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STANDING COMMITTEE ON RURAL AND REGIONAL AFFAIRS AND TRANSPORT
10/09/2008
Management of the Murray-Darling Basin system

CHAIR —I welcome Mr Gavin McMahon from the Central Irrigation Trust. Do you have any comments to make on the capacity in which you appear?

Mr McMahon —I am the acting CEO for Central Irrigation Trust.

CHAIR —Before we go to questions, do you wish to make a brief opening statement, and do you have a problem if your good-looking face is splashed across the screens?

Mr McMahon —No, that is fine. I will make just a brief opening statement and allow sufficient time for questioning. I will give you an outline of our business, where we run from, and the impacts that any decisions may have within our communities. Central Irrigation Trust operates a number of pumping stations for irrigators along the South Australian stretch of the river. We service 1,500 customers, who are also our owners; so our customers are our owners. The vast majority of our customers are in the Riverland around the towns of Barmera, Berri, Loxton and Waikerie, and all above lock 1, but we do service a very small community at Mypolonga just upstream from Murray Bridge, and so we do understand the impacts that occur from the falling river levels. In fact, at that pumping station we ourselves have invested just about a quarter of a million dollars to be able to access water for our customers.

Our area is built on permanent planting. Our horticulture is in a very dry zone. We have an average rainfall of about 250 millimetres per year.

Our permanent plantings are basically tree crops—for example, nuts: almonds, walnuts, pistachios; citrus: oranges, mandarins, tangelos; and deciduous fruit: nectarines, apricots, and both table and wine grapes.

The areas have built up over time because of the water and the allocations that they have. South Australia has high-security water products. They are the only product that they have. They have been very high security, so there have not been water restrictions in South Australia until the mid-2000s, and so the infrastructure and the capital investment in those regions have revolved around those high-security water products.

While we understand what is happening below lock 1 and in lower parts of the river and the Lower Lakes, it is certainly tragic. A tragedy is also unfolding in our communities. To give an example, our communities have relied on 100 per cent allocation. Two years ago the allocations were 60 per cent, last year they were 32 per cent, and we currently sit on six per cent. If you are in our communities with the current six per cent allocation, this year looks quite frightening as well.

The way that our communities have been able to deal with that is that last year our customers went into the temporary market and purchased water or leased water, with prices varying from $250 to $1,200 per megalitre. Our customers and owners spent in the vicinity of $20 million just to try and keep their assets operating last year and they will have to do the same this year. The trouble we have this year is that we have virtually exhausted all of our financial capital and so we will be entering that market with, certainly, a restricted financial capacity.

The one comment that I would like you to take away from this is that any decisions that you make have an impact at some other place. Certainly, if you do enter the water market and buy significant quantities of water, you need to also understand what that does to current operators in that market in terms of both volumes and prices, and what impacts will flow through those communities as well.

Senator WORTLEY —Thank you, Mr McMahon. I am a South Australian senator, so I have some understanding of the impact on irrigators in South Australia that depend on the Murray for their water supplies, but we have senators from other states and I wonder if you could just expand on the impact of the current drought on South Australian irrigators and the communities and their families.

Mr McMahon —The impact of the drought is actually quite severe. As I said, our allocations are currently at eight per cent. Last year, with the purchases of water, we pumped about 60 per cent of what we would normally pump and in a normal year we would probably use about 80 per cent of that. So the volumes of water going on are significantly less. That has resulted in a number of things. In terms of crops that are currently growing, we are starting to see the citrus industry being decimated in South Australia, and certainly a lot of citrus trees are being bulldozed out. We are starting to see people really weigh up now what their options are for the future. Two of our schemes already have had four per cent net sales of water back to the government, so we are starting to see some of that water leave the districts for other purposes. The cash flows through the towns are significantly reduced and there is a flow-on effect in the towns. So it is quite devastating and debilitating right at this point in time.

