Report for Dairy Australia. Key Issues Follow up Notes Meeting with Independent Panel Inquiry into Dairying in the Lower Murray Darling Basin

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1 Report for Dairy Australia Follow up Notes Meeting with Independent Panel Inquiry into Dairying in the Lower Murray Darling Basin Monday, 19 th September 2009

2 1 Background The Independent Panel contributing to the Inquiry into Dairying in the Lower Murray Darling Basin had meeting with representatives from RMCG (Daryl Poole, Rob Rendell), Rural Plan (Murray Chapman) and DPI (Neil Barr) on Monday the 19 th of September. The purpose of the meeting was to follow up on earlier discussions looking at the key issues facing the dairy industry. This document summarises the key points from the discussions as well as further articulating the impacts to the dairy industry of changed water availability. 2 Key messages The key messages expressed by RMCG include: Industry needs to be export competitive or it will shrink: Future farming systems need to be able to operate with a milk price that will be largely determined by world prices. This will mean that farms will need to operate at productivity levels that are world competitive. Dairy farms in the region will need access to water which will be influenced by: Demand and competitiveness of other agricultural users; Increased demand from urban; Government buyback; and Climate change (this will be further illustrated in section 4 of this report). NVIRP is critically important: Without NVIRP water charges would double; Non targeted buyback will impact on system viability; and Infrastructure must be reduced in the system. RMCG Consultants for Business, Communities & Environment Page 2

3 Future water value: Will be set by dairy as it will continue to be the biggest user for all three water availability scenarios of no climate change, medium climate change and repeat of the last ten years. This is further described in section 4 of this report. Irrespective of which climate scenario eventuates the dairy industry will need to improve efficiency 1 t DM/ML industry benchmark is poor and needs to at least double and more likely treble for the industry to be competitive for the use of water. Lucerne and maize will be crops that drive improved water use efficiency combined with farm system change (cut and carry more common). More improvement will be made in the growing feed area than the animal system (i.e. genetics). Critical to future investment in the industry will be farmer confidence about future water availability and farmers willingness to invest in technology so that they have the ability to compete for that water. If there is a step change in water availability then the industry will need to have a step change in productivity improvements. This will not be easy but the technology is available that will still allow the industry to grow even with reduced water availability. The future dairy businesses will: be less in number; be bigger; and have sufficient scale to enable adoption of technology to capture the productivity gains that will be required. 3 Dairy water use in the past In the past the dairy industry had developed farming systems that suited an environment of abundant water. Allocations were typically 200% of entitlements and more water was also available from less profitable water users. In this environment the industry grew and developed a low cost farming system that was based on perennial pasture that was flood irrigated and predominately harvested by direct grazing. When water resources were abundant, the drivers for improved productivity were more around labour improvements, grazing management, bought in feeds and animal genetics. There were some improvements in water use efficiency through laser grading and implementation of recycle systems, but they were driven as much by improving labour efficiency as they were in improving feed grown per megalitre. The system employed was a series of compromises. Perennial pasture grows all year but is not the best performing crop during different times of the year (i.e. maize in summer or annual pasture in winter). Flood irrigation is cheap but is inefficient and does not promote the best growing conditions for the crops grown. Harvesting via direct grazing is cheap but comes at the expense of lower utilisation of what is grown and limits what can be grown. RMCG Consultants for Business, Communities & Environment Page 3

4 When water resources are less available, the farming systems of the past will be seriously challenged. This is evident in recent years of very low water availability, which has forced dairy farmers to change what they do. The series of compromises of the past (flood irrigation, perennial pasture, direct grazing) will not deliver the required water use efficiencies needed in the future. This is not to say that they will completely disappear in future farming systems, but farms will generate much more of their feed requirements using improved irrigation technology, growing different crops and more of the crop will be cut and carried compared to direct grazing. Farms will also be more proficient in handling bought in feeds and therefore off farm feed will provide additional opportunities for dairy businesses to grow. 4 Future water scenarios 4.1 Context The biggest influence on the dairy industry in the Lower Murray Darling Basin will be future access to water resources. There is significant change occurring in the water industry that is influenced by: Water policy reform including water buyback; Irrigation system modernisation; Expansion of the irrigation grid increasing the connectivity between other agricultural irrigation systems as well as to urban water supplies; and Future impacts of climate change. The Goulburn Murray Irrigation District (GMID) is the largest irrigation district in the Lower Murray Darling Basin and supports the majority of the dairy industry. Therefore what happens in the GMID will have the biggest influence on dairy industry and will be the focus of the remaining section of this report. 4.2 What is happening? The GMID is currently undergoing a major modernisation program aimed at securing the economic, social and environmental future of northern Victoria. It is the largest ever irrigation renewal project in Australia aimed a recovering approximately 425 GL of water that is currently lost in the system. Approximately 80% savings will be shared between irrigators and the environment with the remaining 20% going to Melbourne. In addition to the modernisation program, the Federal Government is implementing its water buyback initiative aimed at restoring the balance between consumptive use and the needs of the environment in the Murray Darling basin. The third issue and potentially one that presents the biggest threat to future water availability is the impact of future climate change. All of the above will influence future water availability and the dairy industry needs to be able to quantify the impact and look at how it may respond to a changed operating environment. RMCG Consultants for Business, Communities & Environment Page 4

