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Irrigated agriculture in the southern Murray–Darling BasinMurrumbidgee, Murray and Goulburn–Broken regions 2006–07 to 2012–13Dale Ashton

Research by the Australian Bureau of Agriculturaland Resource Economics and Sciences

Research report 14.10September 2014

© Commonwealth of Australia 2014

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Cataloguing data

Ashton, D 2014, Irrigated agriculture in the southern Murray–Darling Basin: Murrumbidgee, Murray and Goulburn–Broken regions 2006–07 to 2012–13, ABARES research report 14.10, Canberra, September.

ISSN 1447-8358ISBN 978-1-74323-199-9ABARES project 43493

Internet

Irrigated agriculture in the southern Murray–Darling Basin: Murrumbidgee, Murray and Goulburn–Broken regions 2006–07 to 2012–13 is available at daff.gov.au/abares/publications.

Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES)

Postal address GPO Box 1563 Canberra ACT 2601Switchboard +61 2 6272 2010Facsimile +61 2 6272 2001Email [email protected] daff.gov.au/abares

Inquiries about the licence and any use of this document should be sent to [email protected].

The Australian Government acting through the Department of Agriculture, represented by the Australian Bureau of Agricultural and Resource Economics and Sciences, has exercised due care and skill in preparing and compiling the information and data in this publication. Notwithstanding, the Department of Agriculture, ABARES, its employees and advisers disclaim all liability, including for negligence and for any loss, damage, injury, expense or cost incurred by any person as a result of accessing, using or relying upon information or data in this publication to the maximum extent permitted by law.

Acknowledgements

This report uses data collected in an ABARES survey of Murray–Darling Basin irrigation farms. This survey was voluntary. Its success depended on the cooperation of farmers and their accountants providing information on farm operations. ABARES appreciates their support as the survey would not have been possible without their full cooperation and assistance. The 2012–13 survey was co-funded by the Murray–Darling Basin Authority and the Australian Government Department of Agriculture. Earlier surveys were co-funded by the Australian Government Department of the Environment and the National Water Commission.

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Irrigated agriculture in the southern Murray–Darling Basin

ContentsSummary v

1 Introduction 1

2 Overview of farm performance 2

3 Irrigators and water policy 14

Water allocation trading 14

Sale of permanent entitlements 17

Investment and irrigation technology 18

Survey methods and definitions 21

Glossary 25

References 29

TablesTable 1 Financial performance, by industry, southern Murray-Darling Basin 6

FiguresFigure 1 Farm cash income, by industry, 2006–07 to 2012–13 3

Figure 2 Index of prices for selected commodities 4

Figure 3 Rate of return, horticulture farms, southern Murray–Darling Basin 6

Figure 4 Distribution of horticulture farms, by rate of return, southern Murray–Darling Basin 7

Figure 5 Distribution of horticulture farms, by rate of return, southern Murray–Darling Basin 7

Figure 6 Rate of return, irrigated broadacre farms, southern Murray–Darling Basin9

Figure 7 Distribution of irrigated broadacre farms, by rate of return, southern Murray–Darling Basin 9

Figure 8 Distribution of irrigated broadacre farms, by rate of return, southern Murray–Darling Basin 10

Figure 9 Indexes of milk prices, production and receipts, Murray and Goulburn–Broken regions 11

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Figure 10 Rate of return, dairy farms, Murray and Goulburn–Broken regions 11

Figure 11 Distribution of dairy farms, by rate of return, Murray and Goulburn–Broken regions 12

Figure 12 Distribution of dairy farms, by rate of return, Murray and Goulburn–Broken regions 12

Figure 13 Receipts and income, by selected rate of return, Murray and Goulburn–Broken regions 13

Figure 14 Proportion of farms trading water allocations, by region 15

Figure 15 Volume of water applied, by region 16

Figure 16 Water purchases as a proportion of total use, by region 16

Figure 17 Water use as a proportion of total allocation, by region 17

Figure 18 Farm cash income, southern Murray–Darling Basin 18

Figure 19 Main irrigation systems, by industry, southern Murray–Darling Basin19

Figure 20 Water application rate, by commodity, southern Murray–Darling Basin20

MapsMap 1 Reporting regions 2

Map 2 Rainfall deciles for the Murray–Darling Basin, 2011–12 and 2012–13 5

BoxesBox 1 Key financial performance measures 3

Box 2 Commodity prices 4

Box 3 Seasonal conditions and water availability 4

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SummaryThis report contains the results of analysis of farm financial and physical performance data collected from irrigation farms in the southern Murray–Darling Basin (Murrumbidgee, Murray and Goulburn–Broken regions) over the period from 2006–07 to 2012–13. The three regions covered account for around 62 per cent of irrigation farms in the Murray–Darling Basin and produce a wide variety of irrigated crops. The results in this report cover key farm performance measures, water trading, farm investment, and irrigation technology.