Senator WORTLEY —If the government, either federal or state, were to purchase water on the temporary market to send to the Lower Lakes, what do you think would be the likely reaction of irrigators in your region?

Mr McMahon —The impact if you go and buy significant quantities—and there are people that can give you the figures in storage quite accurately—is that that will drive the price up.

he government’s announcement last year that it would probably be capped at 16 per cent drove the water price up from $500 to virtually $1,200, so a significant purchase in there will drive the water price up. That starts to hit at the viability of a number of customers in our region. They cannot afford the prices that were paid last year and at $600 a megalitre, they are struggling to buy it this year with the commodity prices that are projected as well.

Senator WORTLEY —If they cannot afford it, what would be the impact of that?

Mr McMahon —The impact for us will be sales of water ex the districts, certainly a drop in production and the cash flow through the towns significantly reduced. All of our towns would struggle. We are already starting to see businesses and families exit our communities.

Senator WORTLEY —So for the communities as a whole?

Mr McMahon —Very significant. As you start to lose businesses and people, the fabrics of your community change and diminish.

Senator BIRMINGHAM —Two quick issues from me: firstly, one of the suggestions mooted to raise the level of the Lower Lakes is to lower the weir pools upstream. What impact would that have on your businesses?

Mr McMahon —You need to look at that in a number of lights. First of all, a lot of the infrastructure is set up for the current water levels, so there would be significant adjustment in infrastructure to be able to cope with a lowered weir pool. That being said, that can be achieved. It only requires a capital injection to be able to do that. A number of pumps are on backwaters or lagoons, which would have to be shifted out of there or somehow water taken into that. We have one ourselves, so if the water through Ral Ral Creek decreases by half a metre, that pump station is virtually out of water, and that services about 10 gigalitres worth of customers—water sales.

The other side of the coin that you probably need to understand is: what are the salinity impacts in doing that? If things are dire, the only water left from a South Australian perspective if we get minimum inflows is what is in the weir pools. If you drain the weir pools down, you will then start to bring the watertables back in, increase the salinity levels in those and that has an adverse impact right the way down the river, so that would have to be carefully looked at. It is something that we do not support for the salinity reason as much as for any other reason.

Senator BIRMINGHAM —The second issue relates to water buybacks or acquisitions. You mentioned the impact of government intervention on market price. Current proposals have government involved in buyback over a prolonged period of time, which presumably will have a prolonged impact on the price and the operation of the water markets. Wouldn’t it be better for government to take steps quickly to be in the marketplace for only a couple of years?

Mr McMahon —We do not disagree with that—that is, for permanent water, permanent sales, to come in, get what is required and then hop out and we can all restructure our businesses. That is correct. The part that I was talking about was as much about temporary water and temporary sales, so if you lease water this year in significant quantities, that has a different impact on the temporary market.

Senator SIEWERT —I am not sure if you were in the room when Professor Mike Young was speaking at first, but we heard evidence yesterday about climate change and its impact. It is commonly acknowledged that the system is overallocated but now, layering on top of everything else the impact of climate change, we are looking at a radically drier future. How is the industry starting to manage that because, from what we can tell, we are now entering completely different scenarios. It will never be business as usual. I hate to be the doomsayer, but I know we are never going to get back to 100 per cent allocations. How is the industry adapting to that?

Mr McMahon —That is a good question. From where we sit we have to be slightly optimistic otherwise we would not sit in the chairs we sit in. The climate change data that you read, the projections and the confidence limits on them are all variable, so trying to ascertain and understand where you will be in the future is difficult. There is no doubt there will be less and we will have to do more with less. That is well understood. Our business has understood that for a fair period of time. Since 1997, our budgets and long-term business models have had a one per cent decline in water sales in recognition of upgrading systems and on-farm systems.

There are significant advances that the irrigation industry itself can make. Right at this point of time we are seeing massive conversions. We run pressurised pipeline schemes efficiently, but even on farms we are seeing massive conversions from overhead and undervine sprinklers to drip irrigation systems, so the farming sector is already adjusting to the worst drought in white man’s history.

