairy –4.5Grains –9.4Grapes –3.2Canola and lucerne –6.8Perennial horticulture –2.2Rice –8.2Vegetables –2.1

Total –5.1


6 Percentage change in water use, by region (6 per cent scenario)

change %RegionMaranoa–Balonne –7.3Condamine –7.6Border Rivers Qld –6.0Border Rivers–Gwydir –4.0Namoi –3.8Central West –4.7Western –4.6Lachlan –3.7Lower Murray–Darling –5.5Murrumbidgee –6.3Murray –7.6North East –4.8Goulburn Broken –4.2North Central –4.5Mallee –3.3Wimmera –5.9SA MDB –4.0

Total –5.1


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Responses to reductions in water allocationsThe results presented above indicate that water use is likely to decline, but generate no insights into what measures could be used to conserve water at the enterprise level. One option available to irrigators is to reduce the area of land irrigated. Figure 3 illustrates how a representative dairy farmer (in this instance from the Goulburn Broken region in northern Victoria) is likely to alter their land use decisions in response to changes in allocations (expressed in percentage terms) attached to their water entitlement (see appendix D for an application to the Loddon-Avoca and Victorian Murray regions).

While the dairy model used in this analysis holds fixed capital and area operated constant, it may be useful in providing some insights into how irrigators respond to a reduction in water availability in the event they sell part of their water entitlement. Under these circumstances, the x axis in figure 3 denotes changes (expressed in percentage terms) in the irrigator’s volumetric entitlement assuming the irrigator always received a 100 per cent allocation.

Initially, most land is allocated to irrigated pastures (it is assumed in this analysis that the total area of land on the representative dairy farm is fixed). As surface water allocations fall, irrigated land is gradually converted into dryland pasture (figure 3). The substitution towards dryland pasture reduces overall pasture production. It is worth noting that the modelling predicts that as water allocations decline the area of land used to irrigate annual pasture declines faster than the area of land used to irrigate perennial pasture, with the irrigator ceasing to irrigate annual pasture when allocations fall to around 30 per cent. It is important to note that in the model

the reduction in water availability is known to irrigators in advance, and is permanent. As such, the adjustments in the model may differ from those observed when water shortages are one-off and random.

Given the dairy model estimates presented in figure 3, and the changes in water use for the Goulburn Broken dairy industry estimated using the Water Trade model under the 6 per cent buyback scenario (-3.8 per cent), the buyback is estimated to lead to a 3.5 hectare reduction in irrigated pasture (and conversely, a 3.5 hectare increase in dryland pasture) for the representative 110 hectare dairy farm in this region.

The modelling also indicates that farmers reduce herd size as allocations decline and become more reliant on feeding supplementary grain (from around 170 animals at a 100 per cent allocation to around 100 animals at a 30 per cent allocation) (figure 4). The analysis also suggests that farmers will try to maintain stock numbers at

Irrigated pasture response to change in water allocations Goulburn Broken – a representative farm

3

120

100

60

80

20

40

water allocations for irrigation (%)

ha

020406080100

dry

perennial

annual

Source: ABARE Dairy model.


29

around 100 when allocations fall below 30 per cent. Given that the buyback is only expected to reduce water use by dairy farmers in the Goulburn Broken region by around 3.8 per cent, it is estimated that the representative farmer in this region would only reduce herd size by around 4 animals.

Overall, the model results suggest that as allocations (and hence on-farm pasture availability) are reduced, a farmer’s most profitable option initially is to reduce herd size, as the costs of purchasing additional feed grains outweigh the loss in milk production and farm income (figure 4). As water allocations fall to less than 50 per cent, it remains profitable to continue reducing herd size. However, additional supplementary grain feeding is needed to meet the reduction in on-farm feed availability and energy requirements of the

dairy herd (figure 5). Once water allocations fall below 30 per cent, the most profitable option for a farm in this model is to maintain herd size by meeting the shortfall in on-farm pasture production with supplementary feed grains.

Land useOverall, the area of land irrigated in the Basin is estimated to decline by 1.6 per cent under the 6 per cent buyback scenario. This land moves into dryland agricultural production, with the total area of dryland production increasing as a result.

The reductions in irrigated land use are largest in the NSW Murray (4.8 per cent), the Condamine (4.8 per cent) and Maranoa-Balonne (4.6 per cent). In contrast, the area of land irrigated in the South Australian MDB, North East (VIC), North Central (VIC), Goulburn Broken and Lachlan (NSW) remained basically unchanged (table 7).

Herd composition response to change in water allocations Goulburn Broken – a representative farm

4

200

160

80

120

40


020406080100

yearlings

heifers

milkers

herdsize


Supplementary feed grain response to change in water allocations Goulburn Broken – a representative farm

5

2.5

2.0

1.0

1.5

0.5


020406080100

t/head


30


Water pricesThe Water Trade model estimated that the buyback will result in water prices being around 13.1 per cent higher in the northern Basin and around 17.5 per cent higher in the southern Basin than they would have been in the absence of the buyback. These price estimates are based on changes in average water availability. The increase in the southern Basin was larger because of the composition of activities and the scarcity of groundwater. The southern Basin comprises a greater share of horticultural and dairy activities, for which the demand for water tends to be less responsive to changes in water prices than other activities, and hence reductions in water supply lead to larger increases in price. Also, groundwater is much more accessible in the northern Basin than in the southern Basin.

These results suggest that the demand for irrigation water is highly inelastic in the long run, with the model implying a price elasticity of demand for the Basin of -0.3. This means that a 10 per cent increase in

water prices would only lead to a 3 per cent reduction in water use. To assess the plausibility of this result, ABARE reviewed the available literature on demand elasticities for irrigation water. This review identified research that suggested there were distinct differences in elasticity estimates generated using mathematical programming models and econometric models. For instance, Scheierling et al. (2006) found in a meta analysis of 24 US studies on the elasticity of demand for irrigation water that studies using econometric analysis yielded on average higher elasticity estimates than those estimated by mathematical programming models. This may be a result of the limited range of responses to reduced water availability accessible to producers in most irrigation water demand models. Another study by Wheeler et al. (2008) also states that, consistent with international findings, all estimates of Australian price elasticities based on mathematical programming models have found the demand for irrigation water to be very inelastic at low prices (short run elasticity estimates ranged from -0.02 to -2.81, depending on the range of water prices). In contrast, an econometric analysis by Bell et al. (2007) estimated short run water demand elasticities for various irrigated industries in the MDB range between -0.8 and -1.9, which would imply that the buyback would lead to a price increase of less than 8 per cent. It is assumed that there are no external effects associated with changes in water use. A review of the literature by Appels et al. (2004) identified irrigation water demand elasticities ranging between -0.1 and -3, depending on water prices (elasticities will tend to increase as water prices increase). None of the studies investigated by Appels et al. covered irrigated agriculture in the northern Basin.

7 Percentage change in irrigated land use, by region (6 per cent scenario)

change %RegionMaranoa–Balonne –4.6Condamine –4.8Border Rivers Qld –3.0Border Rivers–Gwydir –0.9Namoi –1.0Central West –2.2Western –3.1Lachlan –0.7Lower Murray–Darling –2.0Murrumbidgee –2.1Murray –4.8North East –0.6Goulburn Broken –0.3North Central –0.7Mallee –1.3Wimmera –1.1SA MDB 0.0

Total –1.6



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Given the difference between water demand elasticities generated by the Water Trade model and various econometric analyses, ABARE estimated demand elasticities using an alternative data set and methodology to assess the plausibility of the elasticities implied by the production functions used in the Water Trade model (see appendix B for more information on this data set and appendix E for detailed regression outputs). The results are shown in table 8. The estimated demand elasticities were more varied than in Bell et al. (2007), but followed a similar general pattern. At any given price, short run enterprise level demand for irrigation water is more inelastic for grapes than dairy and wheat. The differences between the translog and quadratic elasticity estimates in table 8 can be attributed to differences in the functional form assumed for the production functions, with the quadratic estimates being much more inelastic that the translog estimates. The quadratic estimates are also more inelastic than those presented in Bell et al. (2007). For example, a 10 per cent increase in water prices is estimated to reduce water use for grapes by around 0.6 per cent under the quadratic model (evaluated at $100 a megalitre). Applied to wheat enterprises, the estimated effect is around 7 per cent. Interestingly, the demand elasticities derived using the quadratic model suggest that the demand for water for dairy and wheat is undefined at $300 a megalitre. This implies that irrigators engaged in these activities will sell any allocation they receive at $300 a megalitre or above.

The range of estimates generated in ABARE’s econometric analysis and identified more widely in the literature suggests that the elasticity estimates generated by the Water Trade model are at the low end of the range. This is particularly the case when it is taken into consideration that the model estimates are long run estimates and the econometric estimates are short run estimates (long run demand elasticities should be higher than short run elasticities because irrigators have more time to adjust their operations to lower water availability over the long term). Given these concerns, the Water Trade price estimates should be interpreted with caution, and may overstate the effect of the buyback on water prices.

Recent price data for entitlements indicate that prices increased in most regions in the MDB between 2007-08 and 2008-09, although there were a few instances where prices remained static or decreased over this period. It is difficult to attribute any specific contribution by a single factor to these increases, as prices will be affected by a range of factors, including long-term expectations regarding input and output prices and irrigation water reliability. While there is some uncertainty over the effect of the buyback on entitlement prices, the volume of water entitlements likely to be purchased under the buyback suggests that prices will be higher than they would have been in the absence of the buyback.

8 Short run enterprise level demand elasticities a

grapes dairy wheat

translog quad translog quad translog quad

Allocation price ($/ML) 50 –0.29 –0.03 –2.00 –0.24 –5.25 –0.27 100 –0.36 –0.06 –2.00 –0.64 na –0.74 300 –0.60 –0.22 –2.00 na na na

a The columns ‘translog’ and ‘quad’ relate to different functional forms, whereas ‘na’ indicates that no irrigation water was demanded at that price.

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One of the consequences of purchasing entitlements during a severe drought is likely to be higher allocation prices. Purchasing entitlements for the environment will reduce the volume of allocation water available for irrigation in the event these entitlements have allocations attached to them. The nature of the demand curve for allocations is such that demand is likely to be very inelastic at low allocation levels, suggesting that allocation prices will be sensitive to any reduction in the supply of allocations available for irrigation.

The actual effect of government entitlement purchases on the allocation market in a given year will depend on the volume and mix of entitlements purchased. If the government purchases mostly low reliability entitlements, then in a wet year it is likely they will hold a larger percentage of the total Basin water allocation than in a dry year. Conversely, if the government purchases mostly high reliability entitlements, then it is likely they will hold a larger percentage of the total Basin water allocation in dry years. Generally speaking, if allocation levels are low and the entitlements held by the government receive a significant proportion of the total allocation of water against all entitlements held in the Basin, the effect on prices of government entitlement purchases on the allocation market will be relatively significant compared with years with higher allocation levels or lower allocation to government entitlements relative to the total allocation. This reflects the trade-off between using water for irrigation or the environment. In low allocation years, the demand for water for irrigation is likely to be very inelastic, so the opportunity cost of using water for environmental flows in these years is relatively high.

Regional effectsWhile the buyback scenario modelled has the potential to have a significant effect on some towns in the Basin, the overall effects at the broad regional level are likely to be small relative to the total size of the regional economies. At the national level, the estimated reduction in gross domestic product (GDP) in response to a 6 per cent buyback of surface water entitlements is less than 0.01 per cent. Regions reported in this section are based on aggregations of NRM boundaries (table 9).

Table 10 shows estimates of the permanent reduction in gross regional product (GRP) associated with a 6 per cent purchase of surface water entitlements. Northern NSW, Western NSW, Riverina and Queensland MDB are estimated to be least affected in terms of overall economic activity, with GRP falling by less than 0.1 per cent. This is because, relative to the more seriously affected regions, the effects on regional agricultural production tend to be smaller, and/or agricultural and related manufacturing activities account for a smaller share of GRP. The largest effects are estimated to occur in the South Australian MDB, where GRP is estimated to decline by 0.32 per cent. It should be noted that GRP estimates are only partial estimates of changes in welfare, and do not include any social costs or benefits associated with the buyback, or any environmental benefits from increased environmental flows.

While the buyback would be expected to reduce irrigated output, the sale of entitlements would be expected to increase disposable incomes, and hence consumption, in regions where those sales occurred (assuming irrigators selling entitlements remain in these regions).


33

The AusRegion results (table 11) suggest that this is the case, with consumption increasing slightly in most regions.

The economic effects can also be examined at a more disaggregated level. Table 12 shows the estimated change in annual expenditure on farm inputs per head of regional population under the 6 per cent buyback scenario. These estimates have been derived using ABARE survey data to estimate regional average input expenditure per dollar of output (see appendix B for more information). The estimated reduction in annual expenditure on farm inputs varied substantially across regions, with the NSW Murray and Murrumbidgee regions substantially affected (with reductions of $148 a head and $94 a head, respectively), whereas the North East (VIC) and Lachlan regions were minimally affected (with reductions of $2 a head and $6 a head, respectively). The results have been reported on a per head basis to provide some indication of the level of dependence of different regions on irrigated agriculture.

Table 12 also illustrates disaggregation by major inputs. Of particular interest are inputs that tend to be sourced locally, and those which include a substantial value-added component. These include inputs such as hired labour, contracts, and repairs and maintenance. For instance, the decline in annual expenditure on regional hired labour per head (of regional population) tended to be relatively greater in horticultural regions, with this expenditure declining by $15 in the South Australia MDB, by $11 in the Mallee and by $10 in the Lower Murray-Darling. This is because horticulture tends to be more labour-intensive than other irrigated industries. NSW Murray experienced the largest overall reduction in farm expenditure per person, including declines of $10 a person on contracts

9 Regional aggregations used in the AusRegion model

NRM region AusRegion aggregation

Maranoa–Balonne Queensland MDBCondamine Queensland MDBBorder Rivers QLD Queensland MDBBorder Rivers –Gwydir Northern NSWNamoi Northern NSWCentral West Northern NSWWestern Western NSWLower Murray–Darling Western NSWLachlan Northern NSWMurrumbidgee RiverinaMurray RiverinaNorth East North East VictoriaGoulburn Broken North East VictoriaNorth Central North West VictoriaWimmera North West VictoriaMallee North West VictoriaSA MDB South Australian MDB

10 Change in real GRP/GDP

% RegionNorthern NSW –0.02Riverina –0.07Western NSW –0.06North East Victoria –0.15North West Victoria –0.10Queensland MDB –0.04South Australian MDB –0.32

Australia (total) <-0.01

Source: AusRegion.

11 Change in aggregate consumption

% RegionNorthern NSW 0.04Riverina 0.19Western NSW 0.66North East Victoria 0.07North West Victoria 0.19Queensland MDB 0.03South Australian MDB 0.06

Source: AusRegion.

34


and $18 a person on repairs and maintenance. Likewise, the neighbouring Murrumbidgee region experienced the second largest overall reduction in farm expenditure per person. These relatively large effects are likely to be because of the disproportionate effect of the buyback on the value of rice produced in these regions.

Sensitivity analysisThe main scenario considered in this analysis represents a 6 per cent purchase of surface water entitlements from every Basin region, except South West QLD. To examine the sensitivity of the models to changes in surface water purchases, the effects of lower bound (5 per cent or 523 gigalitres) and upper bound (7 per cent or 732 gigalitres) scenarios were also considered. The estimated Basin-wide changes in GVIAP are reported in table 13 along with the main scenario. The estimated changes in GVIAP are essentially linear over the range considered. That is, buying back 5 per cent (as opposed to 6 per cent) of entitlements is estimated to reduce the effect on GVIAP by 0.4 percentage points, whereas increasing the buyback to 7 per cent is estimated to increase the effect on GVIAP by 0.4 percentage points.

12 Change in annual expenditure on farm inputs - dollars per head of regional population a

hired repairs and chemicals contracts labour fertiliser fodder fuel maintenance other total

Maranoa–Balonne –3 –3 –3 –4 –1 –4 –4 –24 –45Condamine 0 –1 –1 –1 0 –1 –1 –5 –9Border Rivers QLD –2 –2 –2 –2 –1 –3 –2 –14 –27Border Rivers–Gwydir –2 –1 –1 –2 –1 –3 –2 –10 –21Namoi –2 –2 –1 –2 –1 –4 –2 –13 –27Central West –2 –1 –1 –1 –1 –3 –2 –9 –20Western –3 –1 –4 –2 –17 –2 –2 –17 –49Lower Murray–Darling –2 –4 –10 –3 0 –1 –2 –22 –44Lachlan 0 0 0 0 0 –1 0 –3 –6Murrumbidgee –4 –6 –4 –8 –3 –9 –6 –53 –94Murray –8 –10 –4 –13 –6 –15 –18 –73 –148North East 0 0 0 0 0 0 0 –1 –2Goulburn Broken –1 –3 –4 –2 –24 –3 –5 –34 –76North Central 0 –1 –2 –1 –12 –1 –2 –17 –37Mallee –2 –4 –11 –3 0 –1 –3 –23 –47SA MDB –3 –6 –15 –5 –1 –3 –5 –37 –75

a Wimmera was removed because of data inconsistencies between the models.


35

Buyback in perspective

Productivity It is important to consider the effects of the buyback in the context of other factors affecting irrigated agriculture. For instance, productivity growth has been the major driver of growth in Australia’s agricultural sector. In fact, agricultural productivity growth has typically exceeded productivity growth in the rest of the economy, with broadacre TFP growing on average at a rate of 1.5 per cent a year between 1977-78 and 2006-07. Average annual TFP growth for dryland cropping over the same period was higher at 2.1 per cent (Nossal et al. 2009). Continued productivity growth has the potential to negate the effect of the buyback on GVIAP.

Analysis revealed that a one-off across the board increase in productivity of between 2.5 per cent and 3 per cent would be sufficient to fully offset the effect of the buyback. Alternatively, if irrigated productivity growth was assumed to be similar to broadacre, it would take around two years to offset the impact of the buyback. The GVIAP effects would not be fully offset for all industries and regions. For instance, rice growers would require a larger increase in productivity to offset the decline in GVIAP for irrigated rice.

The Australian Government’s $5.8 billion investment in upgrading irrigation systems under the SRWUI Program is expected to reduce the volume of water required by irrigators to produce a given level of output, and assist in offsetting the effect of the buyback on water availability for irrigation.

Commodity pricesAgricultural commodity prices can vary substantially from season to season, while over time, even small changes to the growth rate of commodity prices can make a substantial difference to the profitability of farm businesses. Another scenario considered in the analysis was: what across the board increase in commodity prices would be necessary to offset the reduction in Basin-level GVIAP as a result of the buyback? Assuming the trend decline in commodity prices continues, commodity prices will only have to be 1.3 per cent higher over the long term than they would have been in the absence of the buyback, to offset the effect of the buyback on GVIAP. The increase in prices is less than the decrease in GVIAP because of the positive effect higher prices has on irrigated production. It should be noted that the GVIAP effects would not

13 Changes in GVIAP under different scenarios

average total yearly surface water change in yield of purchased changeentitlements purchased GVIAP entitlements in Basin water prices % % GL %

5 –2.0 523 13.86 –2.4 627 16.77 –2.8 732 19.5


36


be fully offset for all industries and regions. For instance, grain growers would require a larger increase in commodity prices to offset the decline in GVIAP for irrigated grains.

DroughtAnother way to place the effects of the buyback in perspective is to compare its effects with the recent drought. The estimated changes in GVIAP during the drought are shown in table 14 for selected commodities. As discussed in the methodology section, the changes reported are likely to be substantially because of the drought, although there are other contributing factors that have not been accounted for. Table 14 suggests that the drought had a much greater effect on some irrigated activities than the likely effect of the buyback. For instance, the recent drought is estimated to have reduced the value of irrigated rice production by around 70 per cent, compared with around 8 per cent under the buyback. The estimated effect of the drought on cotton production was also substantial (47 per cent) compared with the buyback estimate (1.9 per cent). It is important to note that the estimated effects on production because of drought are short-term estimates, while the estimated effects on production because of the buyback are medium to long-term estimates, and hence are not directly comparable.

14 Effect of drought on selected agricultural industries

estimated change in 95% confidence GVIAP during interval for change estimated effect of water the drought in GVIAP during drought buyback on GVIAP % % %IndustryRice –68.2 (–88.3, –48.1) –7.9Cotton –47.4 (–66.8, –28.0) –1.9

37

5· While the overall effect of the buyback is likely to be relatively small, this may not be spread

evenly across the Basin. · The extent to which individual economies will be affected will depend on the decline

in irrigated activity and the relative importance of irrigated agriculture to the regional economy.

· Some smaller towns dependent on irrigated agriculture will be more exposed to a change in irrigation farm expenditure than larger regional centres that have a broader economic base.

· While the effect on regional farm household expenditure is uncertain, regional expenditure on farm inputs is likely to decline.

· The effect on downstream processing and regional services is likely to be relatively minor unless a minimum feedstock or population threshold is breached.

This chapter examines the potential for the buyback to affect regional communities. The investigation involves the use of both qualitative and quantitative analytical techniques, with the qualitative analysis drawing on economic theory, recent literature, and discussions with community and industry representatives.

Unfortunately there is little quantitative data available that can provide a reliable guide to the likely flow-on effects of the buyback to regional communities. Despite these limitations, the study has been able to use irrigation farm survey data to construct a simple model that provides some indication of the direct effect of the buyback on regional demand for farm inputs. The study has also drawn on broadacre survey data about the level and pattern of farm household and input expenditure in rural towns. These towns ranged in size from less than 1000 to more than 50 000 residents, with the results expressed as expenditure per town resident. This indicator provides a measure of the relative dependence of different sized towns on farm expenditure.

A major factor in analysing the effect of any policy is distinguishing between the effects of the policy and other factors. These complexities were highlighted in a study by Frontier Economics (2007) on water trading, where it was stated that it is ‘difficult to separate the effects of water trading from the background of structural adjustment’. In another study, Stubbs (2008) noted that there are many factors external to an agricultural community that influence and shape its social, environmental and financial wellbeing including climate change, commodity prices and technological change. For example, Australian farmers have had to contend with a long-term decline in their terms of trade, and more recently, an extended drought. ABS data suggest that farmers have responded to these external factors by increasing the size of their enterprises (the number of farmers in the Basin has fallen by around 50 per cent over the past 50 years),

Community effects

38


while there has been a significant drift in population away from small towns and remote areas to cities and larger regional centres, where employment opportunities are greater, since the mid-1990s. These changes have been driven by factors other than the buyback, and are likely to reflect autonomous adjustment by irrigators as they respond to external factors such as changing world prices, new technologies and drought.

This chapter begins with a brief analysis of regional population and employment trends in the MDB to help identify the environment in which the buyback will take place. This is followed by a discussion on the importance of scale when investigating flow-on effects to regional communities, which is in turn followed by an examination of how different groups of irrigators are likely to be affected by the buyback and how these impacts are likely to affect farm household demand and demand for inputs to the farming operation. The potential for a decline in irrigated output to affect downstream processing industries is then investigated. The chapter concludes by identifying some community concerns over the buyback’s potential to trigger a loss in regional services.

Basin population analysisThe Australian population grew by around 12 per cent between 1996 and 2006 (table 15). Over the same period, the population in the Basin grew by more than 5 per cent, to 2 million people. The increase in the Basin population ranged from nearly 12 per cent in the SA MDB to slightly more than 1 per cent in the NSW MDB. The population in the Victorian MDB and Queensland MDB increased by around 6 per cent and 9 per cent, respectively.

The ABS has disaggregated Basin population data by level of remoteness. These data indicate there has been a significant increase in the number of people living in cities and major regional centres in the Basin between 1996 and 2006 (an increase of more than 10 per cent), whereas there was a significant decline in the number of people living in small towns and remote areas (see table 16). Furthermore, the ABS data identified a significant decline in the

15 Population change - Murray-Darling Basin 1996-2006

population change

1996 2001 2006 1996-2001 2001-2006 1996-2006 ‘000 ‘000 ‘000 % % %

New South Wales 766 755 776 –1.4 2.7 1.3Victoria 543 551 576 1.5 4.6 6.1Queensland 200 204 217 2.3 6.3 8.8South Australia 100 104 112 3.3 8.5 12.1Australian Capital Territory 297 308 323 3.7 4.9 8.8Murray-Darling Basin Total 1 906 1 922 2 005 0.9 4.3 5.2

Total Australia 17 753 18 769 19 855 5.7 5.8 11.8

Source: ABS 2008.


39

number of people employed as farmers in the Basin over this period (down by 10 per cent). In fact, there has been a continuing trend in Australian agriculture towards fewer and larger farms, with the number of farms declining from a peak of more than 200 000 in the mid-1950s to slightly more than 110 000 in 2000. Over the same period, the average farm size rose from around 2000 hectares to nearly 4000 hectares (DAFF 2008).

While the ABS data do not distinguish between dryland and irrigation farmers, it is likely that both groups would have faced pressures to adjust over this period. Moreover, the ongoing drought would have had a similar effect on irrigators engaged in annual activities relying on lower reliability water as on dryland farmers. The rice industry is a good example of how the drought has significantly affected annual irrigated activities (see discussion later in this chapter).

Overall, the ABS data on population and employment appear to indicate a significant decline in the number of farmers in the Basin, and the number of people living in small rural towns and remote areas. The extent of these changes suggests that farmers and the communities in which they operate have been subject to significant and ongoing pressure to adjust in response to external factors such as changing world commodity prices, new technologies and drought. When considered in the context of these pressures, the buyback is likely to have a relatively modest effect.

Importantly, the ABS employment data also identified a significant increase in the number of people employed in other occupations in the Basin (up by 18 per cent) between 1996 and 2006. These data, coupled with data on the drift in population away from smaller towns and remote areas toward cities and larger regional centres, suggest that some of the labour released as farmers rationalised their farming activities may have been absorbed by other sectors in cities and larger regional centres.