Key farm performance resultsThe first three years covered by the irrigation survey from 2006–07 to 2009–10 were severely affected by drought, with record low inflows to river systems and low irrigation water allocations. Generally, incomes for horticulture and broadacre farms were relatively low throughout this period. They improved significantly from 2010–11 as seasonal conditions improved and there were subsequent changes in the mix of irrigated crops produced and the quantity of outputs obtained. Also, changing commodity prices and the cost of farm inputs were key drivers of annual changes in farm incomes over the period.

For irrigated broadacre farms in the three regions, better seasonal conditions and higher water allocations from 2010–11 to 2012–13 led to increased plantings of both irrigated and dryland crops which, combined with higher prices for most crops, resulted in significantly higher farm cash incomes. The increase in incomes for horticulture farms in the latter survey years was more modest and varied by the type of crop grown.

Compared with horticulture and broadacre farms, incomes for dairy farmers in the Murray and Goulburn–Broken regions tended to fluctuate more from year to year over the survey period. This was largely a result of fluctuations in farm gate milk prices and milk production, and variation in total cash costs (particularly fodder) that was heavily influenced by prevailing seasonal conditions.

Water tradingGrowth in the use of water trading has been a key outcome of water policy reform in Australia, with various government initiatives and policies contributing to the development and expansion of markets for both permanent water access entitlements and temporary water allocations. The survey results show that around 35 per cent of irrigators in each region surveyed — Goulburn–Broken, Murrumbidgee and Murray — traded water allocations (either buying or selling) over the 7 years from 2006–07 to 2012–13. The proportion of farms trading water allocations rose in each region from 2006–07 to 2008–09 and then declined in subsequent years.

Water trading provided irrigators with an important tool for managing low water allocations during severe drought between 2006–07 and 2008–09 by allowing irrigators to adjust flexibly to changing water availability and providing an alternative source of income for many irrigators. The survey results show that the ability to trade water allocations was also important in seasons of higher water availability.

The market for permanent water access entitlements has also provided irrigators with a tool for managing their farm businesses. However, there have been fewer trades in entitlements than in water allocations. Over the period from 2006–07 to 2011–12, the proportion of irrigators selling permanent water access entitlements in the Goulburn-Broken, Murrumbidgee and Murray regions rose from around 1 per cent to 8 per cent, while the proportion of irrigators purchasing permanent entitlements rose from 2 per cent to 5 per cent.

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For those irrigators selling entitlements, around 53 per cent sold to the Australian government in 2011–12. The survey results show that at least part of the proceeds from entitlement sales were used to retire part of farm debt. While some irrigators sold entitlements and ceased irrigating or farming altogether, other irrigators continued irrigated farming by purchasing seasonal water allocations or entitlements. However, these results do not provide a complete picture because those that left farming altogether were not included in the survey.

Investment and irrigation technologyAs part of water policy reforms in recent years, the Australian Government has provided funds to assist irrigators invest in more efficient on-farm irrigation technologies. The results from the survey show there have been movements toward more efficient irrigation technologies in some industries (particularly citrus, wine grapes and vegetables) that have resulted in reduced average water application rates. The survey results also show there have been overall reductions in water application rates for many individual farms within the basin, but these can vary significantly from year to year because of changes in seasonal conditions and water availability.

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1 IntroductionIrrigated agriculture in the Murray–Darling Basin makes an important contribution to the Australian and regional economies. In 2011–12 the basin accounted for 66 per cent of Australia’s total area irrigated and 41 per cent of the nation’s irrigating agricultural businesses (ABS 2013). These businesses undertake a variety of irrigated farm enterprises, including vegetable crops, tree and vine crops, pastures for grazing, hay, rice, cotton, cereals and oilseed crops. In some locations, many of these enterprises could not be produced without the use of irrigation water.

Since 2007, ABARES has conducted annual surveys of irrigation farms throughout the Murray–Darling Basin to provide industry stakeholders and governments with comprehensive data for major irrigation industries and regions. The surveys collect a wide range of financial and physical data from irrigated farms in selected regions and industries within the Basin.

This report contains results for the Murrumbidgee, Murray and Goulburn–Broken regions in the southern Murray–Darling Basin over the period from 2006–07 to 2012–13. The three regions account for around 62 per cent of irrigation farms in the Murray–Darling Basin and produce a wide variety of irrigated crops. The results presented in this report cover key farm performance measures, water trading, farm investment, and use of irrigation technologies.