5 4.3 Future water availability Impacts of modernisation and Government buyback RMCG has further refined the future water scenarios that were provided as part of the background papers for the Inquiry. To more effectively articulate the impacts of the different scenarios to the dairy industry, the information is presented as a series of diagrams. The diagrams begin by looking at the impact on the entire water resource and the users of that resource, then looks specifically at the water available to the dairy industry. The water available is then converted into the amount of feed grown and ultimately to the volume of milk generated from the region. The data to support the diagrams is listed in Appendix 1. Figure 4 1 illustrates the potential impact on water resources after modernisation of the irrigation system, government buyback and under the following climate scenarios: Long term average (rainfall and inflows revert back to historical levels); Medium climate change (as described in the Northern Sustainable Water strategy); and High climate change (as described in the Northern Sustainable Water Strategy assuming a continuation of rainfall and inflow patterns of the last ten years). Figure 4 1 Water balance in the GMID after modernisation and Government buyback The key assumptions for Figure 4 1: Total water is based on average long term cap equivalents. RMCG Consultants for Business, Communities & Environment Page 5

6 Supply system efficiency post modernisation is expected to be ~85%. This compares to the current efficiency of ~73%. Total savings/buyback achieved through modernisation and other programs is 1,070 GL. Of this 75 GL will go to Melbourne, 720 GL will go to the environment and 275 GL will be returned to (or retained by) the irrigators. 720 GL that will go to the environment is made up of: 300 GL from targeted government buyback; 100 GL from trade to the government within the 4% trading cap; 75 GL of savings from stage 1 of the modernisation program; 100 GL of savings from stage 2 of the modernisation program; 96 GL from Central Goulburn 1 4; and 48 GL from on farm water use efficiency improvements. 100 GL has been traded out of the GMID since the base year of 2004/05. Climate change scenarios are based on information provided in the Northern Region Sustainable Water Strategy. If the targeted efficiency gains are achieved through the modernisation project, Melbourne receiving its share of water savings (75 GL) and the government buying 400 GL through buyback, under a no climate change scenario then the level of water delivered to farm will drop by 27% from 2,136 GL (including meter error) to 1564 GL. The magnitude of the impact increases with potential climate change scenarios to a 40% drop with medium climate change and a 56% drop under a high climate change Dairy industry share of water resources Immediate Impact Historically the dairy industry has been the largest user of water in the GMID. Figure 4 2 shows the dairy share of the water delivered to farm in the past and what could be the situation under different climate change scenarios in the future. RMCG Consultants for Business, Communities & Environment Page 6

7 Figure 4 2 Dairy Share of Water Resources Figure 4 2 shows that to minimise the impacts of reduced water availability, the dairy industry needs to lift its share of the resource that is available. Historically, on average the dairy industry has used 56% of the water available. After modernisation and government buyback, and retaining 56% of the available water, the volume used by the industry will drop from 1201 ML to 876 ML (27% drop). It is expected that both horticulture and urban water use will outcompete dairy for water resources and not drop in volume used, even with reduced water availability. The dairy industry should out compete mixed farming enterprises and therefore soften the potential impact if water resources are further reduced through climate change. In figure 4 2 an assumption has been made that dairy s share of the available water moves from 56% to 60% and then to 65% respectively under the three climate change scenarios of no, medium and high climate change. The increased share will come at the expense of mixed farming enterprises. This will not just happen and the dairy industry will need to improve its water use efficiency to ensure that it can compete for the reduced pool of water that will be available in the future. Situation in ten years time It is assumed that in ten years time both horticultural and urban water demand will double. This will increase the pressure on the dairy industry to improve its water use efficiency so that the additional volume demanded by horticulture and urban needs comes from mixed farming enterprises and not reduce the pool available to the dairy industry. This is illustrated in Figure 4 3. RMCG Consultants for Business, Communities & Environment Page 7