It is difficult to ascertain as to how the climate change predictions will overlay the business, but we recognise that there will be less area irrigated. We are looking at how that may affect our own business. Perhaps we will run more districts than we currently run but similar volumes of water to pump, and we might be able to rationalise as time goes on.

Senator SIEWERT —What role do you see government playing in helping with that adjustment?

Mr McMahon —We do not see a lot of help, at this point.

Senator SIEWERT —I meant what role? Into the future, what role can government play?

Mr McMahon —The government can play a large role because right at this point of time there are people that want to exit. However, it is not financially beneficial for them to do so. There are also people who want to stay and readjust. If you have been through some of the worst drought on record, your cash flows are exhausted. You need assistance to do that. There have been schemes put forward. If you look at the EC provisions: very difficult to get. If you look at the exit grants: very difficult to get again. Our average customer owns 100 megalitres of water. If he sells 100 megalitres of water at current market prices, he might clear $2,000, which gives him $200,000. The value of his remaining farmland is negligible because in such a low environment, unless it goes to housing, there are few opportunities for it to be used elsewhere. That is not enough for them to retire on, so they do not have the incentive.

Senator SIEWERT —What is the average debt?

Mr McMahon —I do not know that, unfortunately. But it is not enough for them to then move into the city and buy a house or the like. Our business said, ‘We don’t believe there is a plan for regional Australia for coping with the longer term change.’ We would like to see that so that we can see some adjustments in the communities that are right across the basin. We believe that the current provisions need to be eased up, providing easier access for the exit grants, so that people can financially make that commitment and, for those that want to stay, there is some ability for them to restructure. In the past there have been government schemes on low-interest loans for farm build-up and the like and we support those. We also, as a business, support the national water plan for the future. We believe that it has to occur. We believe that water has to be bought back because, without healthy rivers, our businesses will not survive into the future either.

Senator XENOPHON —You have spoken about the exit packages not being attractive and the readjustments for those that want to get off the land and those that want to stay on the land and make a go of it. In a broad-stroke approach, what do you see as working? What sorts of things would you like to see, firstly with exit packages and secondly with readjustment, to give something officially regarded as a fighting chance?

Mr McMahon —Probably the exit packages first and the readjustment second, but they nearly need to go hand in hand because currently, while you can sell your water to the government, that price indicator shows that it does not have to shift much and the government can buy substantial quantities of water.

Senator XENOPHON —They are distress sales.

Mr McMahon —They are distress sales. They are sales forced by economic circumstances. The person beside them is also currently cash impinged to be able to buy the property next door to build it up. So, while somebody can exit, the person next door still does not have the capacity.

It is a function of the drought. If you look at the money that has gone out of our district for leasing water; if that had stayed there, it would have been able to be used in those types of capacities. So they nearly need to go hand in hand, in my view.

Senator NASH —You mentioned the difficulty in exit grants that Senator Xenophon has just raised. Can you outline those difficulties? We recently saw the government drop the funding available for that program, saying that there were not very many people that had actually accessed those exit grants. So I am interested to know if there are any particular difficulties that you have seen growers come up against who might have wanted to access that program.

Mr McMahon —The answer is, yes, and I can give you my best understanding of it. The financial counsellors are certainly the people that deal fiscally with everybody and they have the best sets of data. They could be easily sourced. One of the conditions in there includes the necessity to have had the property for five years. I believe that you cannot have off-farm income, so if your partner is working, you are excluded. That is a drought strategy that most people employ: you are off farm trying to survive. There are off-farm asset limits. So there are a number of things in there that virtually discount people. As I said, the financial counsellors can give you much more detail.

Senator NASH —Thank you.

Senator XENOPHON —In terms of the whole idea of restructuring, many of the irrigators I have spoken to say that you need to have an additional amount to be able to get off the land. Do you have views on that? Also being allowed to stay on your property: if you have sold your water rights, the property is not a viable primary producing property anyway.