By providing detailed farm-level data, the surveys are critical for monitoring and evaluating affects of changes in the farm operating environment on the physical and financial performance of irrigation farms. For example, the data can be used to monitor and evaluate the implementation and effectiveness of the Murray–Darling Basin Plan by examining ways in which irrigators have responded to changes in water availability, use of water markets, and adoption of more water efficient irrigation technologies. In addition, the survey data have been widely used for monitoring and analysing a range of broader issues affecting irrigation industries such as farm adaptation and structural adjustment. The data can also provide information that can be used to assist in monitoring progress toward water policy and program objectives and assessing the implications for the irrigation sector and regional economies.

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2 Overview of farm performanceIrrigators in the Murray–Darling Basin have faced a number of changes in their operating environment since ABARES began surveying irrigation farms in 2006–07. A range of policy and program initiatives introduced by the Australian and state governments have included better developed water markets, changes to pricing for water storage and delivery, funding for more efficient irrigation infrastructure, government purchases of permanent water access entitlements, and development of the Murray–Darling Basin Plan.

Across the Murrumbidgee, Murray and Goulburn–Broken regions (Map 1), farm financial performance (Box 1) for each industry (horticulture, broadacre and dairy) followed broadly similar trends over the survey period from 2006–07 to 2012–13 (Figure 1). Generally, incomes were relatively low from 2006–07 to 2009–10 before improving significantly from 2010–11. In particular, changing commodity prices (Box 2), the cost of farm inputs, and varying seasonal conditions and irrigation water availability (Box 3) were key drivers of annual changes in farm incomes over the period. The affect of these and other factors differed among horticulture, broadacre and dairy farms.

Map 1 Reporting regions

Source: ABARES

2


Box 1 Key financial performance measures

Farm cash incomeTotal cash receipts (revenues received by the farm business during the financial year) less total cash costs (payments made by the farm business for materials and services and for permanent and casual hired labour, excluding owner, manager, partner and family labour). Farm cash income is the surplus farm-based income available after paying for cash operating costs.

Farm business profit

Refines farm cash income by adding changes in trading stocks and deducting depreciation and imputed value of family labour. Farm business losses do not necessarily mean negative cash flows. In practice, positive cash flows can be maintained by reducing expenditure on capital asset replacement and forgoing wages for family labour.

Rate of return

Farm business profit with interest, lease and rent payments added (adjusted to full equity basis) expressed as a percentage of total farm capital. It represents the ability of the farm business to generate a return to all capital used by the business, including borrowed or leased capital.

Figure 1 Farm cash income, by industry, 2006–07 to 2012–13average per farm

0

50

100

150

200

2006–07 2007–08 2008–09 2009–10 2010–11 2011–12 2012–13

Broadacre

Horticulture

Dairy

$’000(2012–13 dollars)

Source: ABARES survey of irrigation farms in the Murray–Darling Basin

3


Box 2 Commodity prices

Irrigators produce a variety of irrigated agricultural products for which prices received can vary widely from year to year. For irrigated broadacre farms, wheat prices fell sharply in 2008–09 and 2009–10 before improving in subsequent years, rising by 2 per cent in 2011–12 and a further 36 per cent in 2012–13 (Figure 2). Prices for cotton rose sharply in 2010–11 before falling in 2011–12 and 2012–13. Rice prices followed a similar trend, rising sharply in 2008–09 then declining in the following two years, falling by 19 per cent in 2009–10 and a further 43 per cent in 2010–11.

For dairy farms, farmgate milk prices tended to fluctuate from year to year, rising in 2007–08 and 2010–11 but falling in all other years. More recently milk prices fell by 3 per cent in 2011–12 and a further 8 per cent in 2012–13.For horticulture farms, overall prices for fruit remained steady on average, although there were wide variations in prices for individual fruit crops. For example, citrus prices fluctuated with no obvious trend from 2006–07 to 2010–11 but fell sharply in both 2011–12 and 2012–13. Average vegetable prices have tended to fluctuate from year to year with no obvious trend, more recently falling by 4 per cent in 2011–12 before rising by 10 per cent in 2012–13. Wine grape prices on the other hand declined substantially over the period from 2006–07 to 2010–11 before rising by 5 per cent in 2011–12 and by a further 7 per cent in 2012–13.

