The boom in permanent plantation nut crops is driving water demand so high in the southern Murray Darling Basin that the price of water may become unaffordable for rice, dairy or even cotton irrigators according to a report from Aither.
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That's the situation many southern valley irrigators have found themselves in, compounded by a zero per cent general security water allocation.
Leeton cotton grower Anthony Ryan says running an irrigation farm without water is like running a pub without beer.
"If I could buy water for around $150 a megalitre I could irrigate cotton, seed canola, soy beans, a range of different crops," Mr Ryan said.
"But the price has been at close to $600/ML and we have to stop irrigating in that situation."
Mr Ryan moved from growing rice to cotton five years ago.
"We grew cotton and rice one year, did our sums and worked out cotton returned higher prices a megalitre," Mr Ryan said.
The only reason I grew 100 hectares of cotton last year, with the water situation, was because I had contracts to fulfill
- Anthony Ryan
But this coming summer season, irrigators may be priced out of cotton, once billed as a "cash crop".
"The only reason I grew 100 hectares of cotton last year, with the water situation, was because I had contracts to fulfill," Mr Ryan said.
"When the dams were full we thought we'd get at least two to three years of allocation so we locked in contracts, but it didn't happen.
"The dam started at 80 per cent and we only got a 7pc allocation."
This year the Ryans have forgone their winter cropping program, but are still hoping water will be delivered in the spring so they can get some cotton in.
"I'm spreading fertiliser for cotton at the moment," Mr Ryan said.
Coleambally irrigator, Chris Hardy, grew 200ha of cotton last year, but said unless something changes they won't put any in this coming summer.
Instead, the Hardy's have turned to high value seed crops for the winter season.
"Seed oats and seed canola gives us a better return per ML because they're growing in the low evaporative season," Mr Hardy said.
But he said at the moment forgoing growing anything and simply trading water could be the most financially viable option.
"We've learnt over the years that we have to make the best use of our fixed assets and in some cases, including this year, trading our water will be the best return per megalitre," he said.
"As annual croppers if water values get too high, we'll become water traders."
But Mr Hardy was concerned about the affect this would have on irrigation communities.
"It is very tough on our local service providers, our machinery providers and also our local clubs, pubs and schools," Mr Hardy said.
"They don't do so well when we trade our water because there's little money coming in and few employment opportunities."
Leeton Shire Mayor, Paul Maytom, shared Mr Hardy's concern. He said not just his own but all basin communities were being hurt by the reduction in agricultural diversity.
"The reason we are in this situation today is because the water market was deregulated," Councillor Maytom said.
"We now have a system that says you're on your own and the water will go to whoever can grow the highest value crop.
"It worries me for the employees, we need diversity of agriculture to keep our community going."
But Cr Maytom said you can't blame the nut growers for the situation, "you can't condemn the people, you condemn the system".
He said he was particularly concerned about this year's situation with most farmers having used up their carry over water, while the temporary water market prices were too high to justify supplementing a zero per cent allocation.
"If the government doesn't take any action on this we've got serious problems ahead of us," Cr Maytom warned.
Priced out
An alarming finding of a report from water market adviser Aither, commissioned by the Victorian government to investigate the pressures on supply and demand in the connected Murray system.
Nut plantations have risen to dominate the crop mix of permanent planted horticulture. Around 95 per cent of the crop is located below the Barmah Choke - a narrow point in the river that restricts flow - in the lower Murray including Victorian Sunraysia, NSW Murray and South Australian Riverland regions.
NSW and Victoria must balance South Australia's water requirements, guaranteed under Commonwealth law, with their industries' changing irrigation demands.
Their decisions will impact irrigators in their states and those in SA, who supplement their high security entitlement with water traded in from upstream.
Another vexing issue for river managers is what's called deliverability - that is so-called transmission losses from when water flows down a river system, and the longer it travels the more lost to evaporation and seepage.
"It's unacceptable that Murray general security users are losing their allocations because they are at the bottom of the entitlement pile," said Progressive Agriculture consultant Andrew Bomm.
As annual croppers if water values get too high, we'll become water traders
- Chris Hardy
"Some very difficult decisions are coming for governments, which will have to bite the bullet and try to fix transmission losses."
Victorian Water Minister Lisa Neville reacted to the escalating situation by putting a freeze on increased water use in the lower Murray region of her state last week, but it remains to be seen how her state, NSW and the federal river operators respond with new policy (see article page right).
Aither found the annual water demand from permanent plantings is expected to hit a whopping 1555 gigalitres, when all the existing and planned crops are mature.
That's 125 per cent more water than would be available during a very dry year to irrigation across the region.
The demand from permanent plantings has taken the Basin by surprise, with Aither's estimate totalling 55pc more water the Australian Bureau of Statistics estimated in 2015.
Aither found that in future dry years (similar to 2015-16) or extremely dry years (like 2007-08) competition for water allocations will cause a lasting step change to water prices.
"It will be harder for non-permanent irrigation industries to access affordable water," Aither said.
"The recovery of additional environmental water from the consumptive pool would further reduce supply for all water users in the southern Murray-Darling Basin," Aither said.
"This will both exacerbate the likelihood of permanent horticulture water demand exceeding available supply and also reduce the volume of water available for all irrigation industries in all future years."
Aither listed a couple of complicating factors which show it's unlikely that permanent plantings could actually suck all the water up in the southern Basin.