16 Population change, by remoteness - Murray-Darling Basin 1996-2006

population change

1996 2001 2006 1996-2001 2001-2006 1996-2006 no. no. no. % % %

Major cities 324 940 349 370 358 560 7.5 2.6 10.3Inner regional 958 530 975 110 1 059 260 1.7 8.6 10.5Outer regional 548 060 525 180 527 880 –4.2 0.5 –3.7Remote 60 580 58 120 50 910 –4.1 –12.4 –16.0Very remote 13 500 13 890 7 950 2.9 –42.8 –41.1

Source: ABS 2008. For definition of remoteness categories please see ABS 2006, Statistical Geography Volume 1 – Australian Standard Geographical Classification.

40


The importance of scaleScale is important when analysing the effect of the buyback on regional communities. For example, the AusRegion CGE results presented earlier suggest that the buyback will have a fairly modest effect at a broad regional scale. Many of these regions contain a mix of small and medium-sized towns, as well as larger regional centres. These larger regional centres tend to have a broad economic base, which will act to cushion the effect of a decline in irrigated activity. However, some of the smaller towns may be less resilient to a decline in irrigation, with some communities concerned that such a decline could lead to a decline in economic activity and to a loss in local services, including access to health and educational services. Hence, the effects of the buyback are likely to be more substantial in smaller regional towns than in larger regional centres.

ABARE has undertaken some research that highlights the importance of scale. While this research focused on broadacre farmers, it is likely to be indicative for the irrigation sector. The study focused on farm expenditure in country towns, which is likely to be an important source of income for many non-farm businesses. This research found that while most broadacre farm expenditure tends to occur in larger towns (with 70 per cent of total farm expenditure occurring in towns with more than 5000 residents), the economies of small towns were highly dependent on this expenditure (Levantis 2001). When expressed in terms of expenditure per town resident (one measure of economic dependency), annual total farm expenditure per resident ranged from $200 for towns with more than 50 000 people, to $12 000 for towns with less than 1000 people. This suggests that larger towns are likely to be well placed to withstand any reduction in farm expenditure associated with the buyback, whereas some smaller towns that are highly dependent on irrigation may be more vulnerable, particularly those towns with a population of less than 1000.

Effect on irrigatorsBuying water for the environment will increase the price of allocations and remaining entitlements and reduce the volume of water available for irrigation. The increase in the price of water will influence irrigators’ water use and trade decisions, which will influence the level of irrigated activity and the intensity of agricultural activity within a region more generally. It will also affect farm household incomes and wealth.

To distinguish between the various effects, it is useful to divide the irrigation enterprise into two distinct entities: the farm household and farm business. The farm household is assumed to supply inputs such as capital and labour to the farm business, which combines these inputs with other inputs such as seed and fertiliser to produce agricultural products. While the farm household and farm business are considered as separate entities under this framework, the two are closely linked. The National Farmers’ Federation recently emphasised this link by noting that ‘some 98.5 per cent of Australian farm businesses are family owned and operated…with issues affecting the farm business invariably affecting the family unit and vice versa’ (DAFF 2008).


41

While the effect of the buyback is likely to be positive for many irrigators, the effect on individual irrigators will vary, depending on their initial demand for water and the number of entitlements held.

The buyback will cause the value of water entitlements held by most irrigators to increase. Irrigators who sell entitlements will realise this increase in value, whereas those who do not sell will still experience an increase in the book value of their water entitlements, but this increase will be unrealised in the short term. However, this latter group may benefit in the short term by being able to borrow against the increased value of their assets, which could fund additional investments or increased household consumption. Irrigators who do not own entitlements, and rely entirely on accessing the temporary market to purchase allocations for irrigation, will be worse off because their incomes will decline with the increase in water allocation prices.

Irrespective of the number of entitlements held, the buyback is likely to lead to a decline in the level of water use by all irrigators, with irrigators reducing irrigation because of higher production costs, and substituting other factors for water where possible.

Overall, the effect of the buyback on regional communities will largely depend on whether it leads to a change in irrigators’ expenditure on farm inputs and household goods and services, and the availability of raw materials for any downstream processing that is undertaken locally. There may also be some positive effects in the event regional communities benefit from a healthier river system. For instance, irrigators could benefit if increased environmental flows reduced river salinity, which in turn increased the productivity of irrigated activites. There may also be benefits if increased environmental amenity stimulated demand in tourism or recreational activities.

Farm household expenditureEven if most irrigators were to gain financially from the buyback, regional communities would not necessarily benefit from an increase in household expenditure. This would depend on whether there are any changes in the pattern of household expenditure and the extent to which these items are sourced and value-added locally.

In some instances, the price offered in the buyback may be sufficiently attractive for an irrigator to not only sell their entitlement, but to also sell their land and retire. A study by Frontier Economics (2007) quoted an irrigator in the Pyramid-Boort region as saying that ‘The benefits of permanent trade for farmers are the ability to reduce some debt and retire from farming with dignity. The fact is that water rights have given farmers a source of superannuation that they wouldn’t have otherwise have had if there hadn’t been water trade’.

A major concern for some communities is that some irrigators may choose to take their capital and leave the region altogether. However, this resulting decline in expenditure is likely to be offset to some extent by farmers who would be purchasing the dryland enterprises. Unfortunately, there are no robust data available that might indicate the extent to which irrigators selling entitlements may leave a region.

42


In other cases, irrigators selling entitlements may choose to retire and settle within the region. However, these households may have different expenditure patterns to farm households, so it is uncertain what the net effect on regional household expenditure will be. For example, members of these households may choose to travel outside the region, which will be of little benefit to the local region, whereas others may build a new house, or renovate an existing dwelling in the local town, which would rely on the local building industry.

The Gannawarra Shire Council in Kerang, Victoria, recently stated that ‘if the farming sector is undergoing financial hardship, farming families spend less money [which in turn] leads to other small businesses in the area experiencing financial hardship’ (DAFF 2008). Frontier Economics (2007) has also quoted a Victorian Murray Valley irrigator as saying that water trade ‘is a market-driven exercise…and [that] there is no pressure, other than economic pressure…on people to sell or buy water’. Hence, the buyback provides an avenue to alleviate some of the financial stress felt by irrigators, and to boost household expenditure. Any net gain in regional household expenditure depends on whether there is a change in the pattern of household expenditure.

The farm expenditure data collected for ABARE’s broadacre study was separated into expenditure on household items, farm inputs and farm capital. Figure 6 shows a strong inverse relationship between the size of towns and the level of farm household expenditure in the town economy per head of town population. Towns with populations less than 1000 appear to be particularly vulnerable to a change in farm household expenditure, whereas towns with a population of more than 50 000 are more dependent on expenditure from other industries (Levantis 2001).

Farm input expenditureAn increase in the price of water will lead to a decline in irrigated output, as irrigators respond to an increase in production costs. This may be offset to some extent by the substituting of other factors for water.

The opportunities for substitution will vary depending on the activity and type of technology used. For instance, there are likely to be few substitutes for water when producing perennial horticultural commodities that are already using highly efficient irrigation technologies. However, the opportunities for substitution are likely to become more attractive as the price of water rises under the buyback, particularly in systems where water use efficiency is low. The Australian Government’s funding of irrigation efficiency improvements under the SRWUI Program will assist irrigators to adjust to lower water availability.

Farm household expenditure per head6

2.0

1.5

1.0

0.5

town population (’000)

$’000less

than 11

to 22

to 55

to 2020

to 50all

townsmore than50

Source: Levantis 2001.


43

A reduction in the amount of irrigation undertaken within a region, or the conversion of some previously irrigated land to dryland farming, is likely to lead to a decline in demand for inputs for irrigation. While there may be some increase in demand for inputs for dryland activities, the less intensive nature of dryland farming suggests this will be insufficient to offset the decline in expenditure on irrigated inputs.

ABARE has taken a first step in estimating the effect of changes in regional demand for agriculture inputs using GVIAP estimates derived from the Water Trade model and irrigation farm survey data (see chapter 2).

One possible indicator of regional vulnerability is the reduction in input expenditure per head of population. Table 17 shows the estimated change in annual expenditure on farm inputs per head of regional population under the 6 per cent buyback scenario. According to this measure, the NSW Murray and Murrumbidgee regions experienced the largest declines in expenditure. There were also significant declines in the Goulburn, Mallee and SA MDB regions in the south and in the Maranoa-Balonne and Western (NSW) regions in the north.

The analysis can be narrowed further to concentrate on changes in estimated input expenditure per head of population for inputs that are more likely to be sourced locally, and comprise a relatively large value-added component. This analysis reveals that the main

17 Change in annual expenditure on farm inputs - dollars per head of regional population (6 per cent buyback scenario) a

hired repairs and chemicals contracts labour fertiliser fodder fuel maintenance other total

Maranoa–Balonne –3 –3 –3 –4 –1 –4 –4 –24 –45Condamine 0 –1 –1 –1 0 –1 –1 –5 –9Border Rivers QLD –2 –2 –2 –2 –1 –3 –2 –14 –27Border Rivers–Gwydir –2 –1 –1 –2 –1 –3 –2 –10 –21Namoi –2 –2 –1 –2 –1 –4 –2 –13 –27Central West –2 –1 –1 –1 –1 –3 –2 –9 –20Western –3 –1 –4 –2 –17 –2 –2 –17 –49Lower Murray–Darling –2 –4 –10 –3 0 –1 –2 –22 –44Lachlan 0 0 0 0 0 –1 0 –3 –6Murrumbidgee –4 –6 –4 –8 –3 –9 –6 –53 –94Murray –8 –10 –4 –13 –6 –15 –18 –73 –148North East 0 0 0 0 0 0 0 –1 –2Goulburn Broken –1 –3 –4 –2 –24 –3 –5 –34 –76North Central 0 –1 –2 –1 –12 –1 –2 –17 –37Mallee –2 –4 –11 –3 0 –1 –3 –23 –47SA MDB –3 –6 –15 –5 –1 –3 –5 –37 –75

a Wimmera was removed because of data inconsistencies between the models.

44


horticultural regions (SA MDB, Mallee and Lower Murray-Darling) are more susceptible to a decline in demand for hired labour as a result of the buyback than other regions, whereas the NSW Murray and Murrumbidgee regions appear to be susceptible to a decline in demand for contracting activities, which in many cases are likely to be a substitute for hired labour. The NSW Murray and Murrumbidgee regions also appear to be relatively more susceptible to a decline in demand for repairs and maintenance services.

The ABARE broadacre survey data highlights the importance of farm input expenditure to smaller regional towns. The survey indicated that farm input expenditure was the main component of total farm expenditure per town resident. For example, the survey found that, for towns with a population of less than 1000, almost 80 per cent of total farm expenditure per town resident for towns with a population less than 1000 was on inputs ($9400 of a total farm expenditure of $12 000 a resident in 1998-99). The survey data also identified a distinct inverse relationship between town size and input expenditure per resident (figure 7).

A study by Frontier Economics (2007) also noted that the pattern of farm input expenditure can

vary, depending on the size and type of ‘decision making unit’ involved. For instance, ‘family farms might rely on local service providers for farm inputs such as fertiliser, contractors for harvesting and local mechanics for maintenance, [whereas] larger [corporate] farms might find it more efficient to buy some of these directly, bypassing the related industries and local suppliers’.

The ABARE study on broadacre expenditure patterns also investigated expenditure on capital items. While the data suggested that expenditure on capital per town resident generally decreased as town size increased, the pattern was less consistent than for farm household and input expenditure. The capital component also constituted a smaller proportion of total farm expenditure than the other components.

It is difficult for small towns to compete with larger regional centres for the supply of larger farm equipment, such as tractors and harvesters. A farmer in Kerang, Victoria stated that ‘all our machinery and spare parts come from Swan Hill or Echuca, because we don’t have those sorts of services in town. There is very minimal local purchase of machinery. You try to support the locals but they are always fairly dear. There is a rural supply shop in the area, chemical and herbicide and fertiliser places, but when it comes to machinery, hydraulics, trucks and spares there really isn’t anywhere in town for that’ (Frontier Economics 2007).

Given the potential for changes in expenditure to affect regional communities, an important area for future research is to identify where irrigators source their farm inputs and household

Farm expenditure on inputsper head7

10

8

6

4

2

town population (’000)

$’000less

than 11

to 22

to 55

to 2020

to 50all

townsmore than50

Source: Levantis 2001.


45

items from. One possibility would be to analyse irrigators’ expenditure patterns using data collected in ABARE’s irrigation survey.

Downstream processingThe buyback will lead to a decline in irrigated output, which could have implications for the level of downstream processing undertaken in some regions. The modelling suggests that annual activities such as irrigated rice, cotton and dairy will experience more significant declines in GVIAP than perennial activities (see table 23 in appendix C). Despite this, the largest decline in GVIAP for any individual activity in any region is 8.7 per cent (rice in the NSW Murray region).

To gain some insights into the effect of the buyback on downstream processing, and to determine whether the buyback is likely to lead to any threshold breaches whereby a facility may cease to operate, ABARE conducted a case study of the rice industry. The rice industry is particularly appropriate as all production and processing occurs within the Basin.

A processor would be expected to close down if the costs of continuing to operate exceeded any unavoidable costs in the event it closed down. Unavoidable costs exclude the salvage value of any plant and equipment that can be sold off when a plant is decommissioned.

Much of the information received from industry representatives focused on the current status of production and downstream processing in the Basin. Many processing facilities are currently either being operated below capacity or, in some instances, not operated at all. While this is of interest, the focus of this study is the effect of the buyback on downstream processing. Consistent with the Water Trade model, it is assumed that all seasons have average water availability. This means that extreme events are not considered.

Given the relatively modest effect of the buyback on irrigated activities, it is likely that its effect on downstream processing will also be relatively modest, and be reflected in a decline in demand for variable inputs such as labour, rather than in the shutting down of a processing facility. However, there may be instances where processing facilities had been operating close to their minimum threshold when allocations were close to their historical average, with the buyback tipping production below this threshold. It should be noted that the impact estimates in this report do not approximate what may happen over the next few years. For instance, if conditions remain dry, the buyback has the potential to increase water allocation prices beyond what they would have otherwise been, which is likely to see water traded away from annual activities such as rice. This will in turn affect the level of downstream processing undertaken.

RiceAccording to the Ricegrowers’ Association of Australia, the long-term outlook for the rice industry is around 800 000 tonnes a year. This is based on an expected reduction in long-term water availability because of climate change and water policy reform. This is down from an average of around 1.2 million tonnes during the 1990s, and is similar to what occurred in the 1980s.

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There are three rice processing mills in the southern Basin - Leeton, Coleambally and Deniliquin. The combined processing capacity of these mills is around 1.2 million tonnes a year. The Leeton mill has a capacity of 200 000 to 250 000 tonnes a year if operated on a three shift basis, and produces smaller packed products mainly for the domestic market. In comparison, the Deniliquin mill is the largest rice processing mill in the southern hemisphere, and has a capacity of 600 000 to 630 000 tonnes a year. It processes rice mainly for the export market.

The Leeton and Deniliquin mills can process around 800 000 to 880 000 tonnes a year, which is in line with industry expectations for future production. Given this expectation, a permanent shutdown of one mill would not be unexpected. If a mill did close down and production in any season exceeded mill capacity, SunRice has sufficient paddy storage facilities to hold rice over for processing in future years.

As stated earlier, the main effect of the buyback will be to bring forward a reduction in irrigated activity that would have occurred anyway with the introduction of the new sustainable diversion limits. This assumes that irrigators are receiving allocations that allow them to operate at or close to their historical levels of production. Given that two processing mills are likely to be able to satisfy the rice industry’s long run forecast for output (800 000 tonnes), and if this level of output is consistent with the new sustainable diversion limits, it is likely that any reduction in output because of the buyback will be reflected in a small reduction in demand for variable inputs such as labour over the transition period, rather than in the breaching of a feedstock threshold for mills.

This is in contrast to what is currently happening in the processing sector. The 2007-08 rice crop was the smallest in 80 years, yielding 19 300 tonnes from around 2000 hectares. This rice was processed at the Leeton mill, while the Coleambally and Deniliquin mills were temporarily shut down. The 2008-09 crop is expected to yield only 75 000 tonnes (ABARE 2009), which is around one-third of the Leeton mill’s capacity. This shortage in feedstock will be reflected in significantly lower employment compared with when the plant operates close to capacity. On 12 March 2009, SunRice announced a further 36 redundancies, which were mostly from its Leeton plant. Although temporarily closed, a small number of people are employed for maintenance and upkeep of the Deniliquin and Coleambally mills.

Regional services

A major concern raised in discussions with community representatives was the maintenance of regional services. Some important services such as retail, health and education are more difficult for remote communities to access. There are a diverse range of services available in larger urban centres compared with small towns or rural localities, and many people must travel to access them. As such, some community representatives are worried about the potential for the buyback to contribute to population losses, which could lead to population threshold issues for some communities. That is, as population declines, some services may become less viable in smaller towns.

One local council official from the northern Basin stated that ‘population is everything for towns like this’ because a decline in population has the potential to trigger a reduction in


47

service provision. For instance, a reduction in the number of teachers might be triggered by a reduction in the number of children enrolled in the local school. This decline in student numbers may also reduce the number of children participating in local junior sports teams below the necessary critical mass. Rural decline is often experienced as economic downturns and population declines, as well as increasing unemployment and other social changes (Coakes and Kelly 1997).

Many local community representatives in the northern Basin were also concerned about linkages between local services, noting the potential for a decline in service provision in one area to trigger a decline in services in other related areas. They noted that while reduced water availability may lead to only small initial changes in community service levels, it could potentially cause long-term changes that may be difficult to reverse (Goondiwindi shire representatives and Cotton Communities CRC 2009, pers. comm.).

While these types of concerns are legitimate, it is unlikely that the volume of entitlements purchased under the buyback alone will trigger a significant reduction in the level of service delivery for most Basin communities. However, there may be threshold issues for some particular communities related to the distribution of the buyback.

Overall effect

More detailed research can be undertaken to better understand the effects of the buyback at the community level. One possibility would be to analyse data on irrigators’ expenditure patterns using ABARE’s irrigation survey.

While this type of research may be useful, the total volume of water entitlements purchased under the buyback scenario analysed in this study will be relatively small in comparison to the total volume of water entitlements in the Basin. Hence, the effect on regional communities is likely to be relatively small. In addition, the $5.8 billion allocated to irrigation infrastructure upgrades under the SRWUI Program may assist in offsetting the adverse impacts of the buyback. Specifically, the more water savings the Australian Government can generate through the SRWUI Program, the further these investments will offset the effect of the buyback on irrigated agriculture.

The effects of the buyback will vary across the Basin, with smaller towns dependent on irrigation likely to be more adversely affected than larger towns. Different regions and towns may face different drivers of economic and social change (Pritchard 2002). The individual effects will depend on the extent of any decline in irrigated activity, and the relative importance of irrigated agriculture to the local economy.

As stated earlier, the effect of the buyback on regional household expenditure is not known, whereas regional expenditure on farm inputs is likely to decline. The buyback may also lead to a reduction in the level of downstream processing undertaken for some irrigated commodities. Given the scale of the buyback in relation to the baseline used in this analysis, the effect of the buyback in isolation is likely to be relatively minor. However, there is some potential

48


for a decline in irrigated output to breach minimum thresholds necessary for processing plants to remain open in some instances. Similarly, there is also a risk that even small declines in employment and population could reduce the viability of regional services in some communities that are particularly dependent on irrigated agriculture.

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6· The primary role of the buyback is to reallocate water to the environment.· Water purchases should be made with consideration to benefits and costs. As such, it will

be worthwhile to collect scientific and economic information on these benefits and costs. However, the amount of information necessary to make decisions using full cost-benefit analysis will generally be unavailable.

· It will be important to minimise the cost of acquiring water to achieve environmental goals. These costs include administrative and budgetary costs.

· The purchasing mechanism used has the potential to influence these costs. It is uncertain whether administrative or budgetary costs are lower when using unsolicited offers or discriminatory tenders.

· The buyback is dealing with the externality associated with overextraction. Including other externalities (e.g. salinity and water quality) in purchasing decisions has the potential to increase the cost of the buyback. In most cases, the information needed to address the externality is either unavailable or expensive to acquire. Moreover, in the event that it is decided it is worthwhile to address an externality, there are likely to be more direct instruments available.

· Trade restrictions and asset fixity have the potential to increase the cost of purchasing entitlements.

· Access to drought assistance also has the potential to slow the pace of adjustment in the irrigation sector, and possibly limit participation in the buyback.

In the two previous chapters it was suggested that the overall effect of the buyback on irrigators and regional communities is likely to be relatively minor, although the effects will vary by region and industry. The terms of reference for this study also require ABARE to investigate a number of other factors associated with the buyback. These include the effect of the government’s entry into the water market on the efficient operation of that market, and a review of the factors that could slow the pace of adjustment in the irrigation sector or limit irrigator participation in the buyback. This chapter investigates each of these issues.

Efficient distribution of water between usersTo determine how the government’s entry into the water market will affect the efficient operation of that market, it is useful to first define what constitutes an efficient distribution of water between irrigation and the environment. In the most simplistic case, where there is only one region, one class of water entitlement and where environmental purchases are not constrained by a budget constraint, the government should buy an additional entitlement if the marginal benefits from acquiring that water (the additional benefit of that entitlement

Other factors

50


for environmental uses) exceed the marginal cost (the additional cost of making that water available). The relevant marginal cost is determined by the underlying value of the entitlement to the seller (the net value received by the irrigator from using that water or selling it on the open market), the cost of raising additional tax revenue needed to fund the purchase (or value that funding would have elsewhere), and the transaction costs borne by buyers and sellers (which includes administrative and participation costs).

Expanding the analysis to include a budget constraint, multiple regions and multiple entitlement classes complicates the analysis (see box 4). A budget constraint is binding, if after spending all available funding, there remain opportunities for worthwhile purchases. Under these conditions, the government should equalise the marginal net benefit (marginal benefit less marginal cost) per dollar of spending across all types of entitlements (by reliability and region), to maximise the benefit from the funding available. There are a number of complications to the decision rules discussed above, such as uncertainty and threshold effects, but the analysis provides a reasonable starting point.

An important consideration is the extent to which the decision rules should be formalised and used to guide decisions, and the extent to which they should be used only as a broad conceptual framework. In practice, much of the information needed to implement this framework is unknown by the government and, even with considerable expense, may never be known with reasonable precision.

Valuing environmental benefitsEstimating the non-market benefits of water purchases could be difficult. Box 5 shows some of the complexities that are likely to be encountered when attempting to estimate the benefits of environmental water purchases.

While conceptually valid, undertaking robust analysis to place a dollar value on environmental benefits through non-market valuation methods could be very expensive. According to Productivity Commission Chairman Gary Banks (2009), the key ‘is to be able to better assess whether benefits are likely to exceed costs, within a coherent analytical framework, even if everything cannot be reduced to a single number or some elements cannot be quantified.’

box 4 Extension to multiple markets

In practice, the benefits and costs of buying any entitlement type will depend on purchases of other entitlement types. For example, in a connected river system where purchases from any region can satisfy an environmental goal, increased purchases from one region could reduce the marginal benefits of buying entitlements from another region. In other words, these entitlements could be reasonable substitutes. Indeed, even entitlements in disconnected systems could be substitutes if assets they water are substitutes in consumption. The interactions of benefits and costs across markets will need to be considered if the net benefits of the buyback are to be maximised. Conceptually at least, this involves making simultaneous water purchasing decisions across the Basin.


51

An alternative would be to collect scientific and economic information relevant to understanding these benefits (such as the examples given in box 5), with information being collected when the expected benefits for decision-making exceeded the costs. This incomplete information would be presented to the relevant decision-maker, with information on the costs of purchasing entitlements, to arrive at a judgment.

This type of information will assist decision-makers in determining whether the benefits from providing additional water to environmental assets exceed the costs, and could also be used to compile an index that ranks assets in terms of watering priority. This index would assist in targeting purchases which offer greater value for money (environmental benefits per dollar of funding) where environmental benefits vary with the location and type of entitlement purchased. The index could be relatively crude initially, using a simple triage

box 5 Estimating environmental benefits

Assume the Australian Government is considering buying a small number of entitlements that could be used to water a river red gum forest, with some water returning to the river. This would reduce river salinity for downstream users (compared with a situation where this water was previously used for irrigation) and water degraded wetlands, which also have recreational value. In this example the benefits are:

· the benefits of improved water quality to agriculture, which increases agricultural income and reduces expenditure on salt abatement schemes

· the benefits of improved environmental conditions, which include use values (such as recreational benefits) and non-use values (derived from knowing that the wetlands and forests are in better condition, even if the sites are never visited).

The magnitude of these benefits will be influenced by the:

· reliability of entitlements

· initial degradation of the wetlands and forests

· improvement in the ecological conditions of these sites associated with different watering regimes

· proportion and quality of return flow

· initial level of salinity

· cost of salinity mitigation

· sensitivity of agricultural production to salinity

· number of individuals visiting the wetlands and the costs of visitation

· the availability and cost of recreational substitutes

· number of people who value the existence of these sites and the strength of their preferences.

In addition, the costs and benefits of environmental flows are dynamic in nature. Moreover, it may be found that less (or more) water is needed for a particular environmental asset than has been purchased, because its response to watering is better (or worse) than was expected. As such, a purchasing mechanism that is dynamic in nature and responsive to change is important.

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approach to prioritise the allocation of water. The factors determining priority should include environmental uniqueness and the expected response from additional watering. For instance, environmental assets in good condition would be expected to show a limited response to increased watering, while some assets may have deteriorated to such an extent that additional watering may have no effect, and be identified as irretrievable. Such an index would give an internationally recognised wetland expected to respond well to additional watering a higher weighting than a nationally recognised asset expected to respond similarly. A nationally recognised asset would in turn receive a higher weighting than a regionally recognised wetland. Importantly, environmental assets that are identified as being irretrievable would receive a zero weighting in terms of expected response.