Figure 2 Index of prices for selected commodities, 2006–07 to 2012–13Wheat Grain sorghum Cotton Rice Milk Lamb Citrus Vegetables Wine grapes

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Box 3 Seasonal conditions and water availability

For the early years of the survey from 2006–07 to 2008–09 seasonal conditions were among the driest on record for the Basin. Seasonal conditions generally improved in 2009–10, particularly in the southern Basin. However, despite this improvement, dam levels and irrigation water allocations remained low in most regions at the beginning of 2010–11. Seasonal conditions continued improving throughout 2010–11, particularly in the first six months of the year when rainfall throughout the Basin was very much above average to the highest on record, with widespread flooding in some areas. Heavy rainfall in the middle of the 2011–12 financial year resulted in above average rainfall again being recorded across the Murray–Darling Basin for the year (Map 2). Drier conditions returned in 2012–13, with rainfall across most of the basin lower than the long term average.As a consequence of above average rainfall in 2011–12, the level of water held in most major storages was near capacity by the end of the financial year. Reflecting the availability of water, the total volume of irrigation water applied in the Murray–Darling Basin during 2011–12 was 30 per cent higher than the previous year (ABS 2013). The total volume of water used for irrigation is estimated to have increased by a further 13 per cent in 2012–13.

4


Map 2 Rainfall deciles for the Murray–Darling Basin, 2011–12 and 2012–13

2011–12 2012–13

Source: Australian Bureau of Meteorology

Horticulture farmsFarm cash income for irrigated horticulture farms in the Murrumbidgee, Murray and Goulburn–Broken regions averaged around $54 000 (in 2012–13 dollars) over the period from 2006–07 to 2009–10, before rising to an average of $122 000 in 2012–13 (Table 1). From 2010–11 to 2012–13, average farm receipts for vegetables, wine grapes and almonds rose sharply; receipts for stone fruit and citrus rose only slightly; while receipts for apples and pears fell. Average farm cash income rose in each year from 2006–07 (with the exception of 2009–10) as increases in total cash receipts outweighed increases in total cash costs.

The average rate of return (excluding capital appreciation) for irrigated horticulture farms in the three survey regions was estimated to have increased to 2.6 per cent in 2012–13 compared with an average of 2.5 per cent in 2011–12 (Figure 3), both above the average of 1.8 per cent across the entire 7-year period of the survey.

However, there was wide variation around these averages among individual farms (Figure 4). For example, 75 per cent of horticulture farms recorded a rate of return between minus 14 per cent and 4 per cent in 2012–13. In recent years a number of farms recorded very high rates of return, resulting in the average being situated close to the top end of the range.

These results show that while farm financial performance for irrigated horticulture farms has improved on average, improvements have not occurred equally across all horticulture farms. The results in Figure 4 show there has been an increase in the spread of financial outcomes from low to high rates of return across farms in recent years. In particular, there has been an increase in the proportion of horticulture farms with low rates of return (Figure 5). Most of the farms with low rates of return grew crops such as wine grapes and citrus whose prices had fallen over the survey period. Those farms with relatively high rates of return were mostly vegetable growers.

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Table 1 Financial performance, by industry, southern Murray-Darling Basinaverage per farmHorticulture Uni

t2010–11 2011–12 2012–13

Farm cash income $ 85 550 113 917 122 000

Farm business profit $ 21 581 31488 33928

Rate of return % 2.9 2.5 2.6

Broadacre

Farm cash income $ 142 349 166 567 166 732

Farm business profit $ 80 842 40 844 33 184


Dairy

Farm cash income $ 132 021 120 466 79 163

Farm business profit $ 70 289 34 723 –14 807


Note: Estimates for the Murray, Murrumbidgee and Goulburn–Broken regions.Source: ABARES survey of irrigation farms in the Murray–Darling Basin

Figure 3 Rate of return, horticulture farms, southern Murray–Darling Basinaverage per farm

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3.5

2006–07 2007–08 2008–09 2009–10 2010–11 2011–12 2012–13%


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Figure 4 Distribution of horticulture farms, by rate of return, southern Murray–Darling Basin

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2006–07 2007–08 2008–09 2009–10 2010–11 2011–12 2012–13

Average

%

Note: 75 per cent of farms lie within the upper and lower bounds shown. The average shown is for the entire population of farms. Estimates for the Murray, Murrumbidgee and Goulburn–Broken regions.Source: ABARES survey of irrigation farms in the Murray–Darling Basin

Figure 5 Distribution of horticulture farms, by rate of return, southern Murray–Darling Basin

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2006–07

2012–13

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7


Irrigated broadacre farmsAverage farm cash income for irrigated broadacre farms in the Murrumbidgee, Murray and Goulburn–Broken regions can be examined in two distinct periods. In the first period, from 2006–07 to 2009–10, farm cash income fluctuated around an average of $56 000. This period involved severe drought and record low irrigation water allocations and substantially reduced production of rice.