Firstly, permanent planting enterprises would likely carryover water for irrigation from wet years to drier years to avoid a short-term shortfalls and keep their trees alive. But to build their reserves they would need to buy water prior to the irrigation season in which it would be used.
Secondly, the location of 95pc of permanent plantings below the Choke means trade rules and river capacity would prevent their ability to buy and physically transfer all the available water and transfer it from upstream catchments.
Nut thirst
But even with these limitations the soaring demand from nut crops will drive the price of water up in dry years, and even in years of average rainfall.
To highlight the predicament, Aither modelled two hypothetical scenarios for an extremely dry year.
Assuming there were no trade restrictions and permanent plantings in the lower Murray could buy in all the water they liked below the Choke, permanent plantings' thirst would leave minimal water available to other irrigators and there would be significant short and long term price increases.
On the other hand, assuming all trade was restricted, and water from above the Choke could not be bought in, Aither found that water demand in the lower Murray would exceed supply by 60pc.
Aither said the shift to permanent plantings had disrupted the traditional pattern of water use that is more able to respond to variable water availability through dry years.
"This is a significant change from a system that was historically characterised by a large proportion of annual and semi-interruptible irrigated industries like annual cropping and dairy that have more flexible water use requirements and a generally lower willingness to pay for water as an input to production."
So why hasn't this situation already come to fruition this year? Why can some traditional crops still manage (just) to buy water?
That's because of the 800GL or so carried over from a wet 2016. But if the extended dry spell continues, the impact of permanent plantation demand will increase.
Unsustainable growth
"The evidence we are starting to see suggests we may be over-committed below the choke with permanent water requirements," Mr Bomm said.
"There's been a lot of investment done on the basis of cheap land and easy development, but it might not be sustainable in the long term if we do get a sustained dry sequence."
Mr Bomm said there are risks to entitlement owners and for annual trade in SA.
"Entitlement offers pretty good insurance, but you may forgo the opportunity to realise the full value of investment if you are using for a low-value irrigation purpose. But it will become increasingly valuable with more water use below the choke.
"Then there is the deliverability question, which applies if you own entitlement or not. Reducing transmission losses has become a significant risk to irrigators below the Choke.
"They can price the economic cost of it, which would be worn by those downstream water users who are maximising those losses.
"Or they can change the trade settings to minimise movement between regions to minimise losses. Either way, there's some very difficult decisions coming for governments."
States feel heat of trade tensions
Pressure is on the states and Murray Darling Basin Authority to ignore traditional tensions in water management and co-operate for a solution to an unprecedented problem.
The matter has become so pressing that the interstate council of Basin state ministers agreed at a meeting in December there was an urgent need to work with the MDBA on a long term solution to the problems caused by demand in the lower Murray.
The states and the MDBA will report back to each other when they next meet in August.
Victorian Water Minister Lisa Neville got in early this week, on the back of Aither's findings, and announced a bold move to freeze increased water use in the lower Murray until the water market and trade rules had been reviewed.
NSW Water Minister Melinda Pavey is overseas. In her place NSW Nationals Leader John Barilaro said there are concerns over the volume of environmental flow in the lower Murray, took a swipe at the Murray Darling Basin Authority's collaboration.
"The old ways of hiding key information from the public before major decisions are made to the way our rivers are operated is no longer acceptable," Mr Barilaro said.
Some very difficult decisions are coming for governments, which will have to bite the bullet and try to fix transmission losses
- Andrew Bomm
"In the interests of transparency and accountability the NSW Government strongly urges the MDBA to publicly release the reports at least two weeks prior to the next ministerial council meeting to allow all interested parties in NSW to review and have input into our State's position.
"We share similar concerns to those of the Victorian Government, including how regulated environmental flows of up to 80,000 megalitres per day can be delivered to the South Australian border for environmental purposes without causing major third party impacts."
The MDBA said it had developed new modelling, and investigated the factors that affect delivery risks.
Modelling is required to assist the MDBA to inform state governments of likely water availability and impacts on deliverability under various scenarios.
A progress report with recommendations about managing delivery risks next summer, when permanent planting's demand spikes, will be tabled at the next ministerial meeting.
The federal government has commissioned the ACCC to review trade rules, and a panel to investigate socio-economic impacts of water reform.
Local solution for a Basin-scale problem
A group of northern Victorian irrigators, the Gannawarra Water Guardians, are exploring an idea to stop productive water leaving their district.
It's a common problem across the Basin.
Exiting farmers need to generate returns on their water asset, but if they osell on the open market the production will be lost down the river - often to new nut plantations in the lower Murray.
Under the Gannawarra scheme, local irrigators seeking water would be matched with entitlement owners, often retired or exiting farmers, who are prepared to offer multi-year leases for all or some of their water at stable prices.
The scheme has already secured expressions of interest.
GWG committee member Skeeta Verhey, Koondrook, said the project aimed to secure around 1000 megalitres of high reliability entitlement to list on its platform for the 2019/20 water year.
"The response from senior farmers has been really, really good.
"If we want thriving communities, we need water security and a change in thinking about how we achieve it."
Committee member Doug Fehring said the scheme was responding to changing patterns of water use.
"The industry turns over a lot of money, to have it being sacrificed for growing nuts is not conducive to supporting the local community," Mr Fehring said.
Cohuna dairy farmer Steve Henty, who is nearing retirement, said that irrigators exiting the industry wanted to ensure their towns remained vibrant and maintained current service levels.