Minimising costsGiven that a full cost-benefit analysis is not possible, it is important that the government minimises the cost of acquiring water to achieve environmental goals. These costs include administrative and budgetary costs. Several factors can influence these costs, including the method used to purchase entitlements, attempts to include externalities in purchasing decisions, trade barriers, asset fixity and drought assistance.

Purchase mechanismsThere are a number of options for purchasing entitlements, which are discussed in detail in appendix A. So far, the Australian Government has mainly used (discriminatory) tenders. The government could also use an alternative form of tender, such as a uniform tender, whereby all successful bidders receive the same price (usually equal to the highest accepted bid). Alternatively, the government could make unsolicited offers. An unsolicited offer is an offer to buy an asset at a price nominated by the buyer. For example, the Australian Government could offer to buy a certain type of entitlement for $1500 a megalitre. This could be communicated through existing intermediaries such as exchanges and brokers, writing directly to entitlement owners, or advertising in regional media. This section examines the relative merits of discriminatory tenders and unsolicited offers. These purchase mechanisms will tend to converge over time, generating broadly similar outcomes. As a result, the conclusions drawn from this discussion apply mainly to the initial years of the buyback. These mechanisms will be assessed on administrative cost, budgetary cost and information revelation.

Administrative costs are the opportunity cost of resources used in running the buyback (the contribution of those resources in their next best use) plus the cost of raising additional tax revenue needed to pay for those resources. All else equal, the fewer resources used to run the buyback the better.

In this analysis, budgetary costs are the payments made to irrigators selling their entitlements. Whether the budgetary costs are higher with discriminatory tenders or unsolicited offers is ambiguous. As discussed in appendix A, the advantage of a tender is that individuals are paid only their individual bids. However, there is a risk that some individuals could bid above their underlying valuations, and hence, offset this cost advantage. Bids will also be adjusted


53

to reflect some of the costs incurred by irrigators participating in the tender. Participation costs are similar to the administrative costs, in that both are costs associated with making transactions and both are directly relevant in estimating the merits of different purchase mechanisms. If these costs are higher under a discriminatory tender than a system of unsolicited offers, unsolicited offers could become relatively more attractive. However, there is no evidence to suggest that participation costs under a discrimatory tender are higher than those faced when selling entitlements through other means (such as a public water exchange).

There is some evidence regarding the budgetary cost of tenders. According to Hyder Consulting (2008), the average cost of entitlements in the first round was slightly higher than the relevant index of market prices. It is explained in appendix A why this could happen and why, in the absence of altruism, it is unlikely the government will be able to buy substantial volumes of entitlements at less than the market price. Of course, this does not necessarily mean that the alternative mechanisms (unsolicited offers or other alternatives) would reduce budgetary costs.

Purchase mechanisms also reveal information on underlying valuations. This information enables the Australian Government to buy entitlements from individuals who value them least, which increases the efficiency of the buyback. Tenders and unsolicited offers differ in their ability to reveal this private information.

Unsolicited offers reveal whether individuals value their entitlements above or below the offer price. If individual X can make an entitlement available at a cost of $2000, while individual Y can make an entitlement available at a cost of $2500, all else equal, it would be desirable to buy from individual X before individual Y. This occurs when unsolicited offers are used, with X selling at any offer of more than $2000 and Y selling at any offer of more than $2500.

Information revelation is less precise in a discriminatory tender, with bids generally higher than individual valuations. Under a tender, individual X might submit a higher bid than individual Y despite a lower underlying value. Buying from individual Y will tend to reduce the budgetary cost but would lead to a misallocation of entitlements.

An initial misallocation may not be important if secondary trade can occur. After the buyback, individual X has a strong incentive to trade their entitlement to individual Y. In the absence of transaction costs or other barriers to trade, the government’s initial purchase (be it from individual X or individual Y) has no bearing on the final distribution of entitlements between irrigators. Conversely, with transaction costs, some (or all) of the initial misallocation may persist, and there will be costs associated with any redistribution that does occur. Hence, the importance of information revelation depends on the extent of transaction costs and other barriers to trade.

The theory underlying this analysis is general and incomplete. Experience with auction theory indicates that participant behaviour is often difficult to anticipate. For example, even though laboratory experiments had predicted bids in the multiple-round Georgia Irrigation Reduction Auction to increase over time, in reality bids decreased over five rounds (Cummings et al. 2004, cited in Rolfe and Windle 2006). Therefore, the conclusions of this discussion should be interpreted with caution.

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There is no definitive evidence to suggest that administrative or budgetary costs are lower when using unsolicited offers or discriminatory tenders. Given the level of expenditure the government has committed to purchasing water for the environment, it may be worthwhile piloting a program in a system where a market exists whereby entitlements are acquired through unsolicited offers, and comparing the administration and budgetary costs with those incurred under the current system of tenders.

Water markets in the MDB are not uniform, with the market for entitlements in the southern Basin being more mature than the market in the northern Basin. Therefore, it may be appropriate to use different purchase mechanisms in different regions. A problem likely to arise when purchasing water in regions where there is little or no trade will be the absence of a market price to guide these purchases. This will make it difficult to use unsolicited offers (or a fixed price tender), with offers likely to be either heavily oversubscribed, or alternatively, eliciting little interest from irrigators. A system of competitive tenders (either discriminatory or uniform) eliciting information from irrigators on individual valuations may be more appropriate under these circumstances. The more irrigators there are in a system, the more competitive the bids are likely to be.

Another issue is whether unsolicited offers or tenders offer advantages when attempting to target purchases. It may be desirable to target purchases where the environmental benefits from these purchases vary. For instance, it may only be possible to satisfy an instream environmental asset that does not consume water by purchasing water from irrigators located above the asset (the asset will already be benefiting from water delivered to irrigators below it). Given the nature of unsolicited offers and tenders, it should be possible to target purchases from upstream irrigators. The potential for these irrigators to hold out with the aim of achieving a better price is similar under each mechanism.

An environmental index would help decision-makers determine whether purchases from irrigators located upstream of the asset offer value for money when compared with purchases from irrigators located downstream of the asset. It should be noted that the need for an environmental index to help guide purchases is independent of the purchase mechanism used. In this example, it is assumed that purchases from upstream irrigators can satisfy two environmental assets (the additional water provided to the upstream asset is not consumed, and is therefore available for downstream use), whereas the water purchased from downstream irrigators can only satisfy one environmental asset. Similar issues will arise when attempting to compare the value for money derived from purchasing water across physically disconnected systems.

There may be significant monitoring and compliance costs in ensuring that water purchased for environmental use is actually applied to the relevant environmental assets. This is likely to be the case when purchasing entitlements in unregulated systems. Purchasing water entitlements from irrigators in unregulated systems will most likely have implications for river levels and, hence, pumping rights for irrigators located further downstream. It is likely that compliance with any changes in pumping rules will need to be monitored closely to ensure any environmental water attached to these entitlements is actually allocated to environmental assets. As is the case with the costs of developing an environmental index, these monitoring and compliance costs are also independent of the type of purchasing mechanism used.


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ExternalitiesAnother factor that could influence the cost of the buyback is the inclusion of additional externalities in purchasing decisions. Externalities are costs or benefits arising from an activity which do not accrue to the person or organisation carrying out the activity. Externalities can arise where there are missing markets, misspecified contracts or incomplete property rights. The buyback is addressing an externality that arises because of a missing or incomplete market; in this case, a market for the environmental services provided by water dependent environmental assets. The extraction of water for irrigation will reduce the volume of water available for environmental use, which could lead to environmental damage, the costs of which will not be reflected in irrigators’ returns. The buyback could also be used to address other externalities, such as externalities associated with water use. For example, irrigation in regions with highly saline return flows can increase downstream salinity, imposing costs on downstream users, the costs of which will not be reflected in irrigators returns. This externality is another example of a missing market, in this case a market for clean rivers.

Some third party effects are also transmitted through markets. These are not externalities because they are unlikely to cause inefficiencies. For example, buying entitlements for the environment will tend to increase the price of entitlements and allocations. This will generally make sellers of entitlements and allocations better off, while buyers will tend to be worse off. While these effects may have distributional relevance, the extent to which reallocating water to the environment is efficient, any change in water prices resulting from this redistribution must also be efficient. In this instance, higher water prices are just signalling the underlying scarcity of the resource, and encouraging conservation so that water can be made available for the environment.

Attempting to address externalities such as salinity through the buyback is likely to increase the cost of the buyback, as the government will need to have access to reasonable information on the magnitude of these externalities. In natural resource management, externalities often vary substantially between locations, with information on external benefits and costs often being prohibitively expensive to obtain. Moreover, targeting irrigators in regions where salinity is identified as a problem is likely to involve paying these irrigators a premium for their entitlements. This could create an incentive for irrigators that sell water out of these regions to trade water back in at the market price. Some form of restriction will need to be imposed on backtrade to maintain any additional environmental benefits, such as improved water quality. These restrictions are likely to impose additional costs in the form of increased administrative costs, as well as in terms of reduced flexibility for irrigators.

The Tinbergen Rule (1952) suggests that the number of policy goals should not exceed the number of policy instruments. Since the buyback is targeting an externality associated with extraction, this rule suggests that other instruments should be used to deal with other externalities. Ideally, these instruments would be linked directly to the externality in question. If the externality is reduced water quality as saline emissions return to the river following irrigation, the instrument used to deal with this externality should be directly related to the damage caused by saline emissions. If this type of information was available it may be possible to impose a levy that varies directly with the level of damage caused by saline emissions.

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In April 2002, the Victorian Government introduced a system of levies to address the problem of salinity in the Sunraysia irrigation region. Under the Victorian system, water trades from lower salinity impact zones to higher salinity impact zones in the region incur a salinity levy. The scheme is designed to encourage irrigation development in areas that have the least effect on river salinity by internalising the salinity externality in water trade transactions (Pakula 2004).

Barriers to tradeBarriers to inter-regional trade in entitlements can also influence the costs of environmental purchases, limit participation in the buyback and slow the pace of autonomous adjustment within the irrigation sector. Currently, there are limits on net trade in entitlements out of irrigation regions in Victoria and New South Wales. These annual limits are currently set at 4 per cent of the total volume of entitlements held in a region, although the Council of Australian Governments has stated its ambition to lift the annual limit from 4 per cent to 6 per cent by the end of 2009 (COAG 2008). In 2008-09, the limits were binding in a number of Victorian regions including the Pyramid-Boort, Rochester, Campaspe, Murray Valley, Robinvale, Red Cliffs and Merbein, Shepparton, Torrumbarry and Central Goulburn irrigation districts and the Murrumbidgee in New South Wales. As such, the rule has prevented sales which would have been beneficial to buyers and sellers and that otherwise would have occurred. The volume of sales prevented by these restrictions cannot be quantified since it includes both refused sales and sales that were never considered because buyers and sellers realised in advance that their trades would or could be refused.

While the 4 per cent limit has the potential to slow the pace of autonomous adjustment within the irrigation sector, the effect may be mitigated to the extent that trade in the relatively unrestricted allocation market can substitute for entitlement trade. The extent to which allocations can substitute for entitlements depends on the value of entitlements as insurance (against needing to purchase allocations at high prices in years when water availability is low), and the extent to which other substitute forms of insurance may be found. Individuals who greatly value this insurance component, such as farmers in perennial horticulture, may be unlikely to consider allocation purchases as an acceptable substitute for entitlement purchases. Selling entitlements to the government under the buyback is considered out of region trade, in which case the 4 per cent rule applies. This limit has the potential to limit the volume of entitlements the Australian Government can purchase from any one region, potentially forcing it to purchase entitlements in other, more expensive regions. The regional effect of these restrictions will depend on the regional pattern of trade between irrigators and the demand for water for environmental flows in each region. It is possible that the trade restrictions result in a lower budgetary cost for the buyback. However, this is unlikely given the scale and geographic extent of the buyback.

Overall, the trade restriction is likely to reduce the cost effectiveness of the buyback, reducing the volume of entitlements the Australian Government can purchase for a given amount of expenditure. Jurisdictional restrictions on inter-regional trade mean that there is also potential for the government to crowd out private trades that would have assisted autonomous adjustment within the irrigation sector.


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Asset fixityAsset fixity has the potential to limit participation and increase the cost of the buyback. Unfortunately, asset fixity can be a misleading term. For instance, horticultural plantings are not fixed, even over a month. The owner could pay to have the plantings removed. However, this tends not to happen, at least until plantings grow old or fall out of favour, because their salvage value is likely to be very low or zero. Since it is the salvage value rather than the cost of establishing these plantings that is the relevant cost to use in any cost-benefit calculation of the net benefits of keeping or removing these plantings, asset fixity will tend to favour keeping these plantings in the short run. Put another way, irrigators with substantial sunk or irretrievable investments that are reliant on irrigation water and provide income over several years are likely to incur significant losses if they choose to cease irrigating in the short term.

This suggests that horticultural growers are less likely to participate in the buyback, and if they do, are more likely to submit higher bids than irrigators with lower levels of asset fixity. Their willingness to participate, and the level of their bids, will be influenced by what stage of the investment cycle they are in. For instance, they are more likely to sell water at a lower price when they are near the end of their investment cycle (when fixed plantings are near the end of their economic life), and they need to consider the net benefits of re-investing in new plantings. The greater the volume of water required for the environment and the shorter the time frame over which these purchases are made, the larger the potential for asset fixity to influence the price the government will need to pay for environmental purchases. Given the Australian Government’s expenditure between 2008-09 and 2010-11 is only likely to yield 5 or 6 per cent of total entitlements within the Basin, it is unlikely that asset fixity will have a significant effect on prices. This is supported by the modelling, which indicated that the buyback will lead to a significant decline in water use by annual activities, whereas the decline in water use for horticultural activities is relatively modest (see table 5).

Drought assistanceSome forms of government intervention also have the potential to slow the pace of adjustment in the irrigation sector, and to possibly limit irrigator participation in the buyback.

A recent report by the Productivity Commission (PC) (2009) on drought assistance suggests that ‘in the longer term, these business assistance programs are an impediment to farm adjustments that need to occur through exits and amalgamations, and potentially increase the costs for viable farms that want to expand’. The rationale is that often these programs distort farmer incentives and alter farm business practices such that they keep farmers in business when they should otherwise adjust management practices or exit the industry. For example, the Exceptional Circumstances Relief Payment (ECRP) provides up to $405 a fortnight each for the farmer and partner. The PC report found evidence that some families had become dependent on the ECRP in the longer term, which ‘suggests that the program is distorting incentives for some families’ and ‘may be delaying necessary farm adjustments in some areas’.

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To the extent these types of assistance programs discourage irrigators from making the necessary adjustments to achieve financial viability in the long term, including exiting the industry, they have the potential to impede autonomous adjustment within the irrigation sector and participation in the buyback.

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7The terms of reference for this study required an assessment of the likely effects of the Australian Government spending $1.5 billion over the three years from 2008-09 to 2010-11 to acquire surface water entitlements for the environment. The assessment was to include an investigation of the effect of the buyback on the water market and regional communities, and a review of the factors that were likely to either slow the pace of adjustment within the irrigation sector or limit participation in the buyback.

The study involved the use of a number of quantitative and qualitative analytical techniques, with the main quantitative analysis focusing on the effect of the buyback on the value of irrigated output, water use and land use by region and industry. A general equilibrium model was also used to estimate how changes in irrigated output were likely to affect regional economies more generally. Additional research involving ABARE survey data and discussions with relevant industry and community representatives was also undertaken to try to identify the regional effects of the buyback on: expenditure on farm inputs and household items; essential services; and downstream processing. The study concludes by identifying a number of factors that have the potential to influence the cost of the buyback, limit participation in the buyback or impede autonomous adjustment within the irrigation sector. These include the type of purchase mechanism used, the inclusion of externalities in purchasing decisions, trade barriers, asset fixity and drought assistance. The main findings of the analyses are below.

The buyback· The Australian Government is expected to acquire around 6 per cent of surface water

entitlements in the Basin over the three years from 2008-09 to 2010-11. These entitlements would be expected to yield on average around 630 gigalitres of water a year when expressed in long-term cap equivalent terms.

Effect on irrigation· The direct effect of the buyback is likely to be relatively modest, reducing Basin wide GVIAP

by around 2.4 per cent.· When considered in the context of broader water policy changes, the main effect of the

buyback will be to bring forward reductions in irrigated activity that would have otherwise occurred when the new sustainable diversion limits come into effect under the Basin Plan. As such, the buyback will help smooth the transition to the new sustainable diversion limits.

· While the overall effect of the buyback is modest, the industry and regional effects vary, with horticulture and horticulturally-intensive regions located near the lower end of the southern MDB experiencing smaller declines in GVIAP than irrigated broadacre activities, which tend to be more concentrated in regions located further upstream. In the northern Basin, the GVIAP effects are spread more evenly between regions, but there are significant changes at the industry level.

Conclusions and findings

60


Effect on water prices· The model results also suggest that the buyback will result in water prices being around 13

per cent higher in the northern Basin and around 18 per cent higher in the southern Basin than they would have been in the absence of the buyback. These differences are primarily because of differences in the regional mix of activities and differences in groundwater access.

· The water price estimates for the Basin suggest that the demand for irrigation water is relatively inelastic (-0.3 per cent) over the long term.

· Other studies suggest that the demand for irrigation water may be more elastic than reported in this study. As a result, the price estimates derived in this study should be treated with caution.

Effect on regional communities· ABARE modelling suggests that the broader economic effects of the buyback will be almost

indistinguishable at the national level (less than 0.01 per cent of GDP), and equivalent to 0.1 per cent or less of GRP for most regions in the Basin.

· The results do not take into account any benefits associated with improved water quality (e.g. lower river salinity) on agricultural productivity (since the Water Trade model estimates do not take these into account), nor do they take into account any market or non-market benefits associated with improved environmental amenity because of increased environmental flows.

· Many of the regions analysed contain a mix of small, medium and large towns. These larger regional centres tend to have a broad economic base, which will act to cushion the effect of a decline in irrigated activity.

· Some of the smaller towns more dependent on irrigation could be less resilient to a decline in irrigation.

· Previous ABARE research using broadacre farm survey data indicated that smaller towns tend to be much more dependent on farm household expenditure than larger regional centres, and are particularly susceptible to changes in expenditure on farm inputs.

· While the effect of the buyback on regional expenditure on household items is uncertain, a reduction in the level of irrigation undertaken within a region, or the conversion of some previously irrigated land to dryland farming, is likely to lead to an overall decline in demand for farm inputs.

· The Basin level effect of the buyback on downstream processing is likely to be small given the modest effect of the buyback on irrigated output.

· Discussions with community representatives revealed concerns that the buyback could lead to a decline in regional services, such as health care and education. While these types of concerns are legitimate, it is unlikely that the volume of entitlements purchased under the buyback alone will trigger a significant reduction in service delivery for most Basin communities.

· However, it is possible that the spatial distribution of the buyback could move some communities closer to population thresholds that threaten the supply of regional services.


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· Overall, more detailed research is needed to better understand the effects of the buyback at the community level.

Buyback in context· It is important to put the buyback into perspective, and to not to confuse its likely effect

with other issues affecting irrigators. · For instance, it is estimated that the recent drought reduced GVIAP for rice by around 70 per

cent, compared with an estimate of around 8 per cent under the buyback, and by around 47 per cent for cotton, compared with an estimate of 1.9 per cent under the buyback.

· ABS data on population and employment also identify a significant decline in the number of people living in small towns and remote areas, and in the number of people employed as farmers in the Basin between 1996 and 2006. These changes have been driven by factors other than the buyback, and are likely to reflect autonomous adjustment within the agriculture sector as farmers respond to external factors such as changing world prices, new technologies and the drought.

· TFP for broadacre agriculture grew at an average rate of 1.5 per cent a year between 1977-78 and 2006-07. If productivity grew at a similar rate in the irrigation sector, it would only take around two years to offset the effect of the buyback on GVIAP.

· The Australian Government’s $5.8 billion investment in upgrading irrigation systems under the SRWUI Program is expected to reduce the volume of water required by irrigators to produce a given level of output, and will assist in offsetting the effect of the buyback on water availability for irrigation.

Factors influencing the cost of the buyback· The buyback is likely to be a more efficient method of reallocating water to the

environment than regulation because it acquires water from irrigators who have relatively lower value uses for their water.

· Given that a full cost-benefit analysis is not possible, it will be important to minimise the cost of acquiring water to achieve environmental goals. These costs include administrative and budgetary costs.

· Several factors can influence these costs, including the mechanism used to purchase water, attempts to include externalities in purchasing decisions, trade barriers, asset fixity and drought assistance.

· It is uncertain whether administrative or budgetary costs are lower when using unsolicited offers or discriminatory tenders.

· Given the budget involved, it may be worthwhile for the Australian Government to pilot a program whereby entitlements are acquired through unsolicited offers, and to compare the administration and budgetary costs with those incurred under the current system of tenders.

· The purpose of the buyback is to reallocate water from irrigation to the environment. Attempting to include externalities in purchasing decisions has the potential to increase the costs of the buyback. Moreover, in the event that it is decided it is worthwhile to address an externality, there are likely to be more direct instruments available.

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· Barriers to inter-regional trade in entitlements can also influence the cost of environmental purchases, limit participation in the buyback and slow the pace of autonomous adjustment within the irrigation sector.

· Currently, there are limits on net trade in entitlements out of irrigation regions in Victoria and New South Wales.

· These limits also have the potential to restrict the volume of entitlements the government can purchase from any one region, potentially forcing it to purchase entitlements in other, more expensive regions.

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Aappendix

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Individuals will only sell entitlements to the government if the benefits of doing so exceed the benefits of holding the entitlement or of selling on the market. The benefits of holding an entitlement depend on the expected future income from allocations attached to the entitlement, and the effect of owning the entitlement on the income risk of the farmer. The latter depends on the number of entitlements already owned, and attitudes towards risk. The buyback will increase the price of allocations and entitlements.

There are a number of options for buying water, including unsolicited offers (such as writing to irrigators or advertising in local media) and tenders. These purchase mechanisms create different incentives. For example, a discriminatory tender (the type used thus far) may encourage irrigators to ask for more for their entitlements than they are worth to them. The extent to which this occurs depends on the perceived probability that their inflated offers will be accepted.

Collusion between irrigators would reduce the volume of entitlements the Australian Government could buy with its fixed budget. However, there are a number of natural barriers to collusion.

Price theoryIn deciding whether a farmer will sell water to the government, there are three basic questions to consider: What is the entitlement worth to the farmer? What would the farmer receive from selling on the market? What price is the government offering? The farmer will choose the option with the highest expected benefit. Where entitlement markets exist, the farmer will only sell to the Australian Government if the government’s offer exceeds both the value of the entitlement to the farmer (A) and what would be received if the entitlement was sold on the market (B). To understand the framework it is worth examining the basis for A and B.

Value to farmers (A)Like any other asset, the value of a water entitlement is comprised of a risk component and a non-risk (or expected value) component. The value of the non-risk component is determined by the expected stream of income or dividends attached to the asset, and the rate at which the individual is willing to trade off income between the present and the future (the discount rate). This assumes that entitlements are retained indefinitely. Alternatively, owners may intend to sell their entitlements at some point. In this case, the value of entitlements is determined by the expected annual dividends until the sale, and the expected sale value (which reflects the expectations of other individuals, at the time of sale, regarding future dividends). The dividends

Buyback theory

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of a water entitlement are the market value of seasonal water allocations, where such a market exists. Hence, the value of entitlements is closely linked to the market for allocations. An unexpected reduction in the supply of allocations, holding the reliability of entitlements constant, will tend to lead to an increase in the price of allocations, and hence entitlements. An unexpected increase in demand for allocations, perhaps as a result of higher commodity prices, would have a similar effect.

The dividends attached to an entitlement cannot be known in advance. Therefore, there is uncertainty over dividends in any given season, as well as the probability distribution from which seasonal dividends are implicitly drawn. One such probability distribution is shown in table 18. In this example, around 20 per cent of seasons are dry and around 80 per cent of seasons are wet. The non-risk value of the entitlement can be computed from the expected dividend of $60 a megalitre ($100 x 0.2 +

$50 x 0.8) and the relevant individual’s discount rate (at 10 per cent, the non-risk value would be $600 a megalitre when discounted over an infinite horizon).

The value of the risk component could be negative or positive depending on how people feel about risk and the effect that owning the entitlement has on the overall risk to which the individual is exposed. Hence, the risk associated with owning the entitlement needs to be considered in the context of other risks to which the individual is exposed. For example, if overall farm household income tends to be higher in wet seasons, then owning the entitlements described above could potentially offset any decline in household income in the dry seasons, thereby reducing overall risk and increasing the value of entitlements to risk averse irrigators.

Taking the other decisions of the farm business/household as given, the value of owning an entitlement also depends on the number of entitlements already owned, with the marginal value of entitlements (the benefit from holding an additional entitlement) likely to eventually decline as the number of entitlements increases. This could be because the marginal value of using entitlements to reduce risk will tend to decrease as more entitlements are owned, and may eventually become negative. This implies a downward sloping individual entitlement demand curve. These curves show the quantity of entitlements demanded by an individual at different prices, holding economic and technical conditions constant.

Market value of entitlements (B)The entitlement market encompasses all trades, whether through intermediaries such as commercial brokers or agreements between neighbours. Supply and demand are key determinants of outcomes in any market. In this case, market demand is related to individual demand, but the relationship is complex (see figure 8). The market demand curve for entitlements is given by the sum of the quantity of entitlements demanded by individuals at different prices. In general, it is not the sum of individual demand curves (Friedman 1976).