In the second period, from 2010–11 to 2012–13, farm cash income rose to around three times the average recorded in the first period. In 2010–11, better seasonal conditions and higher water allocations led to increased plantings of both irrigated and dryland crops (including rice, wheat, oilseeds, barley, cotton and hay). This was combined with higher prices for most crops, but partly offset by lower rice prices, to result in a 212 per cent increase in average farm cash income.

In 2012–13, total cash receipts for irrigated broadacre farms in the Murrumbidgee, Murray and Goulburn–Broken regions fell by an estimated 0.5 per cent, with higher receipts for irrigated crops such as rice, wheat and oilseeds being offset by lower receipts for dryland wheat, beef cattle, sheep and lambs. Total cash costs fell by around 1 per cent, with increased expenditure on hired labour, crop and pasture chemicals, fuel, electricity, freight and contracts being largely offset by reduced expenditure on fodder, seed, repairs and maintenance and seasonal water allocations.

As a consequence, farm cash income was largely unchanged, rising by around 0.1 per cent to average $166 732 in 2012–13 (Table 1). Irrigated broadacre farms in the three regions surveyed recorded an average farm business profit of $33 184 in 2012–13.

The average rate of return (excluding capital appreciation) for irrigated broadacre farms in these regions was estimated to have fallen to 2.3 per cent in 2012–13 compared with an average of 2.5 per cent in 2011–12 (Figure 6). In comparison, the average rate of return over the first period of the survey — from 2006–07 to 2009–10 — for these farms was around minus 0.2 per cent.

As with horticulture farms there was wide variation around these averages (Figure 7) and the variation between the top and bottom performing farms increased in the latter years. In 2012–13, for example, 75 per cent of farms recorded rates of return between minus 7 per cent and 8 per cent. Reflecting the improvements in farm financial performance in the latter years, the proportion of farms with positive rates of return increased (Figure 8).

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Figure 6 Rate of return, irrigated broadacre farms, southern Murray–Darling Basinaverage per farm

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2006–07 2007–08 2008–09 2009–10 2010–11 2011–12 2012–13

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Figure 7 Distribution of irrigated broadacre farms, by rate of return, southern Murray–Darling Basin

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2006–07 2007–08 2008–09 2009–10 2010–11 2011–12 2012–13

Average

%

Note: 75 per cent of farms lie within the upper and lower bounds shown. The average shown is for the entire population of farms. Estimates for the Murray, Murrumbidgee and Goulburn–Broken regions.Source: ABARES survey of irrigation farms in the Murray–Darling Basin

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Figure 8 Distribution of irrigated broadacre farms, by rate of return, southern Murray–Darling Basin

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2006–07

2012–13

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Dairy farmsFor dairy, the survey only included farms in the Murray and Goulburn–Broken regions. Incomes for dairy farmers in the Goulburn–Broken and Murray regions tended to fluctuate widely from year to year over the survey period, in comparison with horticulture and broadacre farms which tended to have lower incomes in the early years of the survey and higher incomes in the latter years (Figure 1). The greater variability in dairy farm incomes was largely a result of fluctuations in milk receipts as farm gate milk prices and milk production changed (Figure 9), and variation in total cash costs (particularly fodder) that was heavily influenced by prevailing seasonal conditions.

In 2012–13 total cash receipts for irrigated dairy farms in the Goulburn–Broken and Murray regions fell by an estimated 4 per cent as a result of lower milk receipts. Total cash costs rose by 3 per cent with increased expenditure on all major cost items except fodder, fuel and purchases of seasonal water allocations. As a consequence, farm cash income for irrigated dairy farms in these two regions fell in 2012–13 to average $79 163. Irrigated dairy farms recorded an average farm business loss of $14 807 in 2012–13, compared with an average profit of $34 723 in 2011–12.

In line with the recorded changes in farm cash income and farm business profit, the average rate of return (excluding capital appreciation) for irrigated dairy farms in the Goulburn–Broken and Murray regions was estimated to have fallen from 3.1 per cent in 2011–12 to 1.3 per cent in 2012–13. The average annual rate of return to capital (excluding capital appreciation) for dairy farmers over the period from 2006–07 to 2012–13 was 1.3 per cent.

The Murray region had a slightly higher average rate of return than the Goulburn–Broken region in both 2011–12 and 2012–13 (10), while wide variation in financial performance was evident

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across farms in both regions (Figure 11). Seventy-five per cent of dairy farms reported average rates of return ranging from minus 12 per cent to 5 per cent in 2012–13.

In 2012–13, around 36 per cent of dairy farms in the Murray and Goulburn–Broken regions recorded a rate of return less than minus 5 per cent, compared with 22 per cent in 2006–07 (Figure 12). The proportion of farms with relatively high rates of return (more than 5 per cent) was also higher in 2012–13 than in 2006–07. Farms with high rates of return had much larger dairy operations than those farms with low rates of return (Figure 13).

