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Impact of the Murray-Darling Basin Plan on regional Australia

CHAIR —The public hearing will now resume. Before calling the next witness may I repeat for those who may not have been present this morning—people from the general public and other organisations—that those wishing to make short statements towards the end of the proceedings today should please inform the secretariat because we will have a limited time and I would like to know how many people would like to make a brief comment.

I now welcome representatives of the Victorian Farmers Federation to the hearings today. Although the committee does not require you to give evidence under oath I should advise you that this hearing is a legal proceeding of the parliament and therefore has the same standing as proceedings of the respective houses. We have received a written submission and we thank you for that. Do you wish to present any additional submissions or do you wish to make an opening statement and then take some questions?

Mr Broad —We just have an opening statement and then we will take questions. Thank you very much for coming to Bendigo at the heart of central Victoria—Victoria, the greatest agricultural state in Australia.

0Mr Mitchell interjecting

CHAIR —These proceedings are not meant to be divisive!

Mr Broad —The members of the Victorian Farmers Federation are farmers, and farmers by their very nature are practical people. In the opening statement I thought I would run through a little bit of the history to give you some idea of how practical they actually are. In Sunraysia the first lift pumps began pumping in 1881 and there started to grow a fruit industry. The idea at the time was that the farmers would grow the fruit, put it on a paddle steamer, take it down to Echuca and there put in on rail down to Melbourne. They grew the fruit. The river was dry. They could not get it on a paddle steamer and the farmers nearly went broke. That began the start of the dried fruit industry in Sunraysia. Instead of being stuck and the first hurdle they found a way around it.

The Murray River also went dry in 1914. In the late twenties in the Pyramid Hill irrigation district my grandparents started. They realised over time that there was no drainage. They put in recycle systems and our farmers have been very active in tree planting and improving the environment for irrigators there.

The Hume Weir was first built in the late twenties and then further expanded in the thirties. There was the Snowy River Scheme in the fifties and Lake Eildon in 1956. Incidentally, during the floods last week in my home town of Bridgewater the mark on the post office was one inch lower than the 1909 floods. So it is not a one in 100-year flood, it is a one in a 102-year flood!

Dartmouth was the damn built in 1976. So that members of parliament understand how controversial water is, it was only passed by one vote in the parliament then. Since then 35 years have gone by and we have not seen any major investment in infrastructure from the federal government in irrigation and water management. But we have seen farmers putting in laser grading, centre pivot irrigators and subsoil monitoring. They have been very adaptive and have done a lot of the heavy lifting when it comes to irrigation and water management. As well, they have planted substantial numbers of trees, renovated pastures and done some of the largest environmental works on behalf of the Australian community.

We have had 10 years of very dry times, 10 years of drought, and in that time we have seen farmers draw on their equity. Our figures tell us that debt levels for our Victorian dairy farmers went up nearly 10 per cent per year throughout those very dry times. Whilst there is hope, farmers will go into debt because they believe there is a future in irrigated agriculture. What we are seeing, through the Water Act and the proposal of the Murray-Darling Basin Plan, are cuts of 28 to 30 per cent. But in actual fact for irrigators in some valleys that is as high as 79 per cent and an average of 39 per cent. Farmers will not go into debt if there is no light at the end of the tunnel. This is why it is essential not to compare the outworkings of this legislation with the last 10 years of drought when you are talking about the impacts on rural communities and people as a whole.

We firmly believe that whilst this process is going on it s inappropriate for the government to be buying water. I concur with the comments of Sussan Ley: if this were the stock market, you would be suspending trading. We also believe that significant outcomes that the community would feel comfortable with can be achieved through environmental works and infrastructure—through on-farm infrastructure and through system infrastructure—and this is the thrust of our argument.

CHAIR —I have a question on the comments you have made on the suspension of the buyback. Do you have any considerations in relation to the traditional water trade, given—your words—‘the uncertainty’ of the market at the moment?