8 Figure 4 3 Dairy share of water resources ten years time If the dairy industry can out compete mixed farming enterprises then it should grow its share of the water resource. Figure 4 3 shows how the share of the water resource for the mixed farming sector will potentially decrease over time from a historical 37% to 5% in a high climate change scenario Improvements in water use efficiency Farm efficiency The reduced water availability needs to be converted to the amount of feed that can be grown and what that will mean for regional milk production. The implications to the dairy industry will again be highly influenced by how farmers respond to the changed operating environment. The impacts of lower water availability will be much greater if improvements in farm efficiency are not achieved which will be illustrated in Figure 4 4 to Figure 4 6. Farm water use efficiency is broken up into two components: farm application efficiency (reduction in on farm losses); and how much feed can be grown per ML of water used by the plant. If improvements are made in both areas then the impacts of declining access to water can be dramatically reduced. RMCG Consultants for Business, Communities & Environment Page 8

9 Farm application efficiency The volume of water that drives farm production is the amount of water that is available for plant growth. There has been a focus on delivery infrastructure to reduce losses from storages to farm and there needs to be a similar focus on on farm delivery infrastructure. Impacts of lower volumes of water availability will be reduced with improvements in on farm delivery efficiency. Figure 4 4 Improving farm application efficiency Figure 4 4 shows that if the industry stays the same and does not improve on farm water application efficiency, then water available to the plant when compared to the historical availability will drop by about a third from 781 GL to 561 GL in a medium climate change scenario. If a 10% improvement in farm delivery efficiency can be achieved, then with medium climate change the decline in water available to the plant will be restricted to a reduction of 15% from 781 GL to 657 GL. RMCG Consultants for Business, Communities & Environment Page 9

10 Improving feed grown per ML used An industry average of growing one tonne of dry matter (t dm) for every megalitre used will need to improve to remain competitive for water into the future. Water is the driver for on farm feed production and the water is provided by both irrigation and natural rainfall. Figure 4 5 shows how the volume of home grown feed that can be produced based on the water available under the different climate scenarios. Figure 4 5 Increasing Feed Grown per ML Used The key assumptions in Figure 4 5 include: Historical feed produced per ML of total water (rainfall + irrigation) available to the plant of 1.2 t dm/ml. As water resources reduce, it is expected that the t dm grown per ML will increase. The following assumptions are made: No Climate change 1.4 t dm / ML Medium Climate change 1.6 t dm / ML RMCG Consultants for Business, Communities & Environment Page 10

11 High Climate change 2 t dm / ML The impact of reduced rainfall has also been taken into account and it is assumed that average rainfall will drop from 450 mm/yr (no climate change) to 380 mm/yr (medium climate change) and 295 mm (high climate change). It is clearly demonstrated in figure 4 5 that the impact of lower water resources can be significantly reduced if water use efficiency can be improved. In the medium climate change scenario, water resources available to the plant could be reduced by as much as one third but with improved onfarm delivery efficiency and increasing the amount grown per megalitre then there is potential to grow as much feed as has been produced historically from farms in the GMID. Farms in the GMID will also buy in a certain proportion of the total herd requirements. Figure 4 6 shows the total volume of feed available to the industry. Figure 4 6 Total feed available (home grown + bought in) RMCG Consultants for Business, Communities & Environment Page 11

12 It is assumed that as the industry moves into an environment of lower water availability farm systems will also change. Farms will become more proficient in their ability to use bought in feeds as well as cut and carrying more of their home grown feed than they have in the past. The total feed available to the dairy industry in the different climate change scenarios includes an increase in the level of bought in feed from 40% (historical), to 50% (medium climate change) and to 55% in high climate change. 4.4 Implications to regional milk production A key question is what will be the impact to regional milk production after modernisation, government buyback and potential changes to climate. This will also flow onto the implications to all the associated processing, farm services and regional economic activity that is currently generated from the industry. RMCG Consultants for Business, Communities & Environment Page 12