Figure 9 Indexes of milk prices, production and receipts, Murray and Goulburn–Broken regions

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Milk production index

Milk receipts index

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=100)

Note: Estimates for the Murray and Goulburn–Broken regions.Source: ABARES survey of irrigation farms in the Murray–Darling Basin

Figure 10 Rate of return, dairy farms, Murray and Goulburn–Broken regionsaverage per farm


11


Figure 11 Distribution of dairy farms, by rate of return, Murray and Goulburn–Broken regions

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-5

0

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2006–07 2007–08 2008–09 2009–10 2010–11 2011–12 2012–13

Average

%

Note: 75 per cent of farms lie within the upper and lower bounds shown. The average shown is for the entire population of farms. Estimates for the Murray and Goulburn–Broken regions.Source: ABARES survey of irrigation farms in the Murray–Darling Basin

Figure 12 Distribution of dairy farms, by rate of return, Murray and Goulburn–Broken regions

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2012–13

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Figure 13 Receipts and income, by selected rate of return, Murray and Goulburn–Broken regionsaverage per farm

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Total cash receipts

Farm cash income

Farms with rate of return less than -5%

Farms with rate of return more than 5%

$'000(2013–14)


13


3 Irrigators and water policyOngoing reforms of water policies over the past decade have reshaped the landscape for irrigators and other water users. These reforms have included improvement of water markets, changes to pricing for water storage and delivery, funding for more efficient irrigation and water infrastructure, government purchases of permanent water access entitlements, and development of the Murray–Darling Basin Plan.

Monitoring the effect of changes to water policies on irrigation farm businesses —the major users of water — is important to ensure the objectives of policies and programs are being met, to guide any fine tuning or further development, and to ensure the affect of policy changes are well understood. The survey results allow farm-level analysis of the way irrigators adjust farm business operations in the face of changes in their operating environment by recording changes in crop or livestock production, farm receipts and costs, and financial performance.

The affects of three key aspects of water policy reform on farm performance are considered in this chapter:

trade in seasonal water allocations

trade in permanent water access entitlements, including sales to the Australian government

investment and adoption of water efficient technologies.

Water policies are part of a wide range of interrelated factors that shape the overall business operating environment faced by irrigators and it is often difficult to separately identify the influence of any one factor on farm performance. As a consequence, it is important to consider these results within the broader context of changes in commodity prices, seasonal conditions, and other factors, as discussed in the previous chapter.

Water allocation tradingGrowth in the use of water trading has been a key outcome of water policy reform in Australia, with various government initiatives and policies contributing to the development and expansion of markets for both permanent water access entitlements and temporary water allocations.

While it is difficult to attribute to any specific policy change, water trading provided irrigators with an important tool for managing low water allocations during severe drought between 2006–07 and 2008–09. The survey results show that the ability to trade water allocations was also important in seasons of higher water availability.

The characteristics of buyers and sellers changed over time, partly because of changes in the availability and price of water. As water availability declined and prices rose between 2006–07 and 2008–09, horticulture farms tended to account for a large proportion of the farms that were net buyers of allocation water, whereas net sellers were predominantly irrigated broadacre or dairy farms.

When seasonal conditions improved and water allocations increased in 2009–10 and 2010–11, the proportion of irrigators participating in water allocation trading declined. However, there was an increase in the total volume of water traded in aggregate and on a per farm basis as cotton and rice growers responded to increasing water availability and lower prices by purchasing larger volumes of water.

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The effect of water allocation trading on irrigators’ farm financial performance varies according to whether an individual is a net buyer or net seller. The effect for net sellers is an increase in farm cash receipts from the sale of water allocations. The increase in receipts is likely to be offset by some reduction in receipts from irrigated agricultural production for these farms where water allocation sales correspond with reduced areas of irrigated crops or pasture. The effect for net buyers includes additional production and receipts from crop or livestock sales that would otherwise not have been generated, which will be offset to a degree by additional costs from purchasing water allocations.

The survey results show that around 35 per cent of irrigators in each region — Goulburn–Broken, Murrumbidgee and Murray — traded water allocations (either buying or selling) over the 7 years from 2006–07 to 2012–13. The proportion of farms trading water allocations rose in each region from 2006–07 to 2008–09 and then declined in subsequent years (Figure 14).

Figure 14 Proportion of farms trading water allocations, by region

Note: Data on water trading was not collected in 2012–13.Source: ABARES survey of irrigation farms in the Murray–Darling Basin

Reflecting increased water availability, the volume of water applied per farm rose from 2009–10 to 2012–13. The increase in volume was greatest in the Murrumbidgee region where a higher proportion of irrigation farms are rice growers than in the other two regions (Figure 15).