Mr Anderson —The position of the VFF is that we have been pushing for a more open trading market. We believe that, through the brokerage system, there are some issues—the protection of the irrigators and both buyers and sellers in that process. We understand that that is now being addressed. Minister Burke made reference to that at a meeting we had in Canberra. As far as interstate trade is concerned, each state has its own water register. We need a linkage between those registers to facilitate what we would call ‘quick trade’. There are a few areas there that should be opened up in terms of the transparency of the trading system. But trading in water, given the capital value of water, should not be any different from trading in shares. You should be able to pick up the daily paper and be able to look at any system in Australia. You should see the high and the low and how much was traded on that day at whatever price. When we get to that stage, and a system where brokers are regulated in a way similar to the stockbrokers’ national exchange, it will certainly be a very transparent process. That will require registers in the states who can talk to each other. Given that there are state authorities and private companies, a lot of checking needs to be done before trading can actually take place. What we need is some similarity in the state registers to facilitate that process. It is a fledgling market. It will take only one or two brokers to fall over or something to go horribly wrong and you will do exactly the same to the water market as to the MIS and others. I think there is a lot of work still to be done there.

CHAIR —Richard, just on the MIS, evidence has been given to the committee that the presence of the schemes allowed for the water price to escalate quite dramatically and then others borrowed against that pricing regime. In fact, we were told yesterday that during the MIS arrangements the price of water went to $2,400 a megalitre. Prior to that, it was about $1,400-$1,500. Since then it has come back to about $1,400 to $1,500, and obviously some people have borrowed against the $2,000, which some may argue was an imperfection in the market through the MIS. What do you believe has occurred in the price of water because of those schemes?

Mr Anderson —It is not just MIS, it can be any large corporation that has got pocketfuls of money. If you look at what we have got at the moment, you have got the Commonwealth government buying water. The Commonwealth is the main player in the market and whenever you get a player in the market that accounts for probably 90 per cent or 95 per cent of the market, they can force the market price. We have seen it with the Commonwealth, a water holder buying water at $2,400, and the South Australian government buying water only 12 or 18 months ago at $2,700 a megalitre. Any large player in the market will influence the market. From the point of view of an irrigator, agriculturalist and farmer, the small business operator farmer, it is pretty hard to compete with governments that have got deep pockets and long arms when it comes to money. They can influence the market, and I think that we have seen that. Sussan made reference earlier to what had happened to the price. When you have got a major player and only one major player in the market, they can influence the price one way or the other.

Mr Ford —I might add a bit to that. Our concern with the MIS was, I think, the competitive advantage that they provided to purchase water. It went a bit further than that. It was actually the distribution of risk. Investors in the MIS were not facing the same risk that farmers were directly; it was diffused right through a large proportion; it was not their own source of income. So it was essentially a government subsidy of a type, certainly through the tax breaks that were available to the MIS. There were also some other risk advantages as well, but certainly the tax advantage contributed to the increase in price. Effectively, we have in the marketplace now a large buyer that is 100 per cent government subsidised, so there is no doubt that there are some distortionary processes going on, we believe, in the marketplace.

CHAIR —I guess one of the things we are looking at is the socioeconomic impact of proposed changes. Obviously, any imperfection in the market would create that. There is a lot of concern out there that reductions in water entitlements will have a real impact on the balance sheets of various players, and part of that balance sheet issue has arisen because of the market to a certain extent and some of the imperfections that are already in the existing market. And we are just trying to cut a distinction through that process.

Mr Broad —When you are talking about the market, I guess one of my concerns is essentially the costs of running an irrigation system. The costs are divided by the total amount of water available in that irrigation system. A farmer has to be able to tip water on the ground and grow something and make a profit out the other side if he is going to keep doing it. There will be years, such as this year, when farmers will pay for that water and probably not need a lot of it because of very wet conditions, so in fact their marginal profit needs to be more than just one year’s water price—it needs to be substantially higher.

If you withdraw a large amount of water out of our irrigation system and then, say, we take, for example, 37 per cent so we are going to have an irrigation system that is 37 per cent smaller, I think that is actually flawed. What will happen if you withdraw 37 per cent is that the price of water for those remaining irrigators will be substantially higher and given the cost of production relative to the price of the product they have got to sell—the cost-price squeeze—it means that the viability of those who are left is threatened. Then, I suppose, they may become ‘willing sellers’—and a willing seller is someone who cannot make a profit out of agriculture or who wants to leave for their own personal reasons or personal stage in life.

That is my concern when you are talking about the marketplace. It is essential that we are aware that the costs of the system will be divided by the water that is left and it still has to be profitable for people to be growing our food.

Mr GIBBONS —Andrew, would you elaborate on your concluding remarks about the infrastructure requirements and how your members are actually prepared to pay a role in developing infrastructure, and maybe give us some examples of what sorts of things they could be looking at?