18 Probability distribution of dividends

probability dividends % ($/ML)State of nature Dry 20 100Wet 80 50


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A hypothetical market demand curve (D) is shown in figure 8. This curve can be used to illustrate the volume of entitlements the Australian Government can expect to acquire at different prices. As the supply of entitlements is fixed, an entitlement supply curve, were it to be drawn, would appear as a vertical line at the quantity available. Prior to the government’s entry into the market, the initial quantity of entitlements available is q

0, while the initial market

clearing price is p0. Under these conditions, the Australian Government would need to offer

at least p0 to buy water. If the government

were to offer p1, existing entitlement owners

would sell q0 – q

1 units because entitlements

are now more expensive to hold. The market price would also increase to p

1, because sellers

would refuse to sell to non-government buyers for less than what they would receive for selling to the Australian Government. A higher offer, say p

2, would induce further

supply of entitlements of q1 – q

2 units.

Importantly, figure 8 also illustrates how the slope of the market demand curve will affect irrigators’ willingness to supply water at different prices. For example, under the market demand curve D’, an offer of p

2 would

only elicit q0 - q

1 units of entitlements.

Short run versus long runAssume D’ (figure 8) is the short run demand curve for allocations (rather than entitlements), while D is the long run demand curve for allocations. In the short run, the demand curve for allocations tends to be steeper. In figure 8, the allocations market is initially in equilibrium at q

0 p

0. In a situation where the government enters the market to purchase entitlements and

allocations are reduced from q0 to q

1 , all else constant, allocation prices would increase to p

2 in

the short run, with allocation prices subsequently falling to p1 over the longer run.

One reason for the short run demand curve for allocations being steeper than the long run curve is asset fixity. Irrigators with substantial sunk or irretrievable investments that are reliant on irrigation water and provide income over several years are likely to incur significant losses if they choose to cease irrigating in the short term. As a result, they are likely to be less responsive to higher allocation prices in the short run than irrigators who have low levels of asset fixity.

Asset fixity has other implications. For example, acquiring substantial volumes of entitlements from horticultural growers could be expensive in the short run. Horticultural growers could require a higher price for selling their entitlements because water entitlements are complementary to their fixed assets (in a risk management sense). In the long run, there could be some redistribution of entitlements away from horticulture, as horticultural enterprises face reinvestment and plantings are no longer fixed.

$/ML

p2

p1

p0

q0 Q

D’

D

q2 q1

Hypothetical entitlement market8

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Auction theoryThe previous section established a general framework for understanding the price implications of the buyback. The following section draws on auction theory to better understand the consequences of different buyback arrangements.

Purchase mechanismsThere are different ways to buy entitlements. One option is to make unsolicited offers specifying the amount of water the Australian Government is willing to buy, along with a price. This option is relatively simple and is commonly used in large share acquisitions. In the context of the buyback, unsolicited offers could be communicated through existing market exchanges or brokers, writing directly to entitlement owners, or advertising campaigns in local media. Eligible irrigators would then decide whether to accept the unsolicited offers. Landry (1998) reports that in the United States, unsolicited offers via classified newspaper advertisements, mail outs and other mechanisms have been used successfully to purchase water for environmental flows.

An alternative approach is to use tenders, whereby entitlement owners are invited to submit bids that outline an intention or commitment to sell entitlements and an asking price. The government then assesses the bids, selecting the most attractive bids. Thus far, the buyback has mainly used discriminatory tenders, where successful participants are paid according to their individual bids. A less common alternative is the uniform tender, where all irrigators are paid the same price, with payment often equal to the highest accepted bid. As an example, assume the Australian Government receives four bids – $1500 (W), $2000 (X), $2100 (Y) and $2500 (Z). Further assume the government considers $2000 to be its maximum willingness to pay for these entitlements. With a discriminatory tender, W is paid $1500 and X is paid $2000, while bids from Y and Z are not accepted. With a uniform tender, W and X are paid $2000, while bids from Y and Z are not accepted.

Although it seems intuitive to conclude that a discriminatory tender is the most beneficial to the government, this is not necessarily the case. It is true that if individuals submit identical bids through both uniform and discriminatory tenders, the choice of a discriminatory tender reduces the cost of the buyback. However, the choice of auction method can affect the participation strategy of individuals selling entitlements. Discriminatory tenders offer larger incentives for sellers to inflate the size of their bids than uniform tenders (Cason and Gangadharan 2005), and thus have the potential to increase the cost of the buyback. In a discriminatory tender, the sellers face uncertainty about the acceptance of their offer, but not about the price they will receive. When contemplating increasing the bid price, the seller trades off the decreased probability of acceptance against a higher gain if accepted. However, in a uniform tender, increasing the bid price is less likely to increase the price received, but is likely to affect the probability of acceptance (Cason and Gangadharan 2005). Under this mechanism, bidders are more likely to bid close to their true value, but the government must pay a premium in exchange (an information rent) (Ferraro 2007).


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For example, suppose that an individual is considering selling an entitlement they happen to value at $1500. If the Australian Government were to make an unsolicited offer of $2000, the irrigator would sell, receiving $500 in surplus. The outcome under a tender could be different, depending on how it is structured.

Under a discriminatory tender, the seller has an incentive to inflate their bid. A truthful bid of $1500 would generate no surplus if accepted, even though the probability of acceptance might be high. In contrast, an untruthful bid of $3500 would generate substantial surplus if accepted, but might have little chance of being accepted. Hence, the optimal bid is determined by weighing up the size of the surplus if successful with the probability of having a successful bid.

Uniform tenders often work better in ensuring bids close to their true value. With a large number of sellers, the price received by any individual seller is outside the individual’s control. Thus, bidding above $1500 reduces the probability of being able to sell entitlements without influencing the sale price, and will therefore not be worthwhile. Under a uniform tender, the individual is essentially setting a reserve to reduce the chance of unprofitable sales.

Having established the basis for bidding under different purchase mechanisms, it is worth examining the outcomes. Consistent with the unsolicited offer in the above paragraph, if the Commonwealth’s willingness to pay under a uniform tender was $2000, the bid of $1500 would be accepted. This demonstrates the similarities between the uniform tender and unsolicited offer. That is, under certain conditions, a similar pattern of purchases and wealth transfers might be expected to take place. The exchange may or may not take place under the discriminatory tender, depending on the nature of the bid. For example, if the individual’s bid was $1750, the exchange would have taken place and use of the discriminatory tender would have reduced the wealth transfer by $250. In comparison, if the individual’s bid was $2250, the exchange would not take place.

CollusionThe previous discussion assumes that individual irrigators have limited influence over the price at which bids are rejected or offers made. Under restrictive conditions, it might be possible for irrigators to collude to increase payments above what would occur under a competitive process. Under perfect collusion, entitlement owners would behave in much the same way as a monopoly seller, by restricting supply and driving up price. First, irrigators would determine the price that maximises their joint returns, and would refuse to sell for any less than this price. Second, irrigators would need to commit to a distribution of these returns among the cartel. For the government, the main implication of collusive behaviour is less water for the same budgetary cost.

However, the potential for collusive behaviour should not be overstated. There are a number of barriers to collusion. For example, the benefits from collusion (and the extent of collusion) will be limited if the government’s demand for entitlements at the regional level is substantially elastic (responsive to price). This means that any attempt to drive up entitlement payments will be associated with a substantial reduction in the quantity that can be sold, and the additional

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revenue generated from higher payments could be trivial. Moreover, without knowing the elasticity, it would be difficult for the cartel of irrigators to determine the optimal payment. Thus, the cartel could end up asking too little or too much for entitlements, compared with the level that maximises joint surplus. This would reduce the expected benefits from collusion, and hence, the incentives to collude.

There are also costs associated with organising a collusive arrangement, since operating within the rules of the arrangement may not be in the interest of individual irrigators. Under collusion, irrigators commit to selling fewer entitlements than they otherwise would. Without enforcement of the arrangement, irrigators will tend to sell too many entitlements, which will be to the detriment of the group. Indeed, collusion works by aligning the incentives of the group and the individuals within the group, but this has costs. The literature suggests that cartels will often be least successful where groups are large and diverse (Ferraro 2007; Hailu and Thoyer 2005). The design of purchase mechanisms also matters, with open bidding and multiple rounds increasing the potential for collusion by giving the cartel a chance to punish defectors. For example, in open tenders where sellers’ information is made public, cartel members might be able to identify a member undercutting the cartel and apply social sanctions. Fabra (2003) provides a discussion of why collusion may be more likely when uniform rather than discriminatory tenders are used.

Multiple roundsMultiple rounds give irrigators a chance to learn about the buyback and update their strategies as new information becomes available. For example, in discriminatory tenders, the outcome from previous rounds would be used to better understand the probabilities of acceptance in current rounds. Suppose bids of more than $2000 are always rejected and bids of $2000 or less are never rejected. Under these conditions, bidders who value their entitlements under $2000 would quickly learn to submit bids of $2000, and the outcome would be similar to that under an unsolicited offer of $2000. Empirical evidence suggests that any cost-efficiency of using multiple round tenders decreases over time because of learning (Hailu and Schilizzi 2004; Rolfe and Windle 2006).

Transaction costsTransaction costs are the costs associated with making an economic exchange. Transaction costs incurred by sellers may include the cost of time spent learning about the tender and submitting applications, as well as financial costs of obtaining legal advice. The costs of meeting conditions attached to the buyback are also relevant. For example, if the conditions of the buyback were to state that certain investments be made accompanying the sale, the additional cost of those investments could be considered to be transaction costs, as could moral objections to participating in the buyback. If some irrigators are opposed to the buyback, this will reduce the amount of entitlements available for the government to purchase at any given price. However, recent experience with the MDBC Living Murray purchasing program pilot, which had been intended to run for 11 weeks but was closed after four as purchasing targets were met early (MDBC 2007), indicates that the effect of such attitudes is


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likely to be minimal. Some transaction costs are eventually borne by buyers (in this case the Australian Government) through higher entitlement prices. Like any other cost, the incidence of transaction costs will depend on the relative elasticities of supply and demand.

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appe

ndix

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BOverview of quantitive and qualitative methodsThis section discusses the models used in this analysis in more detail, and identifies their limitations.

Yield adjusted volumes and pricesThe 6 per cent buyback scenario analysed in this report assumed that the average yield adjusted cost of the entitlements was $2300 a megalitre, as was the case in the first round of the buyback in 2007-08. Adjusting for average yield involves converting all water entitlements purchased by the Australian Government into long-term cap equivalents (LTCEs). LTCEs refer to the long-term average contribution an entitlement makes to the cap, or alternatively, the entitlement’s contribution to long-term average flows within a river system (MDBC 2007b). For instance, a 1000 megalitre entitlement may only yield on average 600 megalitres of physical water. In this case, the LTCE of this particular purchase is 600 megalitres. The relevant ‘cap factor’ in this example would be calculated as 600/1000, or 0.6. This cap factor can be used to identify the average yield adjusted price of entitlements to help identify cost-effective purchases across the Basin. For instance, if the price at which the irrigator in this example offered their entitlement was $2000 a megalitre, the yield adjusted price would be $2000/0.6, or $3333 a megalitre. However, if an irrigator in another river system offered their entitlement for sale at $2100 a megalitre, and the relevant cap factor was 0.9, the yield adjusted price would be $2333 a megalitre. If each entitlement was capable of delivering a similar environmental benefit, the government would purchase the latter entitlement in the first instance.

Water trade modelThe Water Trade model was constructed by ABARE to better understand the effects of climate change and water reform on irrigated agriculture and water markets in the Murray-Darling Basin. This section outlines the model and its limitations. More detail on the model is available in Hafi et al. (2009).

RegionsThe regions used in the Water Trade model are based on the boundaries used by CSIRO in their sustainable yields assessment (see map 2 in appendix F). The 18 regions analysed by CSIRO were constructed around river valleys, utilising existing hydrological models where possible. ABARE has modified the boundaries of two CSIRO regions to facilitate analyses by relevant state jurisdictions (the Border Rivers and Murray sub-catchments crossed state boundaries). This involved splitting the Border Rivers sub-catchment into Border Rivers Queensland and

Models


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Border Rivers NSW and the Murray sub-catchment into Murray NSW, Lower Murray-Darling (NSW), Murray Victoria and Murray South Australia. This resulted in the model comprising a total of 22 regions.

The boundaries of Natural Resource Management (NRM) regions are different from CSIRO regional boundaries. The model results are converted to NRM regions by using a matrix of conversion factors, thereby accounting for the differences between the two sets of regional boundaries.

HydrologyWith the exception of Paroo, Lachlan, Mt Lofty and Wimmera, the regions considered in this analysis are hydrologically connected. These connections determine the movement of unused water between regions. For example, unused water moves downstream from Gwydir (northern NSW) to the Barwon-Darling (central NSW) to the Murray system. Transmission losses are based on CSIRO flow efficiency estimates (CSIRO 2008).

Production functionsProduction functions show the relationships between inputs and outputs. The model uses three inputs – land, water and ‘other inputs’ – which can be used to produce 14 agricultural commodities. These commodities and the aggregation used for reporting purposes are listed in table 19.

The production functions were estimated using a two stage process. First, the relationships between annual irrigation water use per hectare and output per hectare were estimated. Data were collected by activity on maximum yield, agronomic crop coefficients for growing months, monthly penalties associated with moisture deficit, historical rainfall and evaporation. A simple model was then constructed to estimate the effect of different water application rates on yield, assuming mean rainfall and evaporation and an optimal allocation of irrigation water across the growing season. These data were then used to estimate a quadratic yield function. The quadratic yield functions for cotton and grapes are illustrated in figures 9 and 10. Salinity was not considered in this model.

19 Agricultural commodities in the Water Trade model

commodity aggregation

Almond Perennial horticulture Canola Canola and lucerneCitrus Perennial horticultureCotton CottonMilk MilkIrrigated grains GrainsGrapes GrapesLucerne Canola and lucerneOlives Perennial horticulturePome fruits Perennial horticultureRice RiceStone fruits Perennial horticultureVegetables VegetablesGeneric dryland Dryland / grains

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Second, the relationship between expenditure on ‘other inputs’ and output was estimated as part of model calibration. It was assumed that for every level of output there is a minimum required expenditure on other inputs. This means that land or water cannot be substituted for ‘other inputs’. The marginal cost of ‘other inputs’ is assumed to be linear and increasing with output, perhaps because of diminishing marginal physical productivity or increasing factor prices (with additional employment of factors in any activity). Because this curve is used to calibrate the model, the slope of the marginal cost of ‘other inputs’ curve will tend to capture other factors, such as error in the data and the effects of risk. Model calibration is further discussed in box 6.

Resource constraintsThe model imposes constraints on the availability of land and water. The availability of land is limited for all regions, and only some land is suitable for irrigation. The physical availability of water is determined by the sum of local surface water run-off, surface water from upstream regions and local groundwater. The water availability baseline simulates a moderate climate change scenario to reflect the environment in which the Australian Government is buying water. The extent of climate change is based on the ‘C mid’ scenario from the CSIRO Sustainable Yield Report. Water use is also constrained by institutional arrangements, such as water sharing rules. Resource constraints were based on ABS and CSIRO data.

Maximisation of returnsThe model chooses the allocation of land and water (and ‘other inputs’) between agricultural activities that maximises Basin-wide returns to land and water, subject to constraints such as limits on water availability. This is equivalent to unrestricted trade in water between physically connected regions. It is assumed that there are no transaction costs or externalities associated with water trade. When a scenario is run through the Water Trade model, the model rebalances land use and water use until the maximising conditions are fulfilled. It is these adjustments, and the implications for output and income, that are generally of interest.

Quadratic yield function for cotton9

5

4

3

2

irrigation water (ML/ha)

yield(t/ha)

4.253.753.252.752.251.751.250.750.25

Quadratic yield function for grapes10

25

20

15

5

10

irrigation water (ML/ha)

yield(t/ha)

6.255.254.253.252.251.250.25


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Time frameLand use can be adjusted to new conditions. For example, reduced grapes prices could cause a reallocation of land towards an alternative, such as almonds. Because of this flexibility and treating capital costs as avoidable (rather than sunk), the results should be considered to be medium run. A long run model would also consider the effects of new technology, which is assumed fixed in this analysis. Thus, extrapolating the results to a different time frame could be problematic.

LimitationsThere are a number of limitations worth elaborating on:

• The model compares different equilibrium states. It does not generate any information on movements toward equilibrium, such as the exact timing of resource use adjustments.

• Output prices are held constant. In practice, changes in agricultural production in the Basin could affect commodity prices, especially for horticultural activities.

• All seasons are assumed to have average water availability and rainfall - there are no droughts or floods.

For more detail on the Water Trade model see Hafi et al. (2009).

Dairy modelThe dairy model is a linear programming model representing dairy enterprises in northern Victoria. The model includes three regions – Goulburn Broken, Loddon Avoca and Victorian Murray – and was mainly constructed using 2006-07 ABARE farm survey data. Farmers are assumed to maximise profit by adjusting their pasture mix, feed mix and herd size. There is a fixed amount of land and water available to the farmer, which must be allocated to produce different types of pasture. The different irrigated pastures – irrigated annuals and irrigated perennials – have different annual water requirements. Dryland pasture has no irrigated water requirement. Pasture, that is not sold as hay, is combined with feed purchases to meet the nutritional requirements of the dairy herd. The herd comprises milkers, heifers and yearlings.

box 6 Calibration in the Water Trade model

Without calibration, or some alternative way to account for costs other than land and water, the model would generate excessive specialisation, with too many resources allocated to capital-intensive industries such as perennial horticulture. The allocation of resources is largely driven by profitability. If, after running the model, too many resources are allocated to horticulture compared with the observed allocation, it could be that costs for horticulture are higher than suggested in the model. In this sense, calibration is about finding the underlying cost structure. That is, the cost structure that brings about land use consistent with observed data (based on the 2001 and 2006 agricultural censuses).

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Econometric model

Econometric analysis was used to estimate the price elasticity of demand for irrigation water at the enterprise level. This elasticity measures the percentage decrease in water use associated with a 1 per cent increase in water prices. The analysis uses data from the 2006-07 ABARE irrigation survey. Initially, enterprise level production functions were estimated for three activities: grapes, dairy and wheat. The dependent variable was revenue per hectare irrigated, while the explanatory variables were irrigation water used per hectare irrigated, fodder expenditure per hectare irrigated (in the case of dairy), cash costs per hectare irrigated and rainfall. Annual rainfall estimates were derived from SILO data (Bureau of Meteorology 2008) using GIS mapping. All other variables were constructed using data from the 2006-07 ABARE irrigation survey.

Quadratic and translog production functions were estimated using ordinary least squares. The estimated parameters of the quadratic models were consistent with economic theory. However, the estimated parameters associated with some translog models were unsuitable to derive elasticities. As a consequence, a number of alternative models were estimated, with the most intuitively reasonable being selected. These models are presented in appendix D.

The production functions were then used to construct simple profit-maximising models using GAMS (general algebraic modeling system) software. The models were solved for various water prices to generate demand schedules, and the price elasticities were evaluated at $50 a megalitre, $100 a megalitre and $300 a megalitre.

These models are intended to complement the literature. More data are required to generate more robust estimates. The potential for endogeneity is a serious limitation. In particular, leaving relevant variables out of the equation could result in correlation between the explanatory variables and the error term. This can lead to biased parameter estimates, even in large samples. Unfortunately, data were not available to implement more sophisticated alternatives, such as estimating water demand functions more directly or using instrumental variables.

Moreover, the survey year was characterised by drought across much of the Basin. This explains some of the estimated production functions being unsolvable within a profit maximising framework. These models could not be solved because the implied marginal cost curves were downward sloping at all levels of output. In general, the marginal cost curve slopes upwards because the availability of resources is limited. Until these constraints kick in, the marginal cost curve should be horizontal or downward sloping (assuming indivisibilities are substantial) (see Friedman 1976 for more detail). There is therefore nothing inherently wrong with this as an empirical finding - marginal cost curves can slope downwards over some range. The issue is reconciling this with profit maximisation.

Profit maximisation requires that enterprises produce output at least until marginal costs start to increase, or not at all. While this is the intention, there could be systematic underproduction or overproduction as a result of uncertainty. For example, delays in water trade could mean that allocation decisions need to be made well in advance, before the relevant conditions


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are known. It could be that a certain amount of rainfall is expected in November, and water purchases are made on this basis. If rainfall does not arrive, the application of irrigation water could be inadequate (that is, less than what would maximise profit). There is some evidence of this in the excessive application of fertiliser by Philippine rice farmers in dry seasons (O’Donnell and Griffiths 2006).

Because of widespread drought in the survey year, the models used in this report may apply to only a small and unrepresentative section of the production surface. Thus, extrapolating the results to a normal season could be misleading.

Ausregion modelAusRegion is a computable general equilibrium (CGE) model of the Australian economy. CGE models are designed to trace the effects of changes in policy or other external shocks through the economy. In a market economy, these adjustments are driven by changes in relative prices. The behavioural assumptions underlying the model (including the elasticities) determine the responses of households and firms to changes in relative prices, as well as the extent of these changes. Adjustments continue to occur until the economy reaches equilibrium. The implications are assessed by comparing the equilibrium values of key variables, with and without the changes being modelled. A medium run version of the model was used in this assessment.

AusRegion has four factors of production: land, labour, capital and natural resources. These factors are used to produce 31 commodities, including 18 primary industry commodities and four related processing commodities. The model mainly uses fixed proportions and constant elasticity of substitution functional forms, often employing a nested structure.

The regional divisions used in this assessment are based on aggregations from NRM boundaries. These regions are Queensland MDB, Northern NSW, Riverina, Western NSW, North East Victoria, North West Victoria, South Australian MDB and rest of Australia (all regions outside the Basin). The base data used in AusRegion have been sourced from the MONASH model (Centre for Policy Studies), with regional level data generated using ABS census data and ABARE farm survey data.

For more information on AusRegion visit ABARE’s website.

Input demand modelThe input demand model estimates the changes in expenditure on farm inputs associated with exogenous changes in agricultural output. ABARE irrigation survey data were used to estimate average input expenditure per dollar of output. The outputs and inputs used in this analysis are listed in table 20. To give sufficiently large sample sizes, the coefficients were estimated at the broad regional level and then applied to the relevant NRM regions.

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The resulting coefficients were multiplied by exogenous changes in agricultural output. In the northern NSW example, the estimated increase in expenditure on hired labour associated with a hypothetical $10 million increase in horticultural output would be $4 million a year (that is, $10 million multiplied by 0.4). Changes in expenditure on inputs were then summed across all activities in the region.

While this approach has some serious limitations, it has been used in this analysis because it offers a greater disaggregation by

region and input than AusRegion. A substantial reduction in expenditure on a factor should be interpreted as indicating that local agricultural production is intensive in the use of that factor, and local agricultural production is estimated to fall substantially in absolute terms. Therefore, the results give a broad indication of adjustment pressures as a consequence of the change being modelled.

This analysis employs a number of highly restrictive assumptions. For example, it is assumed that doubling output requires a doubling of all inputs in the model. In practice, farmers tend to adjust their input mix as they expand output – increasing the use of some inputs more than others – while there may be economies or diseconomies of size. At the aggregate farm demand level, input prices are held fixed, so that the percentage change in factor use corresponds with the percentage change in factor expenditure. Of course, this could be a reasonable assumption under some conditions. Finally, many factors released from agriculture will be employed elsewhere in the economy, meaning that changes in agricultural expenditure will tend to overstate the overall change in expenditure.

Regional visitsIndustry peak bodies, research organisations and private enterprises were contacted and invited to discuss downstream processing effects.

The focus of the scoping study was on three industries:

• cotton ginning• rice milling• dairy processing.

Table 21 lists the industry groups consulted and table 22 provides an outline of the community groups.

20 Coverage of outputs and inputs

outputs inputs

Irrigated dairy ChemicalsIrrigated broadacre ContractingIrrigated horticulture Hired labourDryland grains Fertiliser Fodder Fuel Repairs and maintenance Other cash costs


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21 Industry group consultation

location group key contact focus

Cotton Goondiwindi and Local agricultural Mayor and councillors plus Visits to non-cotton Inglewood processors regional government officials enterprises – organic and area irrigators/processors chicken, lucerne irrigation, lucerne processing, cattle feedlot, etc.

Moree 1 Gwydir Valley CEO 1 Tour of region and discussion. Irrigators Association 2 Cotton irrigation infrastructure Inc. advancements on and off-farm. 2 Local cotton farmer 3 Example of a farm converted to dryland including drivers, surface and groundwater uses, diversification of region to dryland and managed investment schemes.

Wee Waa 1 Namoi Cotton CEO Gin economics. Enterprise diversification. 2 Cotton Seed General manager and Seed economics. Distributors Ltd. Product development manager

Myal Vale 1 AusCott General manager, Namoi Valley Meeting and gin tour. Gin economics. 2 Cotton Catchment CEO, Community analysts, Survey information of community Communities CRC chief scientist, CSIRO cotton effects of reduced cotton scientists production, introduction of genetically modified cotton, ginning rationalisation and related issues.

Narrabri Cotton Research and General manager, Research, Research on reducing water Development Development and Investment reliance and downstream Corporation processing effects.

Sydney Auscott CEO and Marketing manager Cotton production and ginning economics, downstream processing and distribution.

Melbourne 1 Dairy Australia Executive director and Scoping of effects on Regional development downstream processing in program manager dairy and community 2 Geoffrey Gardiner Chief Executive effects of reduced water Dairy Foundation availability.

Rice 1 Ricegrowers’ Discussion with Executive Informal discussions. Association of director RGA via telephone Australia Inc. and email 2 SunRice

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22 Community group consultation

location community representatives format focus

Goondiwindi Mayor, elected councillors, Group meeting with Collaborative meeting sought by economic development officers local agricultural the mayor to inform ABARE work processors and to seek collaboration on (face-to-face) development of a framework for analysing community effects of reduced water availability.

