Water for Ag - We need to do more with less

By: "Farm Tender" News
Dairy News
Feb 17, 2019
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By James Bentley - Associate Director, Natural Value at National Australia Bank

Australia already boasts the world’s best water risk management system – water markets – and our farmers are amongst the most adept at navigating the complexity of water variability. However, recent environmental catastrophe in Menindee, the likely consequences of climate change and our lofty ambitions for the sector - $100 billion by 2030 – raise the stakes yet again. Whatever your views on the water debate, it is clear – we need to do more with less.

Managing water risk is tricky business – investments in soil health, crop types, fertiliser rates, irrigation infrastructure and more are essentially bets about the availability of water. Invest too little and the opportunity water avails will be lost. Over capitalise and the cost of water scarcity can hit hard.

As Australia’s largest agribank, NAB is acutely aware of the critical importance of water risk. Recently we mapped some of our key risk metrics against a crude water risk tool. To give some context; it’s not uncommon to hear of farmers selling land they feel is overvalued in high reliable rainfall zones to purchase much cheaper land in more variable areas. The logic being that the price gap is sufficient to cover the increased failure rate. Indeed – in theory, there ought to be no difference between the commercial risks associated with farming in high or low rainfall risk areas – the market ought to have adjusted over time to account for such.

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But what we found was that over the long term high water risk equated to higher financial risk. The market, it seems, is undervaluing water risk. We could see this in our risk metrics – they were too influenced on recent financial performance and not sufficiently accounting for water risk. Adjusting credit models is a long term process but we are now working with partners such as CSIRO and the Institute of Sustainable Futures to better understand such risks and how best to feed them into our risk models. This is a small piece of the water risk puzzle critical to allocating capital to support productive agriculture into the future.

This question of capital allocation presents serious complexity for farmers. The long term aim of the game is financial resilience but there are many different ways to get there. I think it’s helpful to think of a spectrum of water risk decisions.

At one end, we see farmers who focus on building highly flexible and resilient farming systems that operate within the availability of their local water resources. They are not necessarily the most productive but they are vastly more consistent. A grazing system based on diverse native pastures exemplifies such. They have an astute focus on protecting the quality of their pastures and soils which means destocking ahead of drought. By protecting their pasture and soils – they avoid land degradation issues, can maintain productivity longer into drought and can rebound quickly once rain arrives.

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At the other end, we have the hyper-intensifiers. Think protected cropping. Every drop, every input is tightly controlled so that nearly nothing is wasted. These systems seek maximum value for every drop consumed. But they are incredibly capital intensive. Whilst the risk that they experience water scarcity is low – they can afford to pay a lot for water – the cost of drought, were it to occur, is substantial.

And in between – there is a never ending mix of strategies to build incremental resilience –diversification – of crops, location and investments. Investments in risk mitigating assets – water storages, shelter belts, soil amendments such as delving, irrigation efficiencies, crop genetics, weather sensors and more. The ingenuity in this space is incredible. Indeed, I met one nut farmer experimenting with creating the ability to keep his trees in a state of winter dormancy through summer, should the upstream dam water levels be of concern.

With all water management strategies, the challenge for all farmers is to understand their water risk and, in particular, the value they add to water, relative to the other farmers with whom they compete for water. Production flexibility – the ability change the type or scale of crop grown - is critical but it often involves a trade-off in crop value. A rice enterprise is eminently flexible – it can scale up and down with water availability but an almond farmer, who has relatively vastly less flexibility, will currently always out compete most others when bidding for water. The dairy industry in northern Victoria is presently facing pressure from high feed input costs and not being the highest value add water user in their catchment. High capital exposure and presently high feed prices have constrained their flexibility.

With a highly variable climate, it is clear we cannot intensify everywhere. It is also clear that whilst we need low intensity hyper-resilient farming systems – such alone will not maximise the economic opportunities from farming in Australia.

So as an agricultural sector where might we intensify and where do we shift to resilience?

This is not something any one individual can answer alone. I imagine there is a temptation to just let the market decide. Indeed, that a private investor built an airport in Toowoomba to add significant value to that region’s agricultural fortunes is legendary. But the complexities of water buybacks for much needed environmental water, the evolution of water market rules and the squeeze on water resources from climate change are, I think, problematic for most investors.

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Indeed, NFF's $100b industry objective necessitates vast flows of capital into the Australian agricultural system. Such an objective is achievable but we need to acknowledge that such is in the context of a tide of negative news about water scarcity threats. Hence to unlock this opportunity we need to get vastly more sophisticated at understanding and communicating about the components of water risk and, in particular, how climate change will impact that risk. This requires sectoral coordination – government, agribusinesses, financiers and insurers all speaking the same water risk language.