13 The following diagram represents the potential impact on farm numbers and regional milk production for the different climate change scenarios and whether or not productivity improvements are made. Figure 4 7 Regional milk production The key feed assumptions that have been used to quantify the potential milk production in the region include: Feed used includes both home grown and bought in and supports both milking herd requirements and replacement stock (25% replacement rate); Average per cow milk production of 450 kg milk solids; Per cow feed requirements of 6.45 t dm /cow/yr. Figure 4 7 clearly demonstrates the critical need for the industry to improve how it uses the water resources available to it or there will be a significant retraction of the industry and the inevitable flow on impacts on supporting industries in the region. Under a high climate change and no improvements in farm efficiency the industry could retract to less than half of the current milk production with only one third of the current farms. This would result in significant industry restructure and reduced dairy related economic activity in the order of $500 million (based on an economic multiplier of 1.5). If the industry can increase farm delivery efficiency by 10% (65% to 75%), improve tonnes grown per ML from 1.2 to 2 t dm/ml, grow its share of available water resources to 65% and increase boughtin feed from 40% to 55%, the industry has the potential to grow even in the high climate change scenario described in this report. RMCG Consultants for Business, Communities & Environment Page 13

14 5 Improving water use efficiency There is existing technology that can be implemented to improve water use efficiency to achieve the target levels outlined in section 4. There are farms that have already adopted the technology and are demonstrating the efficiencies can be achieved. The key challenge is how these improvements can actually be achieved across the whole industry. The two most likely forms of technology that will be adopted to help the industry reach efficiency levels required will be fast flow and sub surface drip. Table 5 1 shows the potential that could be achieved through the use of improved irrigation technology if faced with a high climate change scenario. Table 5 1 Potential from fast flow and sub surface drip high climate change scenario Fast Flow Sub surface Drip Ha developed to achieve Application efficiency of 75% 1 36,909 20,505 Ha Developed as a percentage of current dairy area 20% 11% Capital Required for Development $/ha $4,000 $10,000 Total Capital required $,000,000 $148 $205 % Improvement t in t dm grown per ML 25% 155% t dm/ml Irrigation water used in improved technology (GL) % of Total irrigation water available to the plant used in improved technology 53% 31% Rainfall on improved technology area (GL) Total GL on improved technology area Feed Grown on improved technology area (million tonnes) Irrigation water available for use on unimproved area (GL) Rainfall on unimproved area Total Water on unimproved area (GL) Feed Grown on unimproved area (million tonnes) Total feed grown (million tonnes) Total Feed Grown (no improvement million tonnes ) % increase in feed grown compared to no improvement 31% 81% Potential home grown feed production % of potential 64% 89% 1 When determining the area converted to improved irrigation technology it is assumed that sub surface drip technology will be used with cropping activities that will use the irrigation infrastructure for the entire irrigation season (i.e. double cropping or lucerne). With fast flow, it is assumed that there will be areas that will be used for part of the irrigation season (i.e. annual crops). The ratio used in this example is that two thirds of the area RMCG Consultants for Business, Communities & Environment Page 14

15 of fast flow will be used for the full irrigation season and one third will be used for annual crops or part of the irrigation season. Table 5 1 illustrates the potential outcomes if all improvements in irrigation technology were via fast flow or via sub surface drip. In reality there will be a combination of irrigation technologies adopted that will help the industry achieve more with less. What it does show however is that to achieve the potential described in section 4 of this report, the industry will need to adopt technology and develop farm systems that not only improve water application efficiency but also grow more t dm/ml. A summary of potential outcomes is provided in Table 5 2. Table 5 2 Summary of Potential High Climate Change Scenario Stay the Same Fast Flow Sub surface Drip Sub surface Drip Area to match Fast Flow Area developed (ha) 0 36,909 20,505 36,909 Ha developed as a percentage of current dairy area 0% 20% 11% 20% Application efficiency 65% 75% 75% 82% Total capital required $,000,000 0 $148 $205 $369 Irrigation water used in improved technology (GL) % of total irrigation water available used in improved technology 0 53% 31% 56% Total home grown feed (million tonnes) % increase in feed grown compared to no improvement 0% 31% 81% 106% Target home grown feed production (million tonnes) % of potential 49% 64% 89% 106% Key points from Table 5 2 include: If fast flow is the technology predominately used to improve irrigation efficiency then the homegrown feed production will increase from 0.7 to 0.9 million tonnes dm (31% increase); If sub surface drip technology is used to improve irrigation efficiency then home grown feed production will increase from 0.7 to 1.3 million tonnes (81% increase): If sub surface drip technology is used on the same area as fast flow then irrigation application efficiency will increase to 82% and home grown feed production will increase from 0.7 to 1.5 million tonnes (106 % increase). RMCG Consultants for Business, Communities & Environment Page 15