Of the water applied, the proportion that was sourced from water allocation purchases varied by region and from year to year. Irrigators in the Murray and Goulburn–Broken regions tended to rely more heavily on purchases of water allocations than those in the Murrumbidgee region (Figure 16). Irrigators in the Murrumbidgee region were net sellers of irrigation water allocations in most years, whereas irrigators in the Murray and Goulburn–Broken regions were net buyers of water allocations (Figure 17).

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Figure 15 Volume of water applied, by regionaverage per farm


Figure 16 Water purchases as a proportion of total use, by regionaverage per farm

Note: Data on water trading was not collected in 2012–13.Source: ABARES survey of irrigation farms in the Murray–Darling Basin

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Figure 17 Water use as a proportion of total allocation, by region


Sale of permanent entitlementsThe market for permanent water access entitlements has also provided irrigators with an important tool for managing their farm businesses. However, decisions on whether to buy or sell permanent entitlements are generally based on longer term considerations than for trading water allocations. As a consequence, there have been fewer trades in entitlements than in water allocations.

Over the period from 2006–07 to 2011–12, the proportion of irrigators selling permanent water access entitlements in the Goulburn-Broken, Murrumbidgee and Murray regions rose from around 1 per cent to 8 per cent, while the proportion of irrigators purchasing permanent entitlements rose from 2 per cent to 5 per cent.

While some irrigators sold entitlements and ceased irrigating or farming altogether, the survey results show that other irrigators used the proceeds from entitlement sales to reduce debt and continue farming. Irrigators selling water entitlements to the Australian Government recorded lower average debt in 2011–12, while those not selling entitlements recorded an increase in average debt. Nevertheless, there was little difference in overall farm financial performance for entitlement sellers and non-sellers in most years (Figure 18). Some of those that continued farming remained irrigators by purchasing water allocations or entitlements.

For those irrigators selling entitlements, around 53 per cent sold entitlements to the Australian government in 2011–12. While the survey farms that sold entitlements tended to be a different group each year, the survey results show that at least part of the proceeds from entitlement sales were used to retire some debt. On average, the farm business equity ratio for these farms in each year was considerably lower than the average for all farms.

In a report conducted for the Australian Government, Marsden Jacobs (2012) found that selling entitlements to the government allowed irrigators to better manage their financial situation. Most irrigators who sold part or all of their water entitlements and continued farming reported no consequences for farm production (Marsden Jacobs 2012).

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Figure 18 Farm cash income, southern Murray–Darling Basinaverage per farm

0

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$'000(2011–12 dollars)


Investment and irrigation technologyAs part of water policy reforms in recent years, the Australian Government has provided funds to assist irrigators invest in more efficient and productive on-farm irrigation technologies. The results from the survey show there have been movements toward more efficient irrigation technologies in some industries (particularly citrus, wine grapes and vegetables) that have resulted in reduced average water application rates. The survey results also show there have been overall reductions in water application rates for many individual farms within the basin, but these can vary significantly from year to year because of changes in seasonal conditions and water availability.

The proportion of farms making additions to irrigation capital ranged from 7 per cent in 2009–10 to 12 per cent in 2010–11, with those farms making investments adding more than $80 000 in new irrigation capital, on average, in most years.

New investment in fixed irrigation infrastructure accounted for around 5 per cent of the average opening value of irrigation capital over the period. A number of farms in the survey made new investments in on-farm irrigation infrastructure that were significantly higher than the opening value of their irrigation capital. It appears that many of these farms were completely replacing existing irrigation systems with newer technologies.

Between 2006–07 and 2012–13, the survey results show an increasing trend in the proportion of horticulture farms using drip/trickle systems and fewer horticulture farms using flood/furrow and overhead sprinkler systems (Figure 19).

For broadacre and dairy farms, there were small increases in the proportion of farms using drip/trickle or travelling irrigator systems, but flood/furrow systems still account for most of

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the area irrigated on these farms. Year to year changes in the proportion of irrigators using various systems were partly the result of changes in the area of crops irrigated, the availability and price of water, and relative commodity prices. While the results vary slightly by crop type, average water application rates tended to decline over the survey period for rice and stone fruit (Figure 20). For most crops and pasture, water application rates rose in 2011–12 and 2012–13 because of greater water availability. For some crops, particularly rice, lower traded water prices also contributed to higher water application rates per hectare in the latter survey years.