Mr McMahon —Sorry, Nick?

Senator XENOPHON —Do you have a view of a price indicator that would be fair for people to enable them to sell their water, to exit from primary production, but still remain in the community by staying in their home?

Mr McMahon —We would support SAMI’s position on that and the price is around $4,000 a megalitre. If you start to work that out, for our customers at 100 megalitres, that gives them $400,000. I would say a lot of people would take that.

CHAIR —Sorry, Senator Xenophon. You are talking about subsidising temporary water, are you?

Senator XENOPHON —No, I am talking about people exiting—

Senator HEFFERNAN —This is high security.

Senator XENOPHON —High security. Getting rid of their—

Senator HEFFERNAN —Entitlements.

Senator XENOPHON —Just getting off the land. Getting out of primary production.

Senator HEFFERNAN —This is not allocation; this is high-security entitlement.

CHAIR —That clears it up. Thank you.

Senator XENOPHON —For those that want to stay on the land, how would you envisage doing that in a way that is not seen as Riverland specific, but is seen as being fair for the same category of irrigators? How would you see that in terms of allowing for those that are viable? How would you determine those that are more viable than others and have a fighting chance with reduced water in the system?

Mr McMahon —That is a difficult question. I do not know how you would differentiate them, but certainly in discussions we know there are groups that want to stay there and we know there are groups that want to exit. If the price of water was at $4,000 a megalitre—that is permanent entitlement for high security—we would stand on the front office and you would pick up your 1,000 gigalitres straightaway. You would pick it up tomorrow.

Senator HEFFERNAN —Given that we are talking about high-security water, some of which, if it was in New South Wales, would be general allocation—it is not all high-security use—if we were to do that and double the price of water, how would anyone up the system make a profit without growing marijuana?

Mr McMahon —Again, I am not an economist. I am very good at pumping water up a hill and down again.

Senator HEFFERNAN —Yes, fair enough. I am a worn out bloody welder, mate!

Mr McMahon —You will have an impact in the marketplace whatever you do because of the volumes that you want to buy. If you are in there for longer you will pick the low-hanging fruit early and the price will go up, irrespective. If you are in there quickly it will happen and it will all be over and done with and the price will readjust back to a position that people can actually make money from.

Senator HEFFERNAN —What you are suggesting, though, is that we would pay $4,000 for a farmer who has got dairy cows.

Mr McMahon —If they wanted to sell a water entitlement and it was high security, it would not matter where it was. It does not necessarily have to be South Australia.

Senator HEFFERNAN —At $17 a tonne for the carbon side of the equation, without the water, they are insolvent anyhow. I am saying to you that, if we did that and we did not reconfigure the system—which is what I think we have got to do; we have got to actually reconfigure the way we have settled even southern Australia—you would absolutely bankrupt the river all the way up.

Mr McMahon —It depends how you want to look at it. If it continues to operate the way it is—

Senator HEFFERNAN —I appreciate that. I am a farmer.

Mr McMahon —Yes.

Senator HEFFERNAN —What we have had for the last three years is actually a bit worse than what the scientists are telling us it is going to be every year, in 40 years time. Do you think the average farmer understands the crisis we face in terms of the long-term outlook if the science is right? The science might be only 50 per cent right. Hopefully, it is wrong.

Mr McMahon —I do not particularly want to debate the science.

Senator HEFFERNAN —Neither do I.

Mr McMahon —It is unclear. We are also in a drought and that is being understood as well, and the drought is the worst drought in white man’s presence here. In fact, it has been described as somewhere between a one in a 300-year and one in a 1,000-year drought. So is it replicated into the future? My understanding is that the flows will actually be better than they are under climate change scenarios, but we will drop into these periods of two- and three-year stretches where we are now. Whether that is right or not, I do not know.

Senator HEFFERNAN —You have not nailed the question. Senator Fisher said the other day up in Canberra that we should double the price of water on offer, but that artificially corrupts the water market for everyone else.