Mr Broad —There are three levels of infrastructure that I think we can invest in. There is the environmental infrastructure, which I will get Richard to allude to soon. There is the on-farm infrastructure, and the federal government has had on-farm infrastructure grants, although in our opinion they have probably been a bit slow in rolling those out. Then there is the system infrastructure, for example, things like the modernisation of our irrigation system in Northern Victoria, which I imagine you would be familiar with, Steve. So I guess they are the way forward.

Looking at it from a purely economics point of view, to say that you could buy a megalitre of water for $1,000 or $2,000 as opposed to saying that you can recover a megalitre of water by infrastructure for $3,000, you would say that the pure economics do not stack up. But if you are looking at it—and governments should look at things from a long-term, nation building perspective—the money you spend means that you not only save the water once, you save it every year probably for the next 100, 200 or 300 years. I would love to think that our members of parliament are statesman and not just politicians.

Mr GIBBONS —And are we looking at ourselves living for 300 years?

Mr Broad —With good Australian food you might live longer. I will just get Richard to expand on some of those projects.

Mr Anderson —In terms of environmental infrastructure, through state departments we have identified a large number of environmental infrastructure works which do amount to reasonable levels of savings. For example, there is Lindsay Island, 277 gigalitres; Gunbower Forest, 185 gigalitres; and the Hattah Lakes system, 371 gigalitres. Just following on from what Andrew has pointed out, investment in infrastructure, whether it be the environmental infrastructure or on-farm or whatever, does leave you a long-lasting legacy in terms of the economic activity. A lot has been said about socioeconomic studies and everything else. By investing in the infrastructure for the longer term, you get that rural-regional economic activity anyway purely out of programs, and then you do not have the effect of physically taking water out of irrigated agriculture.

I guess the other thing in terms of the projected population growth here in Australia is that we still need to be able to feed ourselves, and by that investment in infrastructure and efficiencies we would not expect a decrease in economic output from the agricultural sector. If anything, it would be maintained and probably even increased with that modernisation of infrastructure. So it is not just the environmental infrastructure; it is the on-farm efficiencies, and as Andrew pointed out, that program has been rolled out. It has been somewhat messy, and I think some work can be done in that process coming out of Canberra, but as far as the socioeconomic effects of the Basin Plan, if you do it via infrastructure you get forward rural-regional development going with that and you leave a long-lasting benefit to those regional communities.

CHAIR —Just following up the point that Steve was making, we are getting different information. One of the things that we want information on is: what sorts of things in terms of micromanagement, evaporative savings, works and measures, and a whole range of other things, can improve river health before going to the fairly blunt instrument of cutting licence entitlements? We are getting different measures in relation to what these savings are and what the savings are being measured against. That figure for Lindsay Island that you just mentioned—271 gigalitres—is that against what the authority is saying? Can you put that in the context of, say, the 3,000 or 4,000 gigalitre objective that the authority has put out in the guide? If you carry out those works and measures can you deduct 271 gigalitres from that number? Is it as crude as that?

Mr Anderson —In raw figures, yes. Lindsay Island takes somewhere around 3,000 gigalitres, I think, to do it properly. That same work can be done because under the plan we are talking about overbank flows, and there is lot of wastage in overbank flows in delivering outcomes to these environmental sites. A lot of that work can be done through pumps and piping and so on. I heard a reference earlier this morning from one of the other groups represented to the efficiency at Kow Swamp. There are a lot of ‘kow swamps’ around where we use the wetlands and so on as part of the delivery system to deliver water to agriculture and, if you spend your money on those areas, there are a lot of savings to be made.

I will not stop there. This should not be just a Victorian or a New South Wales thing; this goes down to South Australia and what may be able to be done with the Lower Lakes. You have got 2½ metres of evaporation off the Lower Lakes and pretty much three metres of evaporation off the Menindee Lakes. Some of those issues are management issues and it is better to look for management outcomes that can achieve those outcomes in terms of water savings, not just the infrastructure. Infrastructure certainly leads economic development in local rural communities, there is no question about that, and sort of overrides the problem of the socioeconomic fallout from just taking the water back.

Mr Broad —One of the problems we had, and I imagine not just us, is trying to find whether the 271 gigs is actually a real saving or is it just part of a mix that you still need to flow down the river for various reasons. It has been the failure of the MDBA to actually come up with a detailed environmental watering plan that you could actually measure all these things as you move down the system. We have been very concerned that there has not been any detailed work conducted with the state departments, who are really the experts in managing these environmental assets through their jurisdictions. That makes it very hard to actually calculate how you would incorporate these individual discrete site savings into an overall basin plan.