Moree Civic official Meeting Community level effects of reduced water availability

Narrabri Civic officials, irrigator Group meeting Community level effects of representatives reduced water availability

Myal Vale Cotton Catchment Group meeting The CRC provided pre- Communities CRC publication access to two consultant studies of community profiles and changed circumstances for four communities that are largely dependent on the cotton industry.

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Scenario 2: 6 per cent buyback scenario

C Water Trade model results

23 Change in GVIAP by region and commodity under the 6 per cent scenario

canola and perennial cotton dairy grains grapes lucerne horticulture rice vegetables totalRegion Maranoa–Balonne –1.8 na na na –5.0 –1.1 na –0.1 –1.8Condamine –1.6 na na na –5.5 na na –0.1 –1.7Border Rivers Qld –1.6 na na na na na na –0.1 –1.6Border Rivers–Gwydir –1.6 na na na na na na na –1.7Namoi –1.8 na na na –3.8 –0.9 na na –2.1Central West –2.8 –2.7 na –0.5 –5.3 na na –0.2 –2.4Western –2.5 na na na na –1.3 na na –2.3Lachlan –1.7 –2.0 –2.5 –0.3 –3.8 –0.7 –4.8 –0.1 –1.3Lower Murray–Darling na –5.0 na –1.2 na –1.7 na –0.5 –1.8Murrumbidgee –3.4 –3.9 –3.2 –0.8 –6.6 –1.1 –7.9 –0.3 –3.1Murray na –1.8 –7.4 na –7.7 –1.1 –8.7 na –3.8North East na –3.2 na –0.8 na na na na –2.3Goulburn Broken na –2.6 na –0.6 –4.2 –0.5 na –0.1 –2.3North Central na –2.9 –3.3 –0.6 –5.0 –0.7 na –0.2 –2.6Mallee na –2.4 –7.1 –0.6 na –0.7 na na –1.9Wimmera na –4.0 na –0.8 –7.9 –1.2 na –0.2 –3.0SA MDB na –6.4 na –1.5 na –1.8 na –0.6 –1.7

Total –1.9 –3.2 –5.0 –1.1 –5.7 –1.2 –7.9 –0.3 –2.4

Note: Regional totals include offsetting adjustment in dryland activity.

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24 Change in irrigated land use by region under the 6 per cent scenario

totalRegion Maranoa–Balonne –4.6Condamine –4.8Border Rivers Qld –3.0Border Rivers–Gwydir –0.9Namoi –1.0Central West –2.2Western –3.1Lachlan –0.7Lower Murray–Darling –2.0Murrumbidgee –2.1Murray –4.8North East –0.6Goulburn Broken –0.3North Central –0.7Mallee –1.3Wimmera –1.1SA MDB 0.0

Total –1.6

25 Change in irrigation water use by region and commodity under the 6 per cent scenario


Total –3.3 –4.5 –9.4 –3.2 –6.8 –2.2 –8.2 –2.1 –5.1


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Total –1.5 –2.7 –4.1 –0.9 –4.7 –1.0 –6.6 –0.3 –2.0




Total –1.3


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Total –2.8 –3.7 –7.8 –2.7 –5.7 –1.9 –6.8 –1.8 –4.3



Total –2.2 –3.7 –5.8 –1.3 –6.7 –1.4 –9.3 –0.4 –2.8




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Total –1.9


canola and perennial cotton dairy grains grapes lucerne horticulture rice vegetables totalRegionMaranoa–Balonne –4.2 na na na –6.4 –2.1 na –2.5 –8.5Condamine –4.2 na na na –7.1 na na –2.8 –8.8Border Rivers Qld –4.0 na na na na na na –2.6 –7.0Border Rivers–Gwydir –3.5 na na na na na na na –4.6Namoi –3.6 na na na –5.2 –2.0 na na –4.4Central West –4.3 –4.4 na –2.9 –6.7 na na –1.7 –5.5Western –3.7 na na na na –1.9 na na –5.3Lachlan –3.3 –3.7 –5.2 –5.1 –5.2 –2.1 –5.9 –2.6 –4.4Lower Murray–Darling na –7.0 na –3.1 na –2.8 na –2.1 –6.4Murrumbidgee –5.6 –6.6 –6.5 –4.4 –9.7 –2.6 –9.5 –2.7 –7.4Murray na –3.1 –10.7 na –10.2 –2.4 –10.5 na –8.9North East na –5.0 na –4.7 na na na na –5.6Goulburn Broken na –4.4 na –5.6 –5.9 –3.2 na –3.4 –4.9North Central na –4.7 –6.0 –4.6 –6.9 –2.4 na –2.7 –5.2Mallee na –3.5 –9.6 –2.3 na –1.7 na na –3.8Wimmera na –6.2 na –8.2 –10.3 –3.1 na –3.8 –6.9SA MDB na –8.9 na –3.3 na –3.0 na –2.1 –4.6

Total –3.9 –5.2 –11.0 –3.7 –7.9 –2.6 –9.6 –2.4 –6.0

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DDairy model results

Irrigated pasture response to change in water allocations Goulburn Broken - a representative farm

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Irrigated pasture response to change in water allocations Loddon Avoca - a representative farm

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Herd composition response to change in water allocations Victorian Murray - a representative farm

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Herd composition response to change in water allocations Loddon Avoca - a representative farm

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Change in annual grain fed per milking cow

Supplementary feed grain response to change in water allocations Goulburn Broken - a representative farm

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Supplementary feed grain response to change in water allocations Loddon Avoca- a representative farm

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Water price elasticity of demand estimationap

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ixE

32 Initial trans logarithmic regression output (grapes)

Dependent variable: ln(REC) Method: Least squares Included observations: 156

variable estimated coefficient standard error

Constant –8.22 18.48ln(VOL) 5.89 1.53(ln(VOL))^2 –0.11 0.06ln(CC) 2.81 3.11(ln(CC))^2 –0.06 0.14ln(RAIN) –0.59 4.57(ln(RAIN))^2 0.25 0.48ln(VOL)*ln(CC) –0.45 0.12ln(VOL)*ln(RAIN) –0.22 0.30ln(CC)*ln(RAIN) –0.17 0.41

Statistics R–squared 0.45 Adjusted R–squared 0.41 F–statistic 13.09

33 Final trans logarithmic regression output (grapes)

Dependent variable: ln(REC) Method: least squares Included observations: 156


Constant 3.84 1.06ln(VOL) 0.68 0.10(ln(VOL))^2 –0.15 0.05ln(CC) 0.13 0.10ln(RAIN) 0.53 0.18

Statistics R-squared 0.34 Adjusted R-squared 0.32 F-statistic 19.16

Variables

REC Receipts per hectareVOL Water use per hectareCC Cash costs per hectareRAIN Rainfall

Dairy only variablesF Fodder per hectareHERD Dairy herd size (no. of cows)

Grapes regression output

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The Australian Government environmental water purchase program abare.gov.au 10.03Water price elasticity of demand estimation

34 Quadratic regression output (grapes)

Dependent variable: REC Method: least squares Included observations: 156


Constant –2 643.72 3 346.31VOL 1 672.67 523.57CC 0.67 0.21RAIN –0.95 14.14VOL^2 –55.84 18.95CC^2 0.00 0.00RAIN^2 0.01 0.01VOL*CC –0.08 0.02VOL*RAIN –0.15 1.82CC*RAIN 0.00 0.00


35 Initial trans logarithmic regression output (dairy)



Constant –19.26 22.54ln(VOL) 1.76 1.99ln(F) –1.89 1.65ln(RAIN) 10.70 7.58(ln(VOL))^2 0.07 0.05(ln(F))^2 –0.01 0.01(ln(RAIN))^2 –1.18 0.68ln(VOL)*ln(F) –0.21 0.05ln(VOL)*ln(RAIN) –0.06 0.36ln(F)*ln(RAIN) 0.45 0.28ln(HERD) 0.63 0.07

Statistics R–squared 0.93 Adjusted R-squared 0.92 F-statistic 88.56

Dairy regression output


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36 Final trans logarithmic regression output (dairy)

Final trans log Dependent variable: ln(REC) Method: Least squares Included observations: 77


Constant 8.01 3.19ln(VOL) 0.55 0.12ln(RAIN) –0.11 0.56

Statistics R-squared 0.22 Adjusted R-squared 0.20 F-statistic 10.69

37 Quadratic regression output (dairy)

Dependent variable: REC Method: Least squares Included observations: 80


Constant 299.09 2 404.30VOL 354.52 470.98F 1.28 1.10RAIN 0.91 9.99VOL^2 –3.57 10.38F^2 0.00 0.00RAIN^2 –0.01 0.01VOL*F 0.01 0.07VOL*RAIN –0.38 1.65F*RAIN 0.00 0.00HERD 567.92 93.81

Statistics R–squared 0.85 Adjusted R–squared 0.83F–statistic 38.83

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38 Initial trans logarithmic regression output (wheat)



Constant 27.98 36.16ln(VOL) 1.75 2.49(ln(VOL))^2 –0.03 0.06ln(CC) 4.55 2.71(ln(CC))^2 –0.04 0.05ln(RAIN) –14.01 11.78(ln(RAIN))^2 1.68 1.06ln(VOL)*ln(CC) 0.09 0.17ln(VOL)*ln(RAIN) –0.40 0.46ln(CC)*ln(RAIN) –0.66 0.47


39 Final trans logarithmic regression output (wheat)



Constant 1.68 1.94ln(VOL) 4.94 1.97(ln(VOL))^2 0.02 0.05ln(CC) 0.27 0.08ln(RAIN) 0.50 0.37ln(VOL)*ln(CC) –0.03 0.13ln(VOL)*ln(RAIN) –0.79 0.37


Wheat regression output


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40 Quadratic regression output (wheat)

Dependent variable: REC Method: Least squares Included observations: 75


Constant 1 556.34 1 367.23VOL 307.77 282.06CC 0.34 0.18RAIN –9.29 7.42VOL^2 –28.29 24.26CC^2 0.00 0.00RAIN^2 0.02 0.01VOL*CC –0.01 0.02VOL*RAIN –0.24 0.82CC*RAIN 0.00 0.00


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Fm

ap3

Warrego

Condamine-Balonne

Moonie

Border Rivers

Gwydir

Paroo

Barwon-Darling

Macquarie-Castlereagh

Lachlan

Murrumbidgee

Murray

Wimmera Loddan-Avoca Goulburn

-Broken

OvensCampaspe

Eastern Mt Lofty Ranges

Map of CSIRO reporting regions, Sustainable Yields Project

Data from ABARE’s 2006-07 irrigation survey were used to establish regional and industry farm profiles. This section discusses a number of factors that may influence irrigators’ willingness to sell water, and identifies how these factors vary between regions. Because of the nature of the irrigation survey data, regions in this section are classified by CSIRO reporting regions rather than NRM regions (map 3).

Discussion of relevant survey data for the buyback

Source: CSIRO 2008.


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While the irrigation survey data are useful for identifying some of the characteristics of irrigators, there are a number of factors limiting their usefulness in identifying regions where irrigators may be more willing to sell water. Firstly, the discussion in this section is based on just one year of data (2006-07). While some data, such as the average age of farm operators, are unlikely to vary much between years, data such as farm rates of return have the potential to vary significantly between years. Hence using one year of data as an indicator of the long run average or future results may be misleading.

Furthermore, the data vary widely within regions and industries, with most region and industry data having large standard deviations. Therefore, any conclusions drawn from the data, particularly about any specific region or industry, may be less robust. The reliability of estimates would likely improve with more observations.

Finally, the relationship between a factor and its effect on an irrigator’s decision to sell water is often not well understood, and there has been little empirical testing of these factors to date. Of what little analysis is available, financial considerations were identified as primary factors influencing sales. While the sample surveyed was very small, this was found to be the case in the Hyder review (2008) of the initial round of the Australian Government’s buyback. Another study by Isé and Sunding (1998) found financial distress to be the primary motivating factor behind sales in an irrigation entitlement buyback scheme in the US state of Nevada. This study also identified farm soil type and off-farm employment as factors influencing sales, with irrigators located in areas with poor quality soil or whose major occupation was not farming more likely to sell water in the buyback.

In contrast, the Isé and Sunding study found age, farming experience and property size to be statistically insignificant in determining irrigators’ participation in the Nevada buyback. Despite these findings, interviews with sellers revealed that these factors may indirectly influence sales, with interviewees identifying retirement, lack of interest in farming by potential heirs

and job opportunities in other states as factors influencing their decision to sell. It should be noted that the findings in the US study are not necessarily indicative of what will motivate irrigators in the Basin to sell entitlements, given that farming conditions, water property rights and the design and scope of the buyback may differ substantially from what was the case in Nevada.

AgeOne potential factor in determining whether a farmer participates in the buyback is their age. Farmers closer to retirement may have a stronger incentive to sell their entitlements. They may be in

41 Age of farm operator (unweighted)

average std. deviation

Condamine–Balonne 52 13.1Border Rivers 54 9Namoi 52 11.2Macquarie–Castlereagh 50 9.7Lachlan 53 9.5Murray 53 11.1Murrumbidgee 52 10.5Goulburn–Broken 54 10.6Loddon–Avoca 53 10.1Eastern Mt Lofty Ranges 53 12.2

Horticulture 53 11.4Broadacre 53 10.7Dairy 52 10.9

Source: ABARE.

94


the situation where they are looking to exit farming and have almost enough income to maintain themselves. Selling assets, such as entitlements, might enable them to retire earlier, or with greater comfort. Conversely, some farmers may believe that their property is more valuable with water entitlements attached.

Survey data indicate an average operator age of 50 or more in all regions and industries. However, the standard deviations of operator ages are relatively large, ranging between 9 and 12.2. This indicates there are numerous operators in all regions and industries nearing retirement age, with approximately one-sixth of operators aged over 63.

The ABARE irrigation survey also questioned farmers on their future intentions, including whether they plan to retire or semi-retire in the next three years.

In many regions, a number of farmers were planning on some form of retirement or farm sale. Areas such as Border Rivers and Condamine – Balone had high levels of intended semi-retirement, while areas such as Eastern Mt Lofty Ranges and Namoi had high levels of intended retirement/sales. In other areas, such as Macquarie – Castlereagh, relatively few farmers indicated any plan to retire in the next three years.

While it is possible this data may indicate regions with a number of willing entitlement sellers, it is not conclusive. While some farmers moving into semi-retirement might sell their water and continue with dryland farming, the converse may also occur, with farmers halting dryland production and continuing to irrigate. Farmers selling land may be looking to sell water as well, but they may attach the entitlement sale to the sale of the land, or may choose to retain their water entitlements. It is important to realise these intentions only reflect the intentions at the time the survey was performed. With changing circumstances, future intentions could change.

EducationAnother factor that may influence a farmer’s willingness to participate in the buyback is the farmer’s level of education (table 43). Farmers with a higher level of education are likely to have more employment opportunities available to them outside of farming than those with a lower level of education. With more options available to them, it is possible these farmers may choose to sell their water entitlements to the government and seek off-farm work. Conversely, it is possible that better educated farmers are more efficient and may be less likely to sell water.

42 Future intentions (next 3 years)

retire/sell farm semi-retire % %

Condamine–Balonne 7 24Border Rivers 4 28Namoi 21 15Macquarie–Castlereagh 0 5Lachlan 6 4Murray 14 13Murrumbidgee 4 15Goulburn–Broken 9 16Loddon–Avoca 11 10Eastern Mt Lofty Ranges 23 4

Dairy 11 15Broadacre 14 12Horticulture 10 14

Source: ABARE.


95

Survey data indicate the distribution of farmer education levels is relatively similar across differing regions and industries. One exception is the Macquarie – Castlereagh region, with 42 per cent of farmers reported possessing a university degree. This may reflect both the existence of higher learning institutions in the regional centres of Dubbo, Orange and Bathurst (which form part of the Macquarie – Castlereagh region) and the demand for skilled labour in these centres. Other regions containing a relatively large proportion of higher educated farmers included Lachlan and Namoi, with 51 per cent and 44 per cent of surveyed farmers, respectively, reporting a qualification beyond high school. In other regions, such as the Condamine – Balonne, a smaller proportion of farmers possessed qualifications beyond high school. This may be because the opportunities for off-farm employment are more limited in these regions and institutions of further education may not be as readily accessible to farmers in these regions.

Dependence on surface waterSome farms have access to both groundwater and surface water for irrigation. The buyback is concentrated on purchasing surface water entitlements. Farms with access to groundwater may be more likely to sell surface water entitlements since they may substitute groundwater for surface water. The extent to which this is possible depends on whether the farmer is currently accessing as much groundwater as they are allowed. With a rising price of water, farmers who are permitted to extract more groundwater may increase groundwater extraction and sell part of their surface water entitlements. Also, prices might rise sufficiently to make it profitable for some farms which currently do not utilise groundwater to sell entitlements and start utilising groundwater where permitted.

As indicated by table 44, in some regions only a relatively small proportion of farmers have access to groundwater. Regions in this category include Condamine – Balonne, Border Rivers

43 Highest level of education (unweighted)

primary school trade attended or 1-4 years 5-6 years apprenticeship/ completed high school high school technical completed university % % % % %

Condamine–Balonne 3 57 13 10 17Border Rivers 4 44 19 7 26Namoi 0 44 12 18 26Macquarie–Castlereagh 0 26 26 5 42Lachlan 0 30 19 32 19Murray 3 30 35 13 19Murrumbidgee 1 36 28 16 19Goulburn–Broken 4 28 33 16 19Loddon–Avoca 2 24 40 11 24Eastern Mt Lofty Ranges 12 35 27 8 18

Horticulture 4 33 26 13 23Broadacre 1 29 31 16 22Dairy 3 40 35 10 12

Source: ABARE.

96


and Eastern Mt Lofty Ranges, where no surveyed farmer reported access to groundwater, and the Murray, where only 9 per cent of farmers reported access to groundwater. In the Namoi a high proportion of surveyed farms reported access to groundwater (83 per cent). There are also a large proportion of farms with groundwater entitlements in the Lachlan and Macquarie-Castlereagh regions (46 and 51 per cent, respectively). Given the large size of the standard deviations of entitlement sizes, averages do not accurately describe a region or industry. In other words, each region and industry contains farms with a broad range of water entitlements, and the average should not be misconstrued as a representative number.

Across industries, farmers in the horticultural industry have the least access to groundwater, with only 8 per cent of farms holding groundwater entitlements. Meanwhile 19 per cent of broadacre farms and 25 per cent dairy farms have groundwater entitlements.

Reliance on irrigationAnother factor determining possible buyback participation rates is farm reliance on irrigation. Farms often diversify to produce a number of goods, of which some may be irrigated and some may be dryland crops. For irrigation farms with a relatively large proportion of dryland production, the costs of converting irrigated area to dryland are likely to be relatively low. For example, they are likely to have already invested in the capital assets necessary to facilitate dryland production. As such, the benefits of participating in the buyback may be higher for these farms.

44 Water entitlement types

avg farms with groundwater st dev of avg surface st dev of groundwater entitlement groundwater water entitlement surface water (farms with (farms with (farms with (farms with groundwater) groundwater) surface water) surface water) % ML ML Condamine–Balonne 0 0 0 483 1 362Border Rivers 0 0 0 6 865 10 888Namoi 83 666 988 1 298 2 040Macquarie–Castlereagh 51 898 1 244 962 1 199Lachlan 46 483 814 894 1 133Murray 9 562 406 492 734Murrumbidgee 16 2 145 3 273 1 566 1 917Goulburn–Broken 22 214 215 344 273Loddon–Avoca 13 519 907 522 502Eastern Mt Lofty Ranges 0 0 0 378 459

Dairy 25 428 345 510 413Broadacre 19 1 389 2 255 1 435 2638Horticulture 8 281 324 339 744

Source: ABARE.


97

The survey data indicate farm types greatly differ between regions. Farms in areas such as Border Rivers and Loddon – Avoca were comprised mainly of irrigated land, while those in areas such as Namoi and Condamine – Balone were more devoted to dryland. The broadacre industry appears the least reliant on irrigation, with the average farm comprised of about half dryland and half irrigated land, while the horticulture industry appears extremely reliant on irrigation, with almost all land devoted to irrigation. Further data indicate 73 per cent of broadacre farms and 55 per cent of dairy farms contain dryland production, while only 10 per cent of horticulture farms do.

Asset purchasesThe sale or purchase of assets by farmers may provide some indication of their intention to buy or sell water. Farmers who have recently purchased farm assets of considerable value are likely to have done so because they believe those assets will continue to be useful for farming in the future. While asset purchases may indicate a move between industries, in which case they may sell water if moving from a water intensive activity to a less intensive activity, it is likely the majority of purchases involve replacing depreciated assets for the current type of production. Farmers in this instance are less likely to sell water. Sales of large assets most likely indicate a winding down of production, or a swap between industries. Farmers in the former category may be more likely to sell water, while the likelihood of those in the latter category to sell water is ambiguous.

The survey data indicate most regions have similar asset purchases. The Eastern Mt Lofty region had relatively few asset purchases, with a small percentage of farms purchasing more than $40 000 worth of assets and a large majority not purchasing any. Murrumbidgee and Namoi had a relatively large number of asset purchases, with around one-quarter of farms purchasing assets valued more than $40 000. Results varied across industries, because different industries use different types and amounts of capital.

45 Average land allocation (irrigated/dryland)

average proportion average proportion of irrigated land of dryland per farm (%) per farm (%) standard deviation (%)

Condamine–Balonne 48 52 34Border Rivers 92 8 21Namoi 56 44 39Macquarie–Castlereagh 61 39 39Lachlan 69 31 42Murray 85 15 30Murrumbidgee 82 18 28Goulburn–Broken 82 18 27Loddon–Avoca 87 13 27Eastern Mt Lofty Ranges 86 14 29

Dairy 81 19 29Broadacre 51 49 37Horticulture 95 5 17

Source: ABARE.

98


Similar to results on farm asset purchases, survey data indicate most regions have similar farm asset sales. However, some regions are identified with a larger percentage of sales; Eastern Mt Lofty Ranges and Namoi both have a relatively large proportion of farms selling assets more than $20 000, at 10 and 13 per cent, respectively. Some regions have extremely low asset sales, which may indicate a smaller incentive to sell water. These include areas such as Macquarie–Castlereagh, Condamine–Balonne and Loddon–Avoca. Survey data indicate that all industries have a similar pattern of asset disposal.

ProfitabilityThe overall profitability of irrigated farming in a region may play some role in determining whether irrigators in the region are likely to participate in the water buyback. Where profits are relatively low, farmers may be looking to exit their perspective industries, and may sell entitlements as part of this transition.

46 Asset additions and deductions in 2006-07

% of farms purchasing assets of value: 0 $1 - $40K $40K+Condamine–Balonne 63 22 15Border Rivers 69 21 10Namoi 57 19 25Macquarie–Castlereagh 59 24 17Lachlan 78 5 16Murray 68 20 13Murrumbidgee 56 17 27Goulburn–Broken 69 19 12Loddon–Avoca 62 22 15Eastern Mt Lofty Ranges 73 21 6


% of farms disposing assets of vale: 0 $1 - $20K $20K+Condamine–Balonne 88 10 1Border Rivers 94 2 4Namoi 73 14 13Macquarie–Castlereagh 92 7 1Lachlan 87 8 5Murray 87 8 5Murrumbidgee 82 11 7Goulburn–Broken 91 2 7Loddon–Avoca 89 10 2Eastern Mt Lofty Ranges 83 6 10


Source: ABARE.


99

The average level of non-farm cash income may also help identify regions from which water may be sourced. High levels of off-farm income may suggest there are significant opportunities for off-farm employment, which may increase an irrigator’s willingness to sell water. However, irrigators on these farms may be less willing to sell entitlements because they can more easily offset any on-farm losses.

Many regions faced a negative average rate of return for farming in 2006-07. Goulburn – Broken had the lowest, at negative 3.1 per cent. The regions with the largest average rates of return were Namoi (2.3 per cent), Eastern Mt Lofty Ranges (1.3 per cent) and Border River (1.2 per cent). Returns were relatively similar across industries.

For some regions the average proportion of income generated from off-farm work was substantial. These regions included Macquarie-Castlereagh, Murrumbidgee and Goulburn – Broken. This provides some indication that the possibilities of off-farm work for farmers may be relatively high in these areas. Border Rivers and Namoi had relatively low levels of off-farm income as a percentage of total income (7 per cent and 9 per cent, respectively).

Farm rates of return are likely to vary greatly between years depending on changing circumstances. With only one year of data, long run rates of returns may differ substantially. In addition, standard deviations of farm average rates of return are extremely high, indicating that the rates of return varied greatly in each region and industry. In all regions and industries there were a number of very good and very bad performers. Therefore, identifying areas more likely to sell water is difficult.

47 Farm profitability

average average farm std rate of std average non- std cash income deviation return deviation farm income deviation

Condamine–Balonne 111 274 412 625 –0.4 4 33 081 61 955Border Rivers 207 186 464 951 1.2 9 16 237 21 661Namoi 181 160 326 375 2.3 5 18 020 27 831Macquarie–Castlereagh –17 618 347 266 –0.5 6 61 895 134 110Lachlan 105 509 367 062 –0.6 7 26 284 49 020Murray 66 560 370 140 –0.4 9 43 518 193 925Murrumbidgee –3 930 441 532 0.1 7 38 508 71 922Goulburn–Broken 7 749 152 444 –3.1 6 34 770 64 878Loddon–Avoca 58 582 123 332 –0.5 6 23 387 27 714Eastern Mt Lofty Ranges 72 931 305 395 1.3 8 26 403 45 477

Dairy 34 420 126 137 –1 5 28 763 52 591Broadacre 70 253 397 021 0.1 5 47 282 230 794Horticulture 61 081 387 321 –0.5 10 34 882 58 983

Source: ABARE.