Mr McMahon —That is true. If you are going to purchase a quantity of water—

Senator HEFFERNAN —Let’s not go past. It is true. So how are we supposed to deal with it?

Mr McMahon —The government purchase, irrespective of whether it is short or long term, will have an impact on the water market.

Senator HEFFERNAN —But you are saying, ‘Double artificially the water market so these people can get out.’ How does that leave people who have got to work in the real world, in the real market? This is worse than an MIS bloody injection into the market, which has totally corrupted the capital market.

Mr McMahon —That is correct. The only difference is that you will be in and you will be out, and once you are out of the market the market will then go back to a playing field where people can afford what they can get from the returns of the crops.

Senator HEFFERNAN —My view is that that is a fantasy. Sorry.

Senator NASH —Mr McMahon, we have had some discussions around the social and economic impacts on regional communities as a result of removing water, either currently or down the track if more needs to come out, for the Coorong and the Lower Lakes particularly, as we are speaking about now. I am underwhelmed by the amount of work that is actually being done on that social and economic impact on regional communities.

You mentioned before about the flow-on effects from all of this to those communities where you are. Can you tell us a bit about those flow-on effects and how they are affecting the communities. Also, how are the banks treating the situation at the moment? How are people finding finance? Is it getting tighter? Are banks getting more nervous as a result?

Mr McMahon —The regional development corporation has done a socioeconomic study of the Riverland and I am sure that is available. The flow-on effects in the town are really starting to appear now—and remember two years ago we were on 60 per cent—so it takes about 12 months for the flow-on effects of the spending to run through the towns. This is without hard quality data, but you can see the sales of farms, you can see the sales of businesses, and you can see the sales of houses in the place. In fact, in my area, exactly where I live, there are five houses for sale in my street. So that gives you an idea of the impact of it.

Senator HEFFERNAN —It is a bloody nightmare!

Mr McMahon —The banks at this point of time have been supportive and continuing discussions say that they are still supportive, but there certainly are credit limits being placed on people. People trying to secure water for their plantings are going to the banks and some of the banks are saying, ‘You’ve been advanced as much as you can. You’ll have to work through it without further advances.’

So, while the banks are supportive, they are certainly starting to tighten up their policies. That is a result of people’s equity disappearing in their businesses.

Senator HEFFERNAN —That is the same as dryland farming.

Mr McMahon —The same as dryland farming. Correct.

Senator NASH —If we are coming to some sort of tipping point, where the financial institutions are going to start cutting it off and saying, ‘Bang. No more,’ what do you think governments should be doing now to prepare for that, because if it does not rain, it is going to happen. What in your view should government be doing to prepare for that eventuality?

Mr McMahon —It is interesting. In the press at home, even in the last week, the wine industry peak body has said that about 30 per cent of the people in our districts are just about ready to walk away.

Whether that is reality or not, I am not sure. In terms of what the government can do, we outlined that earlier on. We believe that if you are going to buy back water—I will go back—it is at odds with what Wilson Tuckey is saying. If you paid people, they would leave with some dignity. The exit grants packages need to be freed up so that people are able to access those and exit from the properties.

Senator HEFFERNAN —Wouldn’t it be safer, though, to do that without corrupting the water market?

Mr McMahon —We can have this discussion backwards and forwards. We have different views on it.

Senator HEFFERNAN —Fair enough.

Senator NASH —Thank you.

Senator HEFFERNAN —We were told earlier that it is going to take between seven and 900 gigs to send the fresh water to sort out the lakes. If it does not rain this spring and next autumn, the water is not going to be there. What do you think your farmers would think if this spring and summer 900 gigs went past and they could not get a crack at it?

Mr McMahon —You would find certainly a lot of unrest with such a decision.

CHAIR —Thank you, Mr McMahon, for appearing before the committee today and answering our questions. We will now take a break.

Proceedings suspended from 11.01 am to 11.20 am