Mr TEHAN —Graeme, can you elaborate on that? I think it is an interesting point. My understanding is that the Commonwealth is the single biggest owner and has roughly 30 per cent or would definitely be heading towards 30 per cent and maybe 40 per cent if the buybacks continue how they are. Yet what do we know about how that water is measured and managed and all the processes that go into that from the Commonwealth angle?

Mr Ford —Richard is probably the expert on this stuff.

Mr Anderson —I do not know about expert, but I guess this has been one of our concerns. Yes, the Commonwealth will end up with somewhere in the vicinity of 30 or 40 per cent of Victorian high security water, but I guess there is lack of an environmental watering plan in detail. But as Graeme pointed out, the biggest disappointment is that the states have been handling these environmental sites for a long time, they have been using their own environmental water to try and keep these sites going through droughts, making those decisions as to which ones are more environmentally or for whatever need to be protected as against others. But one of the major concerns is that we have not had that plan and the authority failed in terms of talking to the states and the state departments as the number one priority before they even started this process. Up to probably the week before Christmas there had hardly been any dialogue whatsoever in terms of talking to the state departments about their own states and what can and cannot be done. We saw figures come out in the discussion paper of large volumes of water but in some places towns would have been flooded for the best part of three months even to try and deliver that water. That is how far removed it can be if you do not engage the states and the CMAs and the people who know, that is how far removed that draft discussion paper and some of what is in it is from reality.

CHAIR —Do you point that out in your submission?

Mr Anderson —Yes.

CHAIR —On that particular point, though, because we are getting a bit of that as we travel up and down the system, that if you deliver that sort of water over bank that you create some human misery just to try and get the delivery of that water there.

Mr Anderson —Wagga was a good example. You would flood Wagga for three months if you were trying to deliver the amount of water that they were talking about delivering.

CHAIR —We need those examples so that we can question the authority about their logic in terms of that. So any additional information on those sorts of things would be helpful.

Mr TEHAN —What you are really saying is that the Commonwealth are asking farmers and irrigators to get their act in order and yet they are not really getting their own act in order.

Mr Anderson —You said it, I didn’t, but I agree with you.

Dr STONE —Picking up on what you were saying before, Andrew, about the water sales out of areas: I agree with your comments that it is not like selling beans on the stock market. Every time a farmer, whether he is a stressed seller or not, sells most or a big proportion of his entitlement then there are impacts on those in the rest of the system. So it is not like, ‘Just get on the computer in the morning, see what the price is and—bang!—you sell your water.’ There are significant impacts on the system—hence the caps and all sorts of other contrivances that the different states have put in place to try to protect the assets and make it all equitable and make it work.

We have seen, during the drought in northern Victoria, in irrigation in particular, almost the scenario proposed in this guide. In other words, we lost about 35 per cent of our water through drought and stressed selling. Given that, can you describe, for people’s information, what impacts that had on managing properties, on food manufacturing and the dairy companies, and then on the social infrastructure that went with that population moving, rising and falling—because, in a sense, in a microcosm, we have already experienced what is proposed for the area through the seven years of drought.

Mr Broad —Essentially, if you look back over the last few years in northern Victoria, we have seen milk factories shut, which is the flow on of people not producing volumes of milk. We have seen communities ageing. We have seen breakdowns of football clubs, sporting clubs. We have seen retirement villages becoming one of the economic drivers of our country towns. Maybe that is a service industry—if I might allude to past presenters here.

I guess our vision for the future is to see young people coming back into agriculture; to see us producing food, doing secondary processing and then delivering that to port and offshore, particularly given that we are in the Asia-Pacific region. So whilst all our market signals should be telling us that we are going to grow and prosper, the complete opposite has happened in northern Victoria as a result of significant withdrawal of water, and I think that is exactly what we would see right across the basin as a result of this plan.

CHAIR —We are getting towards the end of our time. Are there any quick questions?