100

appe

ndix

100

GBorder Rivers – Maranoa Balonne (Queensland)The Border Rivers - Maranoa Balonne region is located in southern Queensland and borders New South Wales. It covers an area of around 103 000 square kilometres. The main regional centres are Roma and Goondiwindi (map 4).

Community profileDemographicsIn 2006, the population was approximately 42 000, of which around 63 per cent were of working age (between 15 and 65 years). The share of the population at working age was lower

Region profilesm

ap Border Rivers - Maranoa Balonne4

towns

rivers

irrigation areas

Sources: BRS, Geoscience Australia, ABARE.


101

than the national average. Excluding those over 65 years, the number of males was greater than the number of females (ABS Population Census, 2005-06) (figure 20).

EducationAround 41 per cent of the population aged over 15 years had completed a qualification. Within this group, certificates were the most common highest qualification (15 per cent), followed

by bachelor degrees (7 per cent) and diplomas (5 per cent) (figure 21). The percentage of the population without qualifications was substantially higher than the national average of 52 per cent.

The most common fields of study were engineering (15 per cent of those with qualifications) and management and commerce (11 per cent). A further 9 per cent held qualifications in agricultural and environmental studies (figure 22).

IncomeThe percentage of households in the region in low (less than $500 a week) and middle ($500 to $1000) income groups

Age distribution by sex in Border Rivers - Maranoa Balonne, 200620

76 84 521 3 % of population

female

male

0 - 9

10 - 19

20 - 29

30 - 39

40 - 49

50 - 59

60 - 69

70 - 79

80 - 89

90 - 99

100+

Sources: ABS 2006, ABARE estimates.

Highest quali�cation distribution in Border Rivers - Maranoa Balonne, 2006 percentage of those over 15 years

21

postgrad 1%

grad dip/cert 1%

bachelor 7%

diploma 5%

certi�cate 15%

other a 12%

no quali�cation 60%

a Level of education inadequately described or not statedNote: Percentages may not add up to 100 because of rounding.Sources: ABS 2006, ABARE estimates.

102


was greater than the national average, whereas the percentage of households earning more than $1000 a week was significantly less than the national average (table 48).

Regional economyEmployment in Border Rivers - Maranoa Balonne was around 20 000 in 2006 (table 49). Agriculture was the largest employment sector, accounting for 27 per cent of the workforce, while related manufacturing activities contributed a further 2 per cent. Major non-agricultural employment sectors included public and community services (22 per cent) as well as wholesale and retail trade (13 per cent). Around 800 people were unemployed.

Number of persons in common �elds of study in Border Rivers - Maranoa Balonne, 200622

15001000 2000500 people

engineering

management and commerce

education

health

agriculture and environment

society and culture

48 Gross household weekly income in Border Rivers - Maranoa Balonne, 2006

Border Rivers–Maranoa Balonne Australia

households % of total a % of total aIncome groups Less than $500 3 416 26 22$500-$999 4 102 31 26$1000-$1999 4 381 33 33Greater than $2000 1 225 9 18Not given 2 270

a Excludes ‘not given’. Sources: ABS 2006, ABARE estimates.



103

Agricultural productionThe gross value of agricultural production (GVAP) in Border Rivers - Maranoa Balonne was around $900 million in 2000-01. Livestock slaughtered was the largest agricultural industry, accounting for around 45 per cent of GVAP, with cotton contributing a further 19 per cent of GVAP (figure 23).

49 Employment by industry in Border Rivers - Maranoa Balonne, 2006

employment percentage of total employmentIndustryAgriculture, forestry and fishing 5 348 27Public and community services 4 443 22Wholesale and retail trade 2 608 13Other 2 342 12Construction 1 232 6Accommodation, cafes and restaurants 1 165 6Manufacturing 1 111 6Transport and storage 898 5Mining 331 2Electricity, gas and water 203 1Property and business services 183 1Total 19 864 100


Gross value of agricultural production in Border Rivers - Maranoa Balonne, 200123

350300 400150 200 25050 100 $m

Source: ABS 2006, ABARE estimates.

oilseeds and legumes

wool

horticulture

cereals

cotton

livestock slaughtered

Excludes some minor agricultural commodities.Sources: ABS 2001, ABARE estimates.

104


In terms of area, around 93 per cent of land was used for agricultural production, with 99 per cent of agricultural land being used for dryland activities and 1 per cent being used for irrigated activities (table 50). Approximately 79 per cent of agricultural land was used for dryland pasture production. Of the approximately 76 000 hectares used for irrigation, 64 per cent was used to irrigate cotton.

The majority of the irrigation took place in the southern part of Border Rivers - Maranoa Balonne. Of the 2973 agricultural businesses in this region, 556 were involved in irrigated agriculture, being mainly irrigated horticulture, cereal and pasture. In 2005-06, around 410 000 megalitres of water was used in irrigated agricultural production, with an average water application rate of 5 megalitres per hectare. Cotton, the main activity in terms of irrigated land use, accounted for 84 per cent of water consumption (table 51).

50 Agricultural land use in Border Rivers - Maranoa Balonne, 2005-06

agricultural businesses dryland irrigated no. ‘000 ha ‘000 ha

Pasture for grazing 2 589 7 498 3Pasture for hay and silage na na 4Cereal crops cut for hay na na 4Cereal crops for grain or seed 726 679 8Cereal crops not for grain or seed 614 143 1Rice 0 0 0Cotton 99 6 49Other broadacre crops 143 27 0Fruit trees, nut trees, plantation or berry fruits 165 1 3Vegetables for human consumption 147 0 2Nurseries, cutflowers or cultivated turf 17 0 0Grapevines 73 0 1Total a 2 973 9 430 76

a Columns do not add as some minor activities were excluded. na Not available. Sources: ABS 2006, ABARE estimates.


105

51 Water use in Border Rivers - Maranoa Balonne, 2005-06

agricultural businesses irrigating volume applied application rate no. ML ML/ha

Pasture for grazing 81 8 117 3Pasture for hay and silage 70 14 789 4Cereal crops cut for hay 47 8 477 2Cereal crops for grain or seed 41 19 296 2Cereal crops not for grain or seed 39 2 930 3Rice 0 0 0Cotton 93 345 217 naOther broadacre crops 7 980 4Fruit trees, nut trees, plantation or berry fruits 120 4 160 2Vegetables for human consumption 134 5 008 3Nurseries, cutflowers or cultivated turf 11 347 3Grapevines 56 2 006 2Total a 556 412 530 5


106


Condamine (Queensland)The Condamine region is located in south eastern Queensland and covers an area of around 24 000 square kilometres. The main regional centres are Dalby, Toowoomba and Warwick (map 5).

Community profileDemographicsIn 2006, the population was approximately 155 000, of which around 64 per cent were of working age (between 15 and 65 years). The share of the population at working age was similar to the national average. Excluding those over 65 years, the number of males was slightly less than the number of females (ABS Population Census, 2005-06) (figure 24).

map Condamine5

towns

rivers

irrigation areas



107

EducationAround 45 per cent of the population aged over 15 years had completed a qualification. Within this group, certificates were the most common highest qualification (18 per cent), followed by bachelor degrees (8 per cent) and diplomas (6 per cent) (figure 25). The percentage of the population without qualifications was higher than the national average of 52 per cent.


IncomeThe percentage of households in the region in low (less than $500 a week) and middle ($500 to $1000) income groups was higher than the national average, whereas the percentage of households earning more than $1000 a week was significantly less than the national average (table 52).

Age distribution by sex in Condamine, 200624


female

male

0 - 9

10 - 19

20 - 29

30 - 39

40 - 49

50 - 59

60 - 69

70 - 79

80 - 89

90 - 99

100+


Highest quali�cation distribution in Condamine, 2006 percentage of those over 15 years

25

postgrad 1%

grad dip/cert 1%

bachelor 8%

diploma 6%

certi�cate 18%

a

other a 11%



108


Regional economyEmployment in Condamine was around 71 000 in 2006 (table 53). Agriculture was the fourth largest employment sector, accounting for 9 per cent of the workforce, while related manufacturing activities contributed a further 4 per cent. Major non-agricultural employment sectors included public and community services (27 per cent) as well as wholesale and retail trade (16 per cent). Around 3400 people were unemployed.

Number of persons in common �elds of study in Condamine, 200626

80006000 10 00040002000 people

engineering


health

education

society and culture

architecture

food/hospitality and personal service



52 Gross household weekly income in Condamine, 2006

Condamine Australia


a Excludes ‘not given’ Sources: ABS 2006, ABARE estimates.


109

Agricultural productionThe gross value of agricultural production (GVAP) in Condamine was around $675 million in 2000-01. Livestock slaughtered was the largest agricultural industry, accounting for around 42 per cent of GVAP, with cereals contributing a further 17 per cent of GVAP (figure 27).


53 Employment by industry in Condamine, 2006

employment percentage of total employmentIndustryPublic and community services 19 220 27Wholesale and retail trade 11 422 16Other 10 481 15Manufacturing 8 471 12Agriculture, forestry and fishing 6 354 9Construction 5 398 8Accommodation, cafes and restaurants 3 805 5Transport and storage 3 403 5Property and business services 874 1Electricity, gas and water 739 1Mining 580 1Total 70 747 100


Gross value of agricultural production in Condamine, 200127

250 300150 20010050 $m


horticulture

milk

cotton

cereals



110


The majority of irrigation took place along the Condamine River and its tributaries. Of the 4349 agricultural businesses in this region, 956 were involved in irrigated agriculture being mainly irrigated pasture, cereals and cotton. In 2005-06, around 193 000 megalitres of water was used in irrigated agricultural production, with an average water application rate of 3 megalitres per hectare. Cotton, the main activity in terms of irrigated land use, accounted for 53 per cent of water consumption (table 55).

54 Agricultural land use in Condamine, 2005-06


Pasture for grazing 3 416 1 328 5Pasture for seed production na na 0Pasture for hay and silage na na 5Cereal crops cut for hay na na 3Cereal crops for grain or seed 1 717 354 18Cereal crops not for grain or seed 965 48 2Cotton 246 22 29Other broadacre crops 383 21 3Fruit trees, nut trees, plantation or berry fruits 64 1 1Vegetables for human consumption 104 1 2Vegetables for seed 16 0 0Nurseries, cutflowers or cultivated turf 30 0 0Grapevines 29 0 0Total a 4 349 2 120 69


55 Water use in Condamine, 2005-06


Pasture for grazing 275 12 466 3Pasture for seed production 12 433 2Pasture for hay and silage 276 17 413 4Cereal crops cut for hay 117 5 594 2Cereal crops for grain or seed 212 36 331 2Cereal crops not for grain or seed 120 4 390 2Cotton 171 101 234 4Other broadacre crops 51 6 746 2Fruit trees, nut trees, plantation or berry fruits 30 2 540 2Vegetables for human consumption 77 4 783 2Vegetables for seed 5 34 4Nurseries, cutflowers or cultivated turf 27 433 3Grapevines 18 271 2Total a 956 192 781 3



111

Border Rivers - Gwydir (New South Wales)The Border Rivers - Gwydir region is located in northern New South Wales and borders Queensland. It covers an area of around 51 000 square kilometres. The main regional centres are Moree, Inverell and Glen Innes (map 6).

Community profileDemographicsIn 2006, the population was approximately 51 500, of which around 62 per cent were of working age (between 15 and 65 years). The share of the population at working age was lower than at the national level. Excluding those over 65 years, the number of males was greater than the number of females (ABS Population Census, 2005-06) (figure 28).

map Border Rivers - Gwydir6

towns

rivers

irrigation areas


112




Age distribution by sex in Border Rivers - Gwydir, 200628


female

male

0 - 9

10 - 19

20 - 29

30 - 39

40 - 49

50 - 59

60 - 69

70 - 79

80 - 89

90 - 99

100+


Highest quali�cation distribution in Border Rivers – Gwydir, 2006percentage of those over 15 years

29

postgrad degree 1%

grad dip/cert 1%

bachelor 6%

diploma 5%

certi�cate 17%

other a 14%




113


Regional economyEmployment in Border Rivers – Gwydir was around 21 000 in 2006 (table 57). Agriculture was the second largest employment sector, accounting for 24 per cent of the workforce, while related manufacturing activities contributed a further 3 per cent. Major non-agricultural employment sectors included public and community services (24 per cent) as well as wholesale and retail trade (14 per cent). Around 1600 people were unemployed.

Number of persons in common �elds of study in Border Rivers – Gwydir, 200630

1000 1500 2000 2500 3000500 people

engineering


health

education


society and culture

architecture


56 Gross household weekly income in Border Rivers – Gwydir, 2006

Border Rivers - Gwydir Australia



114


Agricultural productionThe gross value of agricultural production (GVAP) in Border Rivers - Gwydir was around $900 million in 2000-01. Cotton was the largest agricultural industry, accounting for around 42 per cent of GVAP, with cereals contributing a further 22 per cent of GVAP (figure 31).

In terms of area, around 85 per cent of land was used for agricultural production, with 98 per cent of agricultural land being used for dryland activities and around 2 per cent being used for irrigated activities (table 58). Approximately 60 per cent of agricultural land was used for dryland pasture production. Of the approximately 93 000 hectares used for irrigation, 81 per cent was used to irrigate cotton.

57 Employment by industry in Border Rivers - Gwydir, 2006

employment percentage of total employmentIndustryPublic and community services 5 183 24Agriculture, forestry and fishing 5 111 24Other 3 005 14Wholesale and retail trade 2 929 14Manufacturing 1 337 6Construction 1 305 6Accommodation, cafes and restaurants 1 124 5Transport and storage 797 4Pro perty and business services 215 1Electricity, gas and water 183 1Mining 70 0Total 21 261 100


Gross value of agricultural production in Border Rivers - Gwydir, 200131

350300250150 200 40010050 $m

cotton

cereals


wool


horticulture



115

The majority of the irrigation took place in the western part of Border Rivers – Gwydir. Of the 3161 agricultural businesses in this region, 331 were involved in irrigated agriculture being mainly irrigated pasture, cereals and cotton. In 2005-06, around 526 000 megalitres of water was used in irrigated agricultural production, with an average water application rate of 6 megalitres per hectare. Cotton, the main activity in terms of irrigated land use, accounted for nearly 90 per cent of water consumption (table 59).

59 Water use in Border Rivers – Gwydir, 2005-06


Pasture for grazing 39 3 236 2Pasture for hay and silage 79 10 644 4Cereal crops cut for hay 19 2 513 2Cereal crops for grain or seed 51 14 174 2Cereal crops not for grain or seed 35 2 076 2Cotton 122 472 091 6Other broadacre crops 13 7 403 4Fruit trees, nut trees, plantation or berry fruits 20 na naTotal a 331 526 254 6


58 Agricultural land use in Border Rivers - Gwydir, 2005-06


Pasture for grazing 2 760 2 558 1Pasture for hay and silage na na 3Cereal crops cut for hay na na 1Cereal crops for grain or seed 1 037 883 6Cereal crops not for grain or seed 718 80 1Cotton 145 20 75Other broadacre crops 339 99 2Fruit trees, nut trees, plantation or berry fruits 46 0 2Total a 3 161 4 206 93


116


Namoi (New South Wales)The Namoi region is located in northern New South Wales. It covers an area of around 42 000 square kilometres. The main regional centres are Narrabri, Gunnedah and Tamworth (map 7).

Community profileDemographicsIn 2006, the population was approximately 90 000, of which around 63 per cent were of working age (between 15 and 65 years). The share of the population at working age was less than the national average. Excluding those over 65 years, the number of males was similar to the number of females (ABS Population Census, 2005-06) (figure 32).

map Namoi7

towns

rivers

irrigation areas



117




Age distribution by sex in Namoi, 200632


female

male

0 - 9

10 - 19

20 - 29

30 - 39

40 - 49

50 - 59

60 - 69

70 - 79

80 - 89

90 - 99

100+

Highest quali�cation distribution in Namoi, 2006 percentage of those over 15 years

33

postgrad 1%

grad dip/cert 1%

bachelor 6%

diploma 5%

certi�cate 19%

other a 13%




118


Regional economyEmployment in Namoi was around 38 000 in 2006 (table 61). Agriculture was the third largest employment sector, accounting for 14 per cent of the workforce, while related manufacturing activities contributed a further 3 per cent. Major non-agricultural employment sectors included public and community services (26 per cent) as well as wholesale and retail trade (15 per cent). Around 2900 people were unemployed.

Agricultural productionThe gross value of agricultural production (GVAP) in Namoi was around $700 million in 2000-01. Livestock slaughtered was the largest agricultural industry, accounting for around 32 per cent of GVAP, with cotton contributing a further 27 per cent of GVAP (figure 35).

Number of persons in common �elds of study in Namoi, 200634

3000 4000 5000 60001000 2000 people

engineering


health

education

society and culture



60 Gross household weekly income in Namoi, 2006

Namoi Australia




119


The majority of the irrigation took place along the Namoi and Peel Rivers. Of the 3502 agricultural businesses in this region, 701 were involved in irrigated agriculture being mainly

Gross value of agricultural production in Namoi, 200135

150 200 25010050 $m

milk


wool

cereals

cotton


61 Employment by industry in Namoi, 2006

employment percentage of total employmentindustryPublic and community services 9 795 26Other 5 952 16Wholesale and retail trade 5 521 15Agriculture, forestry and fishing 5 445 14Manufacturing 3 197 8Accommodation, cafes and restaurants 2 442 6Construction 2 296 6Transport and storage 2 062 5Property and business services 458 1Electricity, gas and water 402 1Mining 279 1Total 37 848 100



120


irrigated pasture, cereals and cotton. In 2005-06, around 435 000 megalitres of water was used in irrigated agricultural production, with an average water application rate of 5 megalitres per hectare. Cotton, the main activity in terms of irrigated land use, accounted for 78 per cent of water consumption (table 63).

63 Water use in Namoi, 2005-06


Pasture for grazing 198 16 688 3Pasture for seed production 8 554 naPasture for hay and silage 266 23 892 4Cereal crops cut for hay 63 6 420 3Cereal crops for grain or seed 124 37 836 2Cereal crops not for grain or seed 65 2 851 2Cotton 159 337 388 6Other broadacre crops 44 7 348 3Fruit trees, nut trees, plantation or berry fruits 23 248 2Nurseries, cutflowers or cultivated turf 9 356 4Grapevines 8 220 3Total a 701 434 137 5


62 Agricultural land use in Namoi, 2005-06


Pasture for grazing 3 032 2 111 6Pasture for seed production na na naPasture for hay and silage na na 6Cereal crops cut for hay na na 2Cereal crops for grain or seed 1 241 539 18Cereal crops not for grain or seed 808 57 2Cotton 170 8 57Other broadacre crops 243 56 3Fruit trees, nut trees, plantation or berry fruits 70 0 0Nurseries, cutflowers or cultivated turf 10 0 0Grapevines 15 0 0Total a 3 502 3 235 94



121

Central West (New South Wales)The Central West region is located in central New South Wales. It covers an area of around 85 000 square kilometres. The main regional centres are Dubbo, Orange, Bathurst and Mudgee (map 8).

Community profileDemographicsIn 2006, the population was approximately 182 000, of which around 63 per cent were of working age (between 15 and 65 years). The share of the population at working age was lower than the national average. Excluding those over 65 years, the number of males was slightly higher than the number of females (ABS Population Census, 2005-06) (figure 36).

map Central West, NSW8

towns

rivers

irrigation areas


122


EducationAround 48 per cent of the population aged over 15 years had completed a qualification. Within this group, certificates were the most common highest qualification (19 per cent), followed by bachelor degrees (8 per cent) and diplomas (6 per cent) (figure 37). The percentage of the population without qualifications was similar to than the national average of 52 per cent.



Age distribution by sex in Central West, NSW, 200636


female

male

0 - 9

10 - 19

20 - 29

30 - 39

40 - 49

50 - 59

60 - 69

70 - 79

80 - 89

90 - 99

100+

Highest quali�cation distribution in Central West, NSW, 2006percentage of those over 15 years

37

postgrad 1%

grad dip/cert 1%

bachelor 8%

diploma 6%

certi�cate 19%

other a 13%





123

Regional economyEmployment in Central West was around 79 000 in 2006 (table 65). Agriculture was the fourth largest employment sector, accounting for 11 per cent of the workforce, while related manufacturing activities contributed a further 3 per cent. Major non-agricultural employment sectors included public and community services (29 per cent) as well as wholesale and retail trade (15 per cent). Around 5000 people were unemployed.

Agricultural productionThe gross value of agricultural production (GVAP) in Central West was around $1 billion in 2000-01. Cereals was the largest agricultural industry, accounting for around 28 per cent of GVAP, with livestock slaughtered contributing a further 26 per cent of GVAP (figure 39).

Number of persons in common �elds of study in Central West, NSW, 200638

4000 6000 8000 10 000 12 0002000 people

engineering


health

education

society and culture

architecture




64 Gross household weekly income in Central West, NSW, 2006

Central West Australia



124



The majority of the irrigation took place north of Narromine and around the towns of Dubbo, Mudgee and Bathurst. Of the 6126 agricultural businesses in this region, 724 were involved

65 Employment by industry in Central West, NSW, 2006

employment percentage of total employmentIndustryPublic and community services 22 839 29Wholesale and retail trade 11 821 15Other 11 228 14Agriculture, forestry and fishing 8 576 11Manufacturing 6 723 9Accommodation, cafes and restaurants 5 219 7Construction 5 168 7Transport and storage 3 450 4Mining 1 801 2Electricity, gas and water 1 094 1Property and business services 960 1Total 78 879 100


Gross value of agricultural production in Central West, NSW, 200139

300250150 20010050 $m

milk


horticulture

cotton

wool


cereals



125

in irrigated agriculture being mainly irrigated pasture, horticulture and cereals. In 2005-06, around 210 000 megalitres of water was used in irrigated agricultural production, with an average water application rate of 5 megalitres per hectare. Cotton, the main activity in terms of irrigated land use, accounted for nearly 64 per cent of water consumption (table 67).

66 Agricultural land use in Central West, NSW, 2005-06


Pasture for grazing 5 440 5 150 5Pasture for seed production na na 0Pasture for hay and silage na na 5Cereal crops cut for hay na na 2Cereal crops for grain or seed 2 551 1 067 5Cereal crops not for grain or seed 972 90 1Cotton 62 0 16Other broadacre crops 344 48 1Fruit trees, nut trees, plantation or berry fruits 227 1 2Vegetables for human consumption 58 0 1Vegetables for seed 8 0 0Nurseries, cutflowers or cultivated turf 53 0 0Grapevines 187 0 6Total a 6 126 7 198 45


67 Water use in Central West, NSW, 2005-06


Pasture for grazing 120 15 180 3Pasture for seed production 7 151 1Pasture for hay and silage 181 18 704 4Cereal crops cut for hay 41 4 785 3Cereal crops for grain or seed 44 11 593 2Cereal crops not for grain or seed 31 1 746 1Cotton 62 133 591 9Other broadacre crops 20 4 416 3Fruit trees, nut trees, plantation or berry fruits 110 4 344 3Vegetables for human consumption 45 4 536 4Vegetables for seed 8 122 5Nurseries, cutflowers or cultivated turf 43 708 3Grapevines 161 8 796 2Total a 724 209 274 5


126


Western (New South Wales)The Western region is located in north western New South Wales and borders Queensland. It covers an area of around 165 000 square kilometres. The main regional centres are Bourke and Broken Hill (located in the Lower Murray–Darling region) (map 9).

Community profileDemographicsIn 2006, the population was approximately 20 000, of which around 64 per cent were of working age (between 15 and 65 years). The share of the population at working age was similar to the national average. Excluding those over 65 years, the number of males was greater than the number of females (ABS Population Census, 2005-06) (figure 40).

map Western, NSW9

towns

rivers

irrigation areas



127



IncomeThe percentage of households in the region in low (less than $500 a week) and middle ($500 to $1000) income groups was substantially higher than the national average, whereas the percentage of households earning more than $1000 a week was substantially less than the national average (table 68).

Age distribution by sex in Western, NSW, 200640


female

male

0 - 9

10 - 19

20 - 29

30 - 39

40 - 49

50 - 59

60 - 69

70 - 79

80 - 89

90 - 99

100+

Highest quali�cation distribution in Western, NSW, 2006percentage of those over 15 years

41

postgrad 1%

grad dip/cert 1%

bachelor 6%

diploma 4%

certi�cate 16%

other a 17%




128


Regional economyEmployment in Western was around 7850 in 2006 (table 69). Agriculture was the second largest employment sector, accounting for 17 per cent of the workforce, while related manufacturing activities contributed very little to the employment market. Major non-agricultural employment sectors included public and community services (30 per cent) as well as wholesale and retail trade (12 per cent). Around 735 people were unemployed.

Agricultural productionThe gross value of agricultural production (GVAP) in Western was around $320 million in 2000-01. Cotton was the largest agricultural industry, accounting for around 31 per cent of GVAP, with wool contributing a further 23 per cent of GVAP (figure 43).

Number of persons in common �elds of study in Western, NSW, 200642

600 800 1000 1200200 400 people

engineering


health

education

society and culture



68 Gross household weekly income in Western, NSW, 2006

Western Australia

households % of total a % of total aIncome groups Less than $500 2 032 33 22$500–$999 1 775 29 26$1000–$1999 1 670 27 33Greater than $2000 668 11 18Not given 1 177



129

In terms of area, around 89 per cent of land was used for agricultural production, with more than 99 per cent of agricultural land being used for dryland activities and less than 1 per cent being used for irrigated activities (table 70). Approximately 96 per cent of agricultural land was used for dryland pasture production. Of the approximately 17 000 hectares used for irrigation, 71 per cent was used to irrigate cotton.