16 To achieve production targets outlined in section 4, the industry will need to adopt technology that not only improves application efficiency but also increases the t dm grown per megalitre of water used. It will be important for the dairy industry to increase its adoption of sub surface drip to achieve the targets in home grown feed production outlined in this report. The high capital cost associated with the adoption of technology like sub surface drip will make it very important that the industry is able to access as much dollar support through initiatives such as the on farm irrigation efficiency program. RMCG Consultants for Business, Communities & Environment Page 16

17 Appendix 1 Data for figures in Section 4 of Report Figure 4 1 Water balance in the GMID after modernisation and Government buyback Before Modernisation No Climate Change After Modernisation Medium change climate High Climate Change Water delivered into GMID (GL) Water to the Environment (GL) Water to Melbourne (GL) Water traded out of GMID (GL) System Losses (GL) Metre Error (GL) 159 Water delivered to Farm (GL) Figure 4 2 Dairy Share of Water Resources Before Modernisation No Climate Change After Modernisation Medium change climate Water delivered to Farm (GL) Dairy (GL) Dairy Use (% of water delivered to farm) 56% 56% 60% 65% Mixed (GL) Mixed including hobby use % 37% 35% 29% 20% Horticulture (GL) Horticulture use % 6% 8% 9% 13% Urban (GL) Urban use % 1% 1% 2% 2% High Climate Change RMCG Consultants for Business, Communities & Environment Page 17

18 Figure 4 3 Dairy share of water resources ten years time Before Modernisation No Climate Change After Modernisation Ten years time Medium Change Climate High Climate Change Water delivered to Farm (GL) Dairy (GL) Dairy Use (% of water delivered to farm) 1 56% 60% 65% Mixed (GL) Mixed including hobby use % 0 26% 18% 5% Horticulture (GL) Horticulture use % 0 15% 19% 25% Urban (GL) Urban use % 1% 3% 3% 4% RMCG Consultants for Business, Communities & Environment Page 18

19 Figure 4 4 Improving farm application efficiency Historical No Climate change Medium Climate change High Climate change Stay same the Improve Stay same the Improve Stay same the Improve Total Irrigation Water delivered to Farm Dairy (GL) Water available for plant use on Dairy (GL) Farm Efficiency Level (GL) 65% 65% 75% 65% 75% 65% 75% Farm Losses (GL) Figure 4 5 Increasing Feed Grown per ML Used Dairy Historical No Climate change Medium Climate change High Climate change Stay same the Improve Stay same the Improve Stay same the Improve Total Irrigation Water available to plant (GL) Rainfall Water available to plant (GL) Total Water available (including rainfall) GL Home grown Feed potential (million tonnes dm) RMCG Consultants for Business, Communities & Environment Page 19

20 Figure 4 6 Total feed available (home grown + bought in) Historical No Climate change Medium Climate change High Climate change Stay same the Improve Stay same the Improve Stay same the Improve Home grown Feed potential (million tonnes dm) Bought in feed (million tonnes dm) % bought in feed 36% 40% 45% 40% 50% 40% 55% Total Feed available to Dairy (million tonnes dm) RMCG Consultants for Business, Communities & Environment Page 20

21 Contact Details: Name: Daryl Poole Title: Senior Consultant Address: Box 2410, Mail Centre, Bendigo 3554 P: (03) F: (03) M: E: International Standards Certification QAC/R61//0611 Document Review & Authorisation Job Number: 25 D 15 Document Version Final/ Draft Date Author Reviewed By Checked by BUG Release Approved By Issued to Copies Comments 1.0 Draft Oct 09 D. Poole R. Rendell R. Kleehammer R. Rendell C. Murphy 1 (e( 2 Final Nov 09 D.Poole R. Rendell R. Kleehamer R. Rendell C. Murphy 1 (e) Final Draft comment for Note: (e) after number of copies indicates electronic distribution Disclaimer: This report has been prepared in accordance with the scope of services described in the contract or agreement between RMCG and the Client. Any findings, conclusions or recommendations only apply to the aforementioned circumstances and no greater reliance should be assumed or drawn by the Client. Furthermore, the report has been prepared solely for use by the Client and RMCG accepts no responsibility for its use by other parties. RMCG Consultants for Business, Communities & Environment Page 21