Mr SECKER —I have one. One of the submissions, No. 521—and I cannot back up whether yours actually says this—says:

In its submission the VFF states that irrigators have sold off HS—

high security water—

to improve liquidity, and goes on to demand that the Commonwealth should not buy back HS entitlement for the environment as this would increase the price of temporary water to those irrigators. Effectively the VFF is demanding that HS holders must hold on to their HS water in order to put a ceiling on temporary water prices. Effectively this is demanding current HS holders subsidise temporary water users, who have the additional benefit of access to capital formerly tied up in their sold off HS.

This demand is unacceptable; irrigators who have sold their HS took a business decision to do so with full awareness of the risks involved.

Do you have a comment on that? It seems to me that if you are going to have a fully transparent, tradeable system you cannot really put roadblocks into that system.

Mr Broad —The Victorian Farmers Federation has not given direction on how people should manage their own personal business and affairs. If an irrigator chooses to sell their high security water, liquefy that and then buy water on the temporary market, that is their choice. However, if you talk to any farm consultant in northern Victoria, he will tell you that when an irrigator sells their water they will exit agriculture completely within two years, and that has been our experience. So, whilst that argument is put up—that we should be able to sell our high security water, particularly past that four per cent cap, and we will have more money and we will just buy water on the water market—our practical experience is: those people are exiting the industry. And that is a loss, I think, to the community as a whole.

Mr SECKER —Is it right to say that you are saying that high security water should not be bought by the buyback?

Mr Broad —I think what we have pointed out is that we should maintain as best we can high-security water for irrigation and food production, but the Victorian Farmers Federation does not direct people on how they should conduct their own business.

Mr SECKER —But are they asking the government not to buy back high-security water or are you just pointing out that this is the effect of that happening?

Mr Ford —Our position is that we would prefer the government not to buy any water, that we prefer all the water to stay in agriculture for production. The support of the four per cent was around an adjustment process, and we did see in the early days of the water market when it first came on with the unbundling process that the market behaved in a way that did hurt the farmers. The four per cent was a way we saw, and it was supported by the Victorian government—and is still supported by the Victorian government, although it is shifting to six per cent—of allowing communities and individuals to adjust to a market that they were not accustomed to in the past.

It is important to remember that when the water market was set up the concept was that agriculture is a changing feast. Whilst the dairy industry might have great outcomes in the future, we might have a great apple industry provided we can get the fire blight out. People will shift and water would shift to the highest value production. There was never any concept at the time that the federal government would enter the market. So the concept of a water trade was to facilitate growth in agriculture and not to facilitate the removal of water from agriculture.

Mr SECKER —Just quickly, you have said that you do not think the government should be in the water market anyway but, given that they are, would you prefer it to be open and transparent where they enter the market just like anybody else or the tendering system that they have now which has obviously driven the price down?

Mr Anderson —I will answer that one. If you have a true, transparent national market, you do not need a tender system. What we find is happening now is that people are going through the tender system but they are not seeing the results of the previous tender before the next one starts, so no-one has any idea, other than perhaps a few brokers with a bit of inside knowledge, what they are paying for the water until after the fact. Even those wishing to sell coming into the next tender have no idea what happened in the last tender. That is not transparency in the market. The point I made earlier is that you should be able to pick up the daily paper every day and see what traded where and at what price. If we get to that stage and every broker is a broker to a national exchange, buyers and sellers, whoever they are, will have some satisfaction in the transparency of the pricing.

Mr Broad —Can I just add something further to that. If I was a major player in any commodity market what I would do if I wanted to buy a lot of product is make sure there was a lot of uncertainty in the market. I would take away people’s confidence to invest in the market. I would wait until the market drops. I would then enter the market in a cloak-and-dagger tender system where I can buy as little or as much as I want and not to tell anyone what I have paid for that until afterwards. That would be my behaviour if I really wanted to screw over the people I was going to buy that product off. I think the parallels are very similar.

Dr STONE —And then not pay them for six to 12 months when they have had their tender accepted. It is the perfect storm they have created.

Mr Broad —If a business was conducting itself in this manner, the Australian government would call on the ACCC to lift their act and just would not tolerate it.

CHAIR —I think we are on time, or a little bit over time. Thank you very much for taking the chance to be here and thank you for your submission and any additional information you did have, particularly in terms of the Lindsay Island type schemes where targeted environmental water may well produce benefits on both sides of the equation. There will be a transcript of the proceedings that will be sent to you and if you have any issues with any of that or any more information please let us know. Thanks very much.

Mr Broad —Thanks very much, and take the time to enjoy some good Victorian food while you are here.

[11.10 am]