The majority of the irrigation took place along the Darling River. Of the 598 agricultural businesses in this region, 44 were involved in irrigated agriculture being mainly irrigated

69 Employment by industry in Western, NSW, 2006

employment percentage of total employmentIndustryPublic and community services 2 354 30Agriculture, forestry and fishing 1 312 17Other 988 13Wholesale and retail trade 927 12Mining 809 10Accommodation, cafes and restaurants 506 6Construction 328 4Transport and storage 238 3Manufacturing 225 3Electricity, gas and water 116 1Property and business services 54 1Total 7 857 100


Gross value of agricultural production in Western, NSW, 200143

40 60 80 100 12020 $m



cereals

wool

cotton


130


cotton, horticulture and pasture. In 2005-06, around 100 000 megalitres of water was used in irrigated agricultural production, with an average water application rate of 6 megalitres per hectare. Cotton, the main activity in terms of irrigated land use, accounted for 88 per cent of water consumption (table 71).

70 Agricultural land use in Western, NSW, 2005-06


Pasture for grazing 566 14 247 1Cereal crops for grain or seed 101 137 3Cereal crops not for grain or seed 27 6 naCotton 10 0 12Other broadacre crops 10 5 0Fruit trees, nut trees, plantation or berry fruits 8 1 0Grapevines 7 0 0Total a 598 14 849 17


71 Water use in Western, NSW, 2005-06


Pasture for grazing 7 2 022 3Cereal crops for grain or seed 5 1 765 1Cereal crops not for grain or seed na na naCotton 13 89 627 8Other broadacre crops 0 0 0Fruit trees, nut trees, plantation or berry fruits 11 3 358 7Grapevines 10 2 662 8Total a 44 101 548 6



131

Lower Murray - Darling (New South Wales)The Lower Murray - Darling region is located in western New South Wales and borders both South Australia and Victoria. It covers an area of around 63 000 square kilometres. The main regional centres are Broken Hill and Mildura (located in Victoria) (map 10).

Community profileDemographicsIn 2006, the population was approximately 22 000, of which around 63 per cent were of working age (between 15 and 65 years). The share of the population at working age was lower than the national average. Excluding those over 65 years, the number of males was greater than the number of females (ABS Population Census, 2005-06) (figure 44).

map Lower Murray - Darling10

towns

rivers

irrigation areas


132




IncomeThe percentage of households in the region in low (less than $500 a week) and middle ($500 to $1000) income groups was considerably higher than the national average, whereas the percentage of households earning more than $1000 a week was significantly lower than the national average (table 72).

Age distribution by sex in Lower Murray - Darling, 200644


female

male

0 - 9

10 - 19

20 - 29

30 - 39

40 - 49

50 - 59

60 - 69

70 - 79

80 - 89

90 - 99

100+


Highest quali�cation distribution in Lower Murray - Darling, 2006percentage of those over 15 years

45

postgrad 1%

grad dip/cert 1%

bachelor 5%

diploma 4%

certi�cate 17%

other a 15%

56%




133

Regional economyEmployment in Lower Murray - Darling was around 8900 in 2006 (table 73). Agriculture was the fourth largest employment sector, accounting for 13 per cent of the workforce, while related manufacturing activities contributed a further 2 per cent. Major non-agricultural employment sectors included public and community services (26 per cent) as well as wholesale and retail trade (15 per cent). Around 700 people were unemployed.

Agricultural productionThe gross value of agricultural production (GVAP) in Lower Murray - Darling was around $200 million in 2000-01. Horticulture was the largest agricultural industry, accounting for around 55 per cent of GVAP, with cereals contributing a further 20 per cent of GVAP (figure 47).

Number of persons in common �elds of study in Lower Murray - Darling, 200646

600 900 1200 1500300 people

engineering


health

education

society and culture

architecture




72 Gross household weekly income in Lower Murray - Darling, 2006

Lower Murray–Darling Australia

households % of total a % of total aIncome groups Less than $500 2 511 34 22$500–$999 2 267 30 26$1000–$1999 2 023 27 33Greater than $2000 673 9 18Not given 1 162


134


In terms of area, around 89 per cent of land was used for agricultural production, with more than 99 per cent of agricultural land being used for dryland activities and less that 1 per cent being used for irrigated activities (table 74). Approximately 93 per cent of agricultural land was used for dryland pasture production. Of the approximately 18 000 hectares used for irrigation, 44 per cent was used to irrigate grapevines.

The majority of the irrigation took place in the along the Darling and Murray rivers. Of the 677 agricultural businesses in this region, 485 were involved in irrigated agriculture being mainly

Gross value of agricultural production in Lower Murray - Darling, 200147

60 80 1201004020 $m


wool

cereals

horticulture


73 Employment by industry in Lower Murray - Darling, 2006

employment percentage of total employmentIndustryPublic and community services 2 341 26Wholesale and retail trade 1 346 15Other 1 229 14Agriculture, forestry and fishing 1 108 13Accommodation, cafes and restaurants 716 8Mining 539 6Construction 487 6Manufacturing 454 5Transport and storage 359 4Electricity, gas and water 197 2Property and business services 83 1Total 8 859 100



135

irrigated grapevines and fruit trees. In 2005-06, around 110 000 megalitres of water was used in irrigated agricultural production, with an average water application rate of 6 megalitres per hectare. Grapevines, the main activity in terms of irrigated land use, accounted for nearly half of water consumption (table 75).

75 Water use in Lower Murray - Darling, 2005-06


Pasture for grazing 26 4 081 3Pasture for hay and silage 19 1 745 naCereal crops for grain or seed 13 7 173 3Fruit trees, nut trees, plantation or berry fruits 166 21 906 8Grapevines 344 53 979 7Total a 485 109 252 6


74 Agricultural land use in Lower Murray - Darling, 2005-06


Pasture for grazing 259 5 182 1Pasture for hay and silage na na naCereal crops for grain or seed 63 89 2Fruit trees, nut trees, plantation or berry fruits 178 0 3Grapevines 352 1 8Total a 677 5 555 18


136


Lachlan (New South Wales)The Lachlan region is located in central New South Wales. It covers an area of around 86 000 square kilometres. The main regional centres are Parkes, Forbes, Cowra and Young (map 11).

Community profileDemographicsIn 2006, the population was approximately 88 000, of which around 61 per cent were of working age (between 15 and 65 years). The share of the population at working age was lower than the national average. Excluding those over 65 years, the number of males was slightly higher than the number of females (ABS Population Census, 2005-06) (figure 48).

map Lachlan11

towns

rivers

irrigation areas



137




Age distribution by sex in Lachlan, 200648


female

male

0 - 9

10 - 19

20 - 29

30 - 39

40 - 49

50 - 59

60 - 69

70 - 79

80 - 89

90 - 99

100+

Highest quali�cation distribution in Lachlan, 2006percentage of those over 15 years

49

postgrad 1%

grad dip/cert 1%

bachelor 6%

diploma 5%

certi�cate 18%

other a 12%




138


Regional economyEmployment in Lachlan was around 37 500 in 2006 (table 77). Agriculture was the second largest employment sector, accounting for 23 per cent of the workforce, while related manufacturing activities contributed a further 3 per cent. Major non-agricultural employment sectors included public and community services (24 per cent) as well as wholesale and retail trade (14 per cent). Around 2300 people were unemployed.

Agricultural productionThe gross value of agricultural production (GVAP) in Lachlan was around $1.3 billion in 2000-01. Cereals was the largest agricultural industry, accounting for around 38 per cent of GVAP, with livestock slaughtered contributing a further 22 per cent of GVAP (figure 51).

Number of persons in common �elds of study in Lachlan, 200650

2000 3000 4000 50001000 people

engineering


health

education


society and culture

architecture

food/hospitality andpersonal service


76 Gross household weekly income in Lachlan, 2006

Lachlan Australia




139

In terms of area, around 85 per cent of land was used for agricultural production, with 99 per cent of agricultural land being used for dryland activities and 1 per cent being used for irrigated activities (table 78). Approximately 72 per cent of agricultural land was used for dryland pasture production. Of the approximately 60 000 hectares used for irrigation, 35 per cent was used to irrigate pasture.

The majority of the irrigation took place along the Lachlan River. Of the 5860 agricultural businesses in this region, 628 were involved in irrigated agriculture being mainly irrigated

Gross value of agricultural production in Lachlan, 200151

300 400 500200100 $m

milk

cotton


horticulture

wool


cereals


77 Employment by industry in Lachlan, 2006

employment percentage of total employmentIndustryPublic and community services 8 822 24Agriculture, forestry and fishing 8 459 23Wholesale and retail trade 5 213 14Other 4 829 13Manufacturing 2 907 8Construction 2 115 6Accommodation, cafes and restaurants 2 083 6Transport and storage 1 607 4Mining 781 2Electricity, gas and water 388 1Property and business services 313 1Total 37 517 100


140


pasture, horticulture and cereals. In 2005-06, around 220 000 megalitres of water was used in irrigated agricultural production, with an average water application rate of 4 megalitres per hectare. Pasture, the main activity in terms of irrigated land use, accounted for 30 per cent of water consumption (table 79).

79 Water use in Lachlan, 2005-06


Pasture for grazing 197 25 209 2Pasture for seed production 24 2 309 naPasture for hay and silage 182 39 276 4Cereal crops cut for hay 51 5 589 2Cereal crops for grain or seed 63 36 314 2Cereal crops not for grain or seed 43 4 902 2Rice 7 12 964 naCotton 10 51 840 11Other broadacre crops 15 3 904 3Fruit trees, nut trees, plantation or berry fruits 83 13 620 4Vegetables for human consumption 45 12 368 5Vegetables for seed 12 999 3Nurseries, cutflowers or cultivated turf 20 764 6Grapevines 104 11 653 3Total a 628 221 952 4


78 Agricultural land use in Lachlan, 2005-06


Pasture for grazing 5 121 5 262 11Pasture for seed production na na naPasture for hay and silage na na 10Cereal crops cut for hay na na 3Cereal crops for grain or seed 3 203 1 206 15Cereal crops not for grain or seed 726 46 2Rice 7 1 naCotton 10 0 5Other broadacre crops 659 69 1Fruit trees, nut trees, plantation or berry fruits 197 2 4Vegetables for human consumption 51 0 3Vegetables for seed 21 0 0Nurseries, cutflowers or cultivated turf 26 0 0Grapevines 133 0 4Total a 5 860 7 271 60



141

Murrumbidgee (New South Wales)The Murrumbidgee region is located in southern New South Wales. It covers an area of around 70 000 square kilometres. The main regional centres are Griffith, Leeton, Wagga Wagga, Tumut and Queanbeyan (map 12). The Australian Capital Territory is considered a separate Natural Resource Management (NRM) region.

Community profileDemographicsIn 2006, the population was approximately 210 000, of which around 65 per cent were of working age (between 15 and 65 years). The share of the population at working age was similar to the national average. Excluding those over 65 years, the number of males was slightly greater than the number of females (ABS Population Census, 2005-06) (figure 52).

map Murrumbidgee12

towns

rivers

irrigation areas


142


EducationAround 50 per cent of the population aged over 15 years had completed a qualification. Within this group, certificates were the most common highest qualification (19 per cent), followed by bachelor degrees (9 per cent) and diplomas (6 per cent) (figure 53). The percentage of the population without qualifications was lower than the national average of 52 per cent.


IncomeThe percentage of households in the region in low (less than $500 a week) and middle ($500 to $1000) income groups was similar than the national average, as was the percentage of households earning more than $1000 a week (table 80).

Age distribution by sex in Murrumbidgee, 200652


female

male

0 - 9

10 - 19

20 - 29

30 - 39

40 - 49

50 - 59

60 - 69

70 - 79

80 - 89

90 - 99

100+

Highest quali�cation distribution in Murrumbidgee, 2006percentage of those over 15 years

53

postgrad 2%

grad dip/cert 1%

bachelor 9%

diploma 6%

certi�cate 19%

other a 13%





143

Regional economyEmployment in Murrumbidgee was around 100 000 in 2006 (table 81). Agriculture was the third largest employment sector, accounting for 10 per cent of the workforce, while related manufacturing activities contributed a further 4 per cent. Major non-agricultural employment sectors included public and community services (30 per cent) as well as wholesale and retail trade (14 per cent). Around 4700 people were unemployed.

Agricultural productionThe gross value of agricultural production (GVAP) in Murrumbidgee was around $1.6 billion in 2000-01. Cereals was the largest agricultural industry, accounting for around 39 per cent of GVAP, with horticulture contributing a further 20 per cent of GVAP (figure 55).


80 Gross household weekly income in Murrumbidgee, 2006

Murrumbidgee Australia

households % of total a % of total aIncome groups Less than $500 14 972 22 22$500 - $999 18 601 28 26$1000 - $1999 22 935 34 33Greater than $2000 10 610 16 18Not given 9 469


Number of persons in common �elds of study in Murrumbidgee, 200654

6000 9000 12 000 15 0003000 people

engineering


health

society and culture

education

architecture



144


In terms of area, around 83 per cent of land was used for agricultural production, with 95 per cent of agricultural land being used for dryland activities and 5 per cent being used for irrigated activities (table 82). Approximately 70 per cent of agricultural land was used for dryland pasture production. Of the approximately 280 000 hectares used for irrigation, 37 per cent was used to irrigate cereals (excluding rice).

The majority of the irrigation took place in the western part of Murrumbidgee. Of the 6252 agricultural businesses in this region, 2025 were involved in irrigated agriculture being mainly

Gross value of agricultural production in Murrumbidgee, 200155

300 400 500 600 700200100 $m

cotton

milk


wool


horticulture

cereals


81 Employment by industry in Murrumbidgee, 2006

employment percentage of total employmentIndustryPublic and community services 30 178 30Other 15 729 16Wholesale and retail trade 14 443 14Agriculture, forestry and fishing 10 274 10Manufacturing 9 291 9Construction 7 045 7Accommodation, cafes and restaurants 6 201 6Transport and storage 4 370 4Electricity, gas and water 1 468 1Property and business services 1 244 1Mining 207 0Total 100 450 100



145

irrigated cereals, rice, pasture and horticulture. In 2005-06, around 1 500 000 megalitres of water was used in irrigated agricultural production, with an average water application rate of 5 megalitres per hectare. Rice accounted for around 46 per cent of water consumption (table 83).

82 Agricultural land use in Murrumbidgee, 2005-06


Pasture for grazing 4 709 4 081 51Pasture for seed production na na 1Pasture for hay and silage na na 16Cereal crops cut for hay na na 10Cereal crops for grain or seed 2 662 810 90Cereal crops not for grain or seed 551 32 3Rice 521 0 55Cotton 5 0 3Other broadacre crops 785 71 14Fruit trees, nut trees, plantation or berry fruits 664 2 12Vegetables for human consumption 92 1 5Vegetables for seed 12 0 0Nurseries, cutflowers or cultivated turf 47 0 0Grapevines 638 2 19Total a 6 252 5 521 281


83 Water use in Murrumbidgee, 2005-06


Pasture for grazing 549 142 876 3Pasture for seed production 26 4 993 4Pasture for hay and silage 270 74 717 5Cereal crops cut for hay 101 28 549 3Cereal crops for grain or seed 439 286 338 3Cereal crops not for grain or seed 60 5 816 2Rice 521 693 715 13Cotton 5 26 194 9Other broadacre crops 131 53 141 4Fruit trees, nut trees, plantation or berry fruits 539 59 605 5Vegetables for human consumption 81 24 110 5Vegetables for seed 7 1 009 6Nurseries, cutflowers or cultivated turf 40 616 4Grapevines 598 92 961 5Total a 2 025 1 499 684 5


146


Murray (New South Wales)The Murray region is located in southern New South Wales and borders Victoria. It covers an area of around 35 000 square kilometres. The main regional centres are Albury and Deniliquin (map 13).

Community profileDemographicsIn 2006, the population was approximately 100 000, of which around 63 per cent were of working age (between 15 and 65 years). The share of the population at working age was lower than the national average. Excluding those over 65 years, the number of males was similar to the number of females (ABS Population Census, 2005-06) (figure 56).

map Murray, NSW13

towns

rivers

irrigation areas



147

EducationAround 48 per cent of the population aged over 15 years had completed a qualification. Within this group, certificates were the most common highest qualification (20 per cent), followed by bachelor degrees (7 per cent) and diplomas (6 per cent) (figure 57). The percentage of the population without qualifications was similar to the national average of 52 per cent.


IncomeThe percentage of households in the region in low (less than $500 a week) and middle ($500 to $1000) income groups was greater than the national average, whereas the percentage of households earning more than $1000 a week was significantly lower than the national average (table 84).

Age distribution by sex in Murray, NSW, 200656


female

male

0 - 9

10 - 19

20 - 29

30 - 39

40 - 49

50 - 59

60 - 69

70 - 79

80 - 89

90 - 99

100+


Highest quali�cation distribution in Murray, NSW, 2006percentage of those over 15 years

57


postgrad 1%

grad dip/cert 1%

bachelor 7%

diploma 6%

certificate 20%

other a 13%

no qualification 52%

148


Regional economyEmployment in Murray was around 45 000 in 2006 (table 85). Agriculture was the fourth largest employment sector, accounting for 13 per cent of the workforce, while related manufacturing activities contributed a further 3 per cent. Major non-agricultural employment sectors included public and community services (24 per cent) as well as wholesale and retail trade (15 per cent). Around 2500 people were unemployed.

Agricultural productionThe gross value of agricultural production (GVAP) in Murray was around $1 billion in 2000-01. Cereals was the largest agricultural industry, accounting for around 43 per cent of GVAP, with livestock slaughtered contributing a further 26 per cent of GVAP (figure 59).

Number of persons in common �elds of study in Murray, NSW, 200658

3000 4000 5000 70006000 80001000 2000 people

engineering


health

education

society and culture

architecture




84 Gross household weekly income in Murray, NSW, 2006

Murray Australia

households % of total % of totalIncome groups Less than $500 8 479 26 22$500-$999 10 178 31 26$1000-$1999 11 083 33 33Greater than $2000 3 436 10 18Not given 4 674



149


The majority of the irrigation took place in the western part of Murray. Of the 3490 agricultural businesses in this region, 1715 were involved in irrigated agriculture being mainly irrigated

85 Employment by industry in Murray, NSW, 2006

employment percentage of total employmentIndustryPublic and community services 10 741 24Wholesale and retail trade 6 872 15Other 6 465 14Agriculture, forestry and fishing 5 675 13Manufacturing 5 471 12Accommodation, cafes and restaurants 3 520 8Construction 3 347 7Transport and storage 2 046 5Property and business services 500 1Electricity, gas and water 471 1Mining 74 0Total 45 181 100


Gross value of agricultural production in Murray, NSW, 200159

300 400 500200100 $m

horticulture

milk


wool


cereals


150


pasture, rice and cereals. In 2005-06, around 1 200 000 megalitres of water was used in irrigated agricultural production, with an average water application rate of 4 megalitres per hectare. Pasture, the main activity in terms of irrigated land use, accounted for nearly 38 per cent of water consumption, while rice accounted for around 45 per cent (table 87).

87 Water use in Murray, NSW, 2005-06


Pasture for grazing 1 165 373 725 3Pasture for seed production 46 5 481 2Pasture for hay and silage 432 74 987 3Cereal crops cut for hay 150 25 637 2Cereal crops for grain or seed 411 121 189 2Cereal crops not for grain or seed 61 7 265 2Rice 514 532 601 12Other broadacre crops 93 19 579 2Fruit trees, nut trees, plantation or berry fruits 73 10 193 6Vegetables for human consumption 38 13 077 5Vegetables for seed 10 264 5Nurseries, cutflowers or cultivated turf 18 809 6Grapevines 96 7 135 4Total a 1 715 1 192 592 4

a Columns do not add as some minor activities were excluded. Sources: ABS 2006, ABARE estimates.

86 Agricultural land use in Murray, NSW, 2005-06


Pasture for grazing 2 967 1 740 137Pasture for seed production na na 2Pasture for hay and silage na na 23Cereal crops cut for hay na na 13Cereal crops for grain or seed 1 936 598 67Cereal crops not for grain or seed 272 14 3Rice 514 0 45Other broadacre crops 744 103 8Fruit trees, nut trees, plantation or berry fruits 94 0 2Vegetables for human consumption 45 1 2Vegetables for seed 17 0 0Nurseries, cutflowers or cultivated turf 22 0 0Grapevines 104 0 2Total a 3 490 2 768 307



151

North East (Victoria)The North East region is located in northern Victoria and borders New South Wales. It covers an area of around 20 000 square kilometres. The main regional centres are Wangaratta and Wodonga (map 14).

Community profileDemographicsIn 2006, the population was approximately 92 500, of which around 64 per cent were of working age (between 15 and 65 years). The share of the population at working age was similar to the national average. Excluding those over 65 years, the number of males was similar to the number of females (ABS Population Census, 2005-06) (figure 60).

map North East, Victoria14

towns

rivers

irrigation areas


152


EducationAround 50 per cent of the population aged over 15 years had completed a qualification. Within this group, certificates were the most common highest qualification (20 per cent), followed by bachelor degrees (8 per cent) and diplomas (7 per cent) (figure 61). The percentage of the population without qualifications was less than the national average of 52 per cent.



Age distribution by sex in North East, Victoria, 2006 60


female

male

0 - 9

10 - 19

20 - 29

30 - 39

40 - 49

50 - 59

60 - 69

70 - 79

80 - 89

90 - 99

100+

Highest quali�cation distribution in North East, Victoria, 2006percentage of those over 15 years

61

postgrad 1%

grad dip/cert 2%

bachelor 8%

diploma 7%

certificate 20%

other a 12%





153

Regional economyEmployment in North East was around 44 000 in 2006 (table 89). Agriculture was the fourth largest employment sector, accounting for 8 per cent of the workforce, while related manufacturing activities contributed a further 5 per cent. Major non-agricultural employment sectors included public and community services (28 per cent) as well as wholesale and retail trade (15 per cent). Around 2100 people were unemployed.

Agricultural productionThe gross value of agricultural production (GVAP) in North East was around $300 million in 2000-01. Livestock slaughtered was the largest agricultural industry, accounting for around 42 per cent of GVAP, with dairy contributing a further 24 per cent of GVAP (figure 63).

Number of persons in common �elds of study in North East, Victoria, 200662

90006000 70003000 4000 500020001000 people

engineering


health

education

society and culture


architecture



88 Gross household weekly income in North East, Victoria, 2006

North East (VIC) Australia



154



The majority of the irrigation took place in the western part of North East. Of the 2674 agricultural businesses in this region, 743 were involved in irrigated agriculture being mainly

Gross value of agricultural production in North East, Victoria, 200163

15090 1206030 $m

wool

tobacco

horticulture

milk



89 Employment by industry in North East, Victoria, 2006

employment percentage of total employmentIndustryPublic and community services 12 310 28Other 6 427 15Wholesale and retail trade 6 412 15Manufacturing 6 162 14Agriculture, forestry and fishing 3 456 8Construction 3 291 8Accommodation, cafes and restaurants 3 152 7Transport and storage 1 662 4Property and business services 480 1Electricity, gas and water 310 1Mining 65 0Total 43 728 100



155

irrigated pasture and grapevines. In 2005-06, around 55 000 megalitres of water was used in irrigated agricultural production, with an average water application rate of 3 megalitres per hectare. Pasture, the main activity in terms of irrigated land use, accounted for 74 per cent of water consumption (table 91).

90 Agricultural land use in North East, Victoria, 2005-06


Pasture for grazing 2 321 505 9Pasture for hay and silage na na 1Cereal crops for grain or seed 200 20 naCereal crops not for grain or seed 72 1 0Other broadacre crops 164 4 1Fruit trees, nut trees, plantation or berry fruits 196 2 naVegetables for human consumption 21 0 0Grapevines 218 1 3Total a 2 674 623 16


91 Water use in North East, Victoria, 2005-06


Pasture for grazing 354 37 504 4Pasture for hay and silage 51 3 086 3Cereal crops for grain or seed 3 126 naCereal crops not for grain or seed 18 310 2Other broadacre crops 25 2 375 4Fruit trees, nut trees, plantation or berry fruits 92 2 464 naVegetables for human consumption 19 203 3Grapevines 180 4 470 2Total a 743 54 904 3


156


Goulburn Broken (Victoria)The Goulburn Broken region is located in northern Victoria and borders New South Wales. It covers an area of around 24 000 square kilometres. The main regional centres are Kyabram, Shepparton, Benalla and Seymour (map 15).

Community profileDemographicsIn 2006, the population was approximately 165 000, of which around 63 per cent were of working age (between 15 and 65 years). The share of the population at working age was less than the national average. Excluding those over 65 years, the number of males was slightly greater than the number of females (ABS Population Census, 2005-06) (figure 64).

map Goulburn Broken15

towns

rivers

irrigation areas



157



IncomeThe percentage of households in the region in low (less than $500 a week) and middle ($500 to $1000) income groups was greater than the national average, whereas the percentage of households earning more than $1000 a week was significantly less than the national average (table 92).

Age distribution by sex in Goulburn Broken, 200664


female

male

0 - 9

10 - 19

20 - 29

30 - 39

40 - 49

50 - 59

60 - 69

70 - 79

80 - 89

90 - 99

100+

Highest quali�cation distribution in Goulburn Broken, 2006percentage of those over 15 years

65

postgrad 1%

grad dip/cert 1%

bachelor 7%

diploma 6%

certi�cate 18%

other a 13%




158


Regional economyEmployment in Goulburn Broken was around 73 000 in 2006 (table 93). Agriculture was the fourth largest employment sector, accounting for 12 per cent of the workforce, while related manufacturing activities contributed a further 6 per cent. Major non-agricultural employment sectors included public and community services (24 per cent) as well as wholesale and retail trade (15 per cent). Around 4000 people were unemployed.

Agricultural productionThe gross value of agricultural production (GVAP) in Goulburn Broken was around $1.2 billion in 2000-01. Dairy was the largest agricultural industry, accounting for around 33 per cent of GVAP, with horticulture contributing a further 23 per cent of GVAP (figure 67).

Number of persons in common �elds of study in Goulburn Broken, 200666

6000 8000 10 000 12 00040002000 people

engineering


health

education

society and culture

architecture




92 Gross household weekly income in Goulburn Broken, 2006

Goulburn Broken Australia




159


The majority of the irrigation took place in the northern part of Goulburn Broken. Of the 5829 agricultural businesses in this region, 3073 were involved in irrigated agriculture being mainly

93 Employment by industry in Goulburn Broken, 2006

employment percentage of total employmentIndustryPublic and community services 17 458 24Wholesale and retail trade 11 144 15Other 10 295 14Manufacturing 9 789 13Agriculture, forestry and fishing 9 050 12Construction 5 770 8Accommodation, cafes and restaurants 4 305 6Transport and storage 3 413 5Electricity, gas and water 943 1Property and business services 783 1Mining 152 0Total 73 102 100


Gross value of agricultural production in Goulburn Broken, 200167

400300200100 500 $m


wool

cereals


horticulture

milk


160


irrigated pasture and horticulture. In 2005-06, around 900 000 megalitres of water was used in irrigated agricultural production, with an average water application rate of 4 megalitres per hectare. Pasture, the main activity in terms of irrigated land use, accounted for 88 per cent of water consumption (table 95).

94 Agricultural land use in Goulburn Broken, 2005-06


Pasture for grazing 4 831 790 157Pasture for seed production na na 1Pasture for hay and silage na na 37Cereal crops cut for hay na na 3Cereal crops for grain or seed 933 132 4Cereal crops not for grain or seed 347 12 1Rice 8 0 1Other broadacre crops 313 29 1Fruit trees, nut trees, plantation or berry fruits 503 1 12Vegetables for human consumption 75 0 2Vegetables for seed 7 0 0Nurseries, cutflowers or cultivated turf 67 1 0Grapevines 211 0 4Total a 5 829 1 098 223


95 Water use in Goulburn Broken, 2005-06


Pasture for grazing 2 254 672 324 4Pasture for seed production 33 3 977 3Pasture for hay and silage 849 113 734 3Cereal crops cut for hay 109 7 350 3Cereal crops for grain or seed 59 9 996 3Cereal crops not for grain or seed 44 3 096 3Rice 8 10 186 12Other broadacre crops 19 1 466 2Fruit trees, nut trees, plantation or berry fruits 429 57 607 5Vegetables for human consumption 65 8 733 5Vegetables for seed 4 49 2Nurseries, cutflowers or cultivated turf 51 2 172 4Grapevines 178 5 816 2Total a 3 073 897 804 4



161

North Central (Victoria)The North Central region is located in northern Victoria and borders New South Wales. It covers an area of around 30 000 square kilometres. The main regional centres are Bendigo, Maryborough, Castlemaine, Echuca and Swan Hill (map 16).

Community profileDemographicsIn 2006, the population was approximately 220 000, of which around 63 per cent were of working age (between 15 and 65 years). The share of the population at working age was less than the national average. Excluding those over 65 years, the number of males was slightly lower than the number of females (ABS Population Census, 2005-06) (figure 68).

map North Central, Victoria16

towns

rivers

irrigation areas


162


EducationAround 48 per cent of the population aged over 15 years had completed a qualification. Within this group, certificates were the most common highest qualification (18 per cent), followed by bachelor degrees (8 per cent) and diplomas (6 per cent) (figure 69). The percentage of the population without qualifications was similar to the national average of 52 per cent.

The most common fields of study were engineering (16 per cent of those with qualifications) and health (11 per cent). A further 4 per cent held qualifications in agricultural and environmental studies (figure 70).


Age distribution by sex in North Central, Victoria, 200668


female

male

0 - 9

10 - 19

20 - 29

30 - 39

40 - 49

50 - 59

60 - 69

70 - 79

80 - 89

90 - 99

100+

Highest quali�cation distribution in North Central, Victoria, 2006percentage of those over 15 years

69

postgrad 1%

grad dip/cert 2%

bachelor 8%

diploma 6%

certificate 18%

other a 13%





163

Regional economyEmployment in North Central was around 93 000 in 2006 (table 97). Agriculture was the fourth largest employment sector, accounting for 9 per cent of the workforce, while related manufacturing activities contributed a further 4 per cent. Major non-agricultural employment sectors included public and community services (27 per cent) as well as wholesale and retail trade (16 per cent). Around 5900 people were unemployed.

Agricultural productionThe gross value of agricultural production (GVAP) in North Central was around $1.2 billion in 2000-01. Livestock slaughtered was the largest agricultural industry, accounting for around 29 per cent of GVAP, with dairy and cereals each contributing a further 22 per cent of GVAP (figure 71).

Number of persons in common �elds of study in North Central, Victoria, 200670

9000 12 000 15 00060003000 people

engineering

health


education

society and culture

architecture




96 Gross household weekly income in North Central, Victoria, 2006

North Central Australia



164


In terms of area, around 74 per cent of land was used for agricultural production, with 89 per cent of agricultural land being used for dryland activities and 11 per cent being used for irrigated activities (table 98). Approximately half of agricultural land was used for dryland pasture production. Of the approximately 235 000 hectares used for irrigation, 80 per cent was used to irrigate pasture.

The majority of the irrigation took place in the northern part of North Central. Of the 5176 agricultural businesses in this region, 2369 were involved in irrigated agriculture being mainly

Gross value of agricultural production in North Central, Victoria, 200171

300200 25015050 100 350 $m


horticulture

wool

cereals

milk



97 Employment by industry in North Central, Victoria, 2006

employment percentage of total employmentIndustryPublic and community services 25 624 27Wholesale and retail trade 14 527 16Other 14 256 15Manufacturing 11 342 12Agriculture, forestry and fishing 8 384 9Construction 7 218 8Accommodation, cafes and restaurants 5 697 6Transport and storage 3 687 4Electricity, gas and water 974 1Property and business services 882 1Mining 695 1Total 93 285 100



165

irrigated pasture, cereals and horticulture. In 2005-06, around 840 000 megalitres of water was used in irrigated agricultural production, with an average water application rate of 4 megalitres per hectare. Pasture, the main activity in terms of irrigated land use, accounted for 85 per cent of water consumption (table 99).

99 Water use in North Central, Victoria, 2005-06


Pasture for grazing 1 598 588 398 4Pasture for seed production 39 3 415 2Pasture for hay and silage 710 115 945 4Cereal crops cut for hay 154 17 042 2Cereal crops for grain or seed 218 36 717 2Cereal crops not for grain or seed 64 4 278 2Rice na 1 664 11Other broadacre crops 60 8 582 2Fruit trees, nut trees, plantation or berry fruits 224 33 066 4Vegetables for human consumption 129 17 211 5Vegetables for seed na 655 3Nurseries, cutflowers or cultivated turf 42 728 3Grapevines 219 7 466 3Total a 2 369 836 063 4


98 Agricultural land use in North Central, Victoria, 2005-06


Pasture for grazing 4 192 1 088 154Pasture for seed production na na 2Pasture for hay and silage na na 34Cereal crops cut for hay na na 8Cereal crops for grain or seed 2 019 532 18Cereal crops not for grain or seed 435 20 2Rice 5 0 0Other broadacre crops 744 103 4Fruit trees, nut trees, plantation or berry fruits 277 1 7Vegetables for human consumption 148 1 3Vegetables for seed 44 0 0Nurseries, cutflowers or cultivated turf 47 0 0Grapevines 283 0 3Total a 5 176 1 958 237


166


Wimmera (Victoria)The Wimmera region is located in western Victoria. It covers an area of around 17 000 square kilometres. The main regional centres are Horsham and Stawell (map 17).

Community profileDemographicsIn 2006, the population was approximately 37 000, of which around 61 per cent were of working age (between 15 and 65 years). The share of the population at working age was significantly lower than the national average. Excluding those over 65 years, the number of males was similar to the number of females (ABS Population Census, 2005-06) (figure 72).

map Wimmera, Victoria17

towns

rivers

irrigation areas



167


EducationAround 45 per cent of the population aged over 15 years had completed a qualification. Within this group, certificates were the most common highest qualification (18 per cent), followed by bachelor degrees (7 per cent) and diplomas (6 per cent) (figure 72). The percentage of the population without qualifications was greater than the national average of 52 per cent.



Age distribution by sex in Wimmera, Victoria, 200672


female

male

0 - 9

10 - 19

20 - 29

30 - 39

40 - 49

50 - 59

60 - 69

70 - 79

80 - 89

90 - 99

100+

Highest quali�cation distribution in Wimmera, Victoria, 2006percentage of those over 15 years

72

postgrad 1%

grad dip/cert 1%

bachelor 7%

diploma 6%

certificate 18%

other a 12%



168


Regional economyEmployment in Wimmera was around 17 000 in 2006 (table 101). Agriculture was the third largest employment sector, accounting for 16 per cent of the workforce, while related manufacturing activities contributed a further 2 per cent. Major non-agricultural employment sectors included public and community services (27 per cent) as well as wholesale and retail trade (16 per cent). Around 900 people were unemployed.

Agricultural productionThe gross value of agricultural production (GVAP) in Wimmera was around $500 million in 2000-01. Cereals was the largest agricultural industry, accounting for around 49 per cent of GVAP, with oilseeds and legumes contributing a further 21 per cent of GVAP (figure 74).

Number of persons in common �elds of study in Wimmera, Victoria, 200673

1500 20001000500 people

engineering

health


education

society and culture



architecture


100 Gross household weekly income in Wimmera, Victoria, 2006

Wimmera Australia




169



The majority of the irrigation took place in the eastern part of Wimmera. Of the 1772 agricultural businesses in this region, 146 were involved in irrigated agriculture being mainly

101 Employment by industry in Wimmera, Victoria, 2006

employment percentage of total employmentIndustryPublic and community services 4 567 27Wholesale and retail trade 2 624 16Agriculture, forestry and fishing 2 616 16Other 2 318 14Manufacturing 1 216 7Construction 1 039 6Accommodation, cafes and restaurants 946 6Transport and storage 746 4Electricity, gas and water 213 1Mining 203 1Property and business services 124 1Total 16 614 100


Gross value of agricultural production in Wimmera, Victoria, 200174

250 300150 20010050 $m

wool



cereals

170


irrigated pasture and grapevines. In 2005-06, around 30 000 megalitres of water was used in irrigated agricultural production, with an average water application rate of 3 megalitres per hectare. Pasture, the main activity in terms of irrigated land use, accounted for 76 per cent of water consumption (table 103).

102 Agricultural land use in Wimmera, Victoria, 2005-06


Pasture for grazing 1 303 690 2Pasture for seed production na na 5Pasture for hay and silage na na 2Cereal crops for grain or seed 1 314 394 0Cereal crops not for grain or seed 133 8 naOther broadacre crops 886 172 naFruit trees, nut trees, plantation or berry fruits 19 1 0Grapevines 38 0 1Total a 1 772 1 423 11


103 Water use in Wimmera, Victoria, 2005-06


Pasture for grazing 28 3 696 2Pasture for seed production 32 13 274 3Pasture for hay and silage 15 5 506 4Cereal crops for grain or seed 6 982 2Cereal crops not for grain or seed na na naOther broadacre crops 4 314 naFruit trees, nut trees, plantation or berry fruits 12 676 2Grapevines 49 2 055 2Total a 146 29 440 3

a Columns do not add as some minor activities were excluded. na Not available.



171

Mallee (Victoria)The Mallee region is located in north western Victoria and borders both South Australia and New South Wales. It covers an area of around 39 000 square kilometres. The main regional centres are Mildura and Swan Hill (located in North Central) (map 18).

Community profileDemographicsIn 2006, the population was approximately 67 000, of which around 62 per cent were of working age (between 15 and 65 years). The share of the population at working age was lower than the national average. Excluding those over 65 years, the number of males was slightly greater than the number of females (ABS Population Census, 2005-06) (figure 75).

map Mallee, Victoria18

towns

rivers

irrigation areas


172


EducationAround 42 per cent of the population aged over 15 years had completed a qualification. Within this group, certificates were the most common highest qualification (16 per cent), followed by bachelor degrees (6 per cent) and diplomas (5 per cent) (figure 76). The percentage of the population without qualifications was significantly greater than the national average of 52 per cent.


IncomeThe percentage of households in the region in low (less than $500 a week) and middle ($500 to $1000) income groups was considerably greater than the national average, whereas the percentage of households earning more than $1000 a week was significantly less than the national average (table 104).

Age distribution by sex in Mallee, Victoria, 200675


female

male

0 - 9

10 - 19

20 - 29

30 - 39

40 - 49

50 - 59

60 - 69

70 - 79

80 - 89

90 - 99

100+

Highest quali�cation distribution in Mallee, Victoria, 2006percentage of those over 15 years

76

postgrad 1%

grad dip/cert 1%

bachelor 6

diploma 5%

certificate 16%

other a 13%





173

Regional economyEmployment in Mallee was around 29 000 in 2006 (table 105). Agriculture was the second largest employment sector, accounting for 19 per cent of the workforce, while related manufacturing activities contributed a further 6 per cent. Major non-agricultural employment sectors included public and community services (23 per cent) as well as wholesale and retail trade (15 per cent). Around 1600 people were unemployed.

Agricultural productionThe gross value of agricultural production (GVAP) in Mallee was around $1.1 billion in 2000-01. Horticulture was the largest agricultural industry, accounting for around 44 per cent of GVAP, with cereals contributing a further 42 per cent of GVAP (figure 78).

Number of persons in common �elds of study in Mallee, Victoria, 200677

2000 2500 3000 35001000500 1500 people

engineering


health

education

society and culture




104 Gross household weekly income in Mallee, Victoria, 2006

Mallee Australia



174


In terms of area, around 55 per cent of land was used for agricultural production, with 98 per cent of agricultural land being used for dryland activities and 2 per cent being used for irrigated activities (table 106). Approximately half of agricultural land was used for dryland cereals production. Of the approximately 44 000 hectares used for irrigation, 52 per cent was used to irrigate grapevines.

The majority of the irrigation took place in the northern part of Mallee, along the Murray River. Of the 2922 agricultural businesses in this region, 1650 were involved in irrigated agriculture

Gross value of agricultural production in Mallee, Victoria, 200178

400300200100 500 $m

milk

wool



cereals

horticulture


105 Employment by industry in Mallee, Victoria, 2006

employment percentage of total employmentIndustryPublic and community services 6 655 23Agriculture, forestry and fishing 5 686 19Wholesale and retail trade 4 456 15Other 4 172 14Manufacturing 2 753 9Construction 1 784 6Accommodation, cafes and restaurants 1 658 6Transport and storage 1 355 5Electricity, gas and water 355 1Property and business services 245 1Mining 96 0Total 29 215 100



175

being mainly irrigated grapevines and fruit trees. In 2005-06, around 265 000 megalitres of water was used in irrigated agricultural production, with an average water application rate of 6 megalitres per hectare. Grapevines, the main activity in terms of irrigated land use, accounted for 61 per cent of water consumption (table 107).

107 Water use in Mallee, Victoria, 2005-06


Pasture for grazing 70 10 641 3Pasture for hay and silage 30 2 172 naCereal crops cut for hay 12 1 420 3Cereal crops for grain or seed 15 3 645 2Cereal crops not for grain or seed 0 0 0Other broadacre crops na na naFruit trees, nut trees, plantation or berry fruits 303 71 253 6Vegetables for human consumption 98 9 790 5Nurseries, cutflowers or cultivated turf 40 1 210 8Grapevines 1 372 161 623 7Total a 1 650 263 886 6



106 Agricultural land use in Mallee, Victoria, 2005-06


Pasture for grazing 907 610 4Pasture for hay and silage na na naCereal crops cut for hay na na 1Cereal crops for grain or seed 1 197 1 000 2Cereal crops not for grain or seed 95 14 0Other broadacre crops 411 105 naFruit trees, nut trees, plantation or berry fruits 353 1 11Vegetables for human consumption 103 0 2Nurseries, cutflowers or cultivated turf 46 0 0Grapevines 1 389 1 23Total a 2 922 2 102 44


176


South Australian Murray-Darling BasinThe South Australian Murray-Darling Basin region is located in eastern South Australia and borders both Victoria and New South Wales. It covers an area of around 56 000 square kilometres. The main regional centres are Murray Bridge and Mount Barker (map 19).

Community profileDemographicsIn 2006, the population was approximately 109 000, of which around 64 per cent were of working age (between 15 and 65 years). The share of the population at working age was similar to the national average. Excluding those over 65 years, the number of males was slightly greater than the number of females (ABS Population Census, 2005-06) (figure 79).

map South Australian Murray-Darling Basin19

towns

rivers

irrigation areas



177

Education Around 54 per cent of the population aged over 15 years had completed a qualification. Within this group, certificates were the most common highest qualification (15 per cent), followed by bachelor degrees (5 per cent) and diplomas (5 per cent) (figure 80). The percentage of the population without qualifications was less than the national average of 52 per cent.



Age distribution by sex in South Australian Murray-Darling Basin, 200679


female

male

0 - 9

10 - 19

20 - 29

30 - 39

40 - 49

50 - 59

60 - 69

70 - 79

80 - 89

90 - 99

100+

Highest quali�cation distribution in South Australian Murray-Darling Basin, 2006 percentage of those over 15 years

80

postgrad 1%

grad dip/cert 1%

bachelor 6%

diploma 5%

certificate 18%

other a 33%




178


Regional economyEmployment in South Australian Murray-Darling Basin was around 48 000 in 2006 (table 109). Agriculture was the second largest employment sector, accounting for 16 per cent of the workforce, while related manufacturing activities contributed a further 7 per cent. Major non-agricultural employment sectors included public and community services (23 per cent) as well as wholesale and retail trade (15 per cent). Around 2500 people were unemployed.

Agricultural productionThe gross value of agricultural production (GVAP) in South Australian Murray-Darling Basin was around $1.4 billion in 2000-01. Horticulture was the largest agricultural industry, accounting for around 56 per cent of GVAP, with cereals contributing a further 20 per cent of GVAP (figure 82).

Number of persons in common �elds of study in South Australian Murray-Darling Basin, 200681

60004000 800020001000 700050003000 people

engineering


health

education

society and culture



architecture


108 Gross household weekly income in South Australian Murray-Darling Basin, 2006

SA Murray–Darling Basin Australia




179

In terms of area, around 85 per cent of land was used for agricultural production, with 99 per cent of agricultural land being used for dryland activities and around 1 per cent being used for irrigated activities (table 110). Approximately 71 per cent of agricultural land was used for dryland pasture production. Of the approximately 71 000 hectares used for irrigation, 45 per cent was used to irrigate grapevines.

The majority of the irrigation took place along the Murray River and in the south western part of South Australian Murray-Darling Basin. Of the 4659 agricultural businesses in this region,

Gross value of agricultural production in South Australian Murray-Darling Basin, 200182

700600 800300 400 500100 200 $m


wool

milk


cereals

horticulture

109 Employment by industry in South Australian Murray-Darling Basin, 2006

employment percentage of total employmentIndustryPublic and community services 11 007 23Agriculture, forestry and fishing 7 628 16Other 7 187 15Wholesale and retail trade 7 084 15Manufacturing 5 924 12Construction 3 156 7Accommodation, cafes and restaurants 2 720 6Transport and storage 1 988 4Property and business services 595 1Electricity, gas and water 511 1Mining 317 1Total 48 117 100



180


2504 were involved in irrigated agriculture being mainly irrigated grapevines, fruit trees and pasture. In 2005-06, around 410 000 megalitres of water was used in irrigated agricultural production, with an average water application rate of 6 megalitres per hectare. Grapevines, the main activity in terms of irrigated land use, accounted for 38 per cent of water consumption (table 111).

110 Agricultural land use in South Australian Murray-Darling Basin, 2005-06


Pasture for grazing 2 458 3 347 11Pasture for seed production na na 1Pasture for hay and silage na na 3Cereal crops cut for hay na na 1Cereal crops for grain or seed 1 431 827 1Cereal crops not for grain or seed 317 28 0Other broadacre crops 355 43 0Fruit trees, nut trees, plantation or berry fruits 999 1 14Vegetables for human consumption 220 0 8Vegetables for seed 29 0 0Nurseries, cutflowers or cultivated turf 69 1 0Grapevines 1 486 1 32Total a 4 659 4 671 71


111 Water use in South Australian Murray-Darling Basin, 2005-06


Pasture for grazing 340 66 441 6Pasture for seed production 12 1 809 3Pasture for hay and silage 167 16 585 5Cereal crops cut for hay 27 3 023 4Cereal crops for grain or seed 10 na naCereal crops not for grain or seed 10 279 2Other broadacre crops 8 na naFruit trees, nut trees, plantation or berry fruits 876 115 539 8Vegetables for human consumption 198 44 293 6Vegetables for seed 24 1 985 6Nurseries, cutflowers or cultivated turf 59 3 214 7Grapevines 1 444 153 997 5Total a 2 504 409 062 6



181

South West (Queensland)The South West region is located in southern Queensland and borders New South Wales. It covers an area of around 135 000 square kilometres. The main regional centre is Charleville (map 20).

Community profileDemographicsIn 2006, the population was approximately 9300, of which around 64 per cent were of working age (between 15 and 65 years). The share of the population at working age was similar to the national average. Excluding those over 65 years, the number of males was greater than the number of females (ABS Population Census, 2005-06) (figure 83).

map South West Queensland20

towns

rivers

irrigation areas


182


EducationAround 41 per cent of the population aged over 15 years had completed a qualification. Within this group, certificates were the most common highest qualification (15 per cent), followed by bachelor degrees (7 per cent) and diplomas (5 per cent) (figure 84). The percentage of the population without qualifications was substantially higher than the national average of 52 per cent.



Age distribution by sex in South West, Queensland, 200683


female

male

0 - 9

10 - 19

20 - 29

30 - 39

40 - 49

50 - 59

60 - 69

70 - 79

80 - 89

90 - 99

100+

Highest quali�cation distribution in South West, Queensland, 2006percentage of those over 15 years

84

postgrad 1%

grad dip/cert 1%

bachelor 7%

diploma 5%

certificate 15%

other a 12%





183


Regional economyEmployment in South West Queensland was around 4500 in 2006 (table 113). Agriculture was the second largest employment sector, accounting for 27 per cent of the workforce, while related manufacturing activities contributed a further 4 per cent. Major non-agricultural employment sectors included public and community services (28 per cent) as well as wholesale and retail trade (12 per cent). Around 170 people were unemployed.

Agricultural productionThe gross value of agricultural production (GVAP) in South West Queensland was around $230 million in 2000-01. Livestock slaughtered was the largest agricultural industry, accounting for around 57 per cent of GVAP, with wool and cotton each contributing a further 18 per cent of GVAP (figure 86).

112 Gross household weekly income in South West, Queensland, 2006

South West (QLD) Australia

households % of total a % of total aIncome groups Less than $500 727 26 22$500-$999 922 33 26$1000-$1999 895 32 33Greater than $2000 220 8 18Not given 611


Number of persons in common �elds of study in South West, Queensland, 200685

350300250150 200 40010050 people

engineering

health

education



society and culture

architecture


184



In terms of area, around 95 per cent of land was used for agricultural production, with more than 99 per cent of agricultural land being used for dryland activities and less than 1 per cent being used for irrigated activities (table 114). Approximately 96 per cent of agricultural land was used for dryland pasture production.

The majority of the irrigation took place along the Warrego River. Of the 458 agricultural businesses in this region, 24 were involved in irrigated agriculture. In 2005-06, around 6500

113 Employment by industry in South West, Queensland, 2006

employment percentage of total employmentIndustryPublic and community services 1 292 28Agriculture, forestry and fishing 1 244 27Wholesale and retail trade 558 12Other 469 10Manufacturing 271 6Transport and storage 211 5Accommodation, cafes and restaurants 206 5Construction 193 4Electricity, gas and water 36 1Mining 31 1Property and business services 24 1Total 4 534 100


Gross value of agricultural production in South West, Queensland, 200186

120 15060 9030 $m

cotton

wool



185

megalitres of water was used in irrigated agricultural production, with an average water application rate of 4 megalitres per hectare (table 115).

115 Water use in South West, Queensland, 2005-06


Pasture for grazing 9 2 877 naCereal crops for grain or seed na na naCereal crops not for grain or seed 6 160 1Total a 24 6 515 4



114 Agricultural land use in South West, Queensland, 2005-06


Pasture for grazing 435 12 358 naCereal crops for grain or seed 5 4 naCereal crops not for grain or seed 22 6 0Total a 458 12 851 2


186

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02.09

AusAid

Australian Fisheries Management Authority

Australian Government Department of Climate Change

Australian Government Department of the Envi-ronment, Water , Heritage and the Arts

Australian Government Department of Resources, Energy and Tourism

CRC Plant Biosecurity

CSIRO (Commonwealth Scientific and Industrial Research Organisation)

Dairy Australia

Department of Primary Industries, Victoria

DN Harris and Associates

.

European commission

Fisheries Research and Development Corporation

Fisheries Resources Research Fund

Forest and Wood Products Australia

Grains Research and Development Corporation

Grape and Wine Research and Development Corporation

Horticulture Australia

International Food Policy Research Institute

Land and Water Australia

Meat and Livestock Australia

National Australia Bank

OECD

Rural Industries Research and Development Corporation

The Treasury

190

ReseaRch funding ABARE relies on financial support from external organ isations to complete its research program. As at the date of this publication, the following or-ganisations had provided financial support for ABARE’s research program in 2009-10. We gratefully acknowledge this assistance.

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