Figure 19 Main irrigation systems, by industry, southern Murray–Darling Basinpercent of farms

Horticulture Broadacre Dairy

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Flood/ furrow Moveable spraylines Overhead sprinklersLow throw sprinklers Micro systems Drip/ trickleTravelling irrigators

%


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Figure 20 Water application rate, by commodity, southern Murray–Darling Basinaverage per farm

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Vegetables

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Pome fruit

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ML/ha


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An economic survey of irrigation farms in the Murray–Darling Basin

Survey methods and definitionsThe ABARES survey of irrigation farms in 2012–13 collected information from broadacre (including rice and cotton), dairy and horticulture irrigation farms within 3 regions of the Murray–Darling Basin. These survey regions cover around 62 per cent of irrigation farms in the Basin and are based on those defined by the Commonwealth Scientific and Industrial Research Organisation (CSIRO) in its Sustainable Yields Project (CSIRO 2007). The regions were Murrumbidgee, Murray, and Goulburn–Broken (Map 1). The Murray region includes parts of New South Wales, Victoria and South Australia.

ABARES field officers conducted the irrigation survey using face-to-face interviews between June and September 2013. The farm financial and physical information collected included land area and value, crop and livestock production and sales, irrigation water use by crop type and pasture, irrigation water delivery methods, farm receipts and costs, labour use, debts and assets and market values of farm capital.

The survey also included questions on types of water licences held, participation in water trading, types of irrigation infrastructure, basis for irrigation scheduling decisions, and future intentions.

While every effort was made to interview the same farms in most years, this was not possible in all regions and industries. In some cases, changes in the composition of the sample resulted in relatively large differences in estimates between years. Relative standard errors can be used to provide an indication of whether changes in the estimates are statistically significant or not.

Target populationsABARES surveys are designed, and samples selected, on the basis of a framework drawn from the Business Register maintained by the Australian Bureau of Statistics (ABS). This framework includes agricultural establishments (farms) classified by size and industry in each statistical local area. To be eligible for this survey, farms had to have engaged in irrigated agricultural activities during 2011–12, had an estimated value of agricultural operations of $40 000 or more, and be defined as broadacre, dairy or horticulture industry farms.

The industry definitions used in this report are based on the Australian and New Zealand Standard Industrial Classification (ANZSIC). This classification is consistent with an international standard and permits comparisons between industries, both within Australia and internationally. Farms assigned to a particular ANZSIC class have a high proportion of their total output characterised by that class (ABS & SNZ 2006).

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The ANZSIC industry classes and codes associated with the broadacre, dairy and horticulture categories used for this study were:

Broadacre Sheep farming ANZSIC code 0141

Beef cattle farming ANZSIC code 0142

Sheep–beef cattle farming ANZSIC code 0144

Grain–sheep and grain–beef cattle farming ANZSIC code 0145

Rice growing ANZSIC code 0146

Other grain growing ANZSIC code 0149

Cotton growing ANZSIC code 0152

Dairy Dairy cattle farming ANZSIC code 0160

Horticulture Vegetable growing (under cover) ANZSIC code 0122

Vegetable growing (outdoors) ANZSIC code 0123

Grape growing ANZSIC code 0131

Apple and pear growing ANZSIC code 0134

Stone fruit growing ANZSIC code 0135

Citrus fruit growing ANZSIC code 0136

Other fruit and tree nut growing ANZSIC code 0139

Survey designThe farm population to be surveyed was stratified by operation size using the estimated value of agricultural operation (EVAO). The size of each stratum was determined using the Dalenius–Hodges method (Lehtonen & Pahkinen 2004). The sample allocation to each stratum was performed using a mixture of the Neyman allocation, which takes into account variability within strata of the auxiliary variable (in this case EVAO), and proportional allocation, which only considers the population number in each stratum. The Neyman allocation allocates large proportions of sample to strata with large variability—in the case of this survey, strata of larger farms (Lehtonen & Pahkinen 2004).

Sample weightingFarm-level estimates published by ABARES are calculated by appropriately weighting the data collected from each sample farm and then using the weighted data to calculate population estimates. Sample weights are calculated so that population estimates from the sample for numbers of farms, areas of crops and numbers of livestock correspond as closely as possible to the most recently available ABS estimates from agricultural census and surveys data. The weighting methodology uses a model-based approach, with a linear regression model linking the survey variables and the estimation benchmark variables. The details of this method are described in Bardsley and Chambers (1984).

Generally, larger farms have smaller weights and smaller farms have larger weights, reflecting both the strategy of sampling a higher fraction of large farms than small farms (the former having a wider range of variability of key characteristics and accounting for a much larger proportion of total output), and the relatively lower number of large farms.

Preliminary and provisional estimates Preliminary and provisional estimates of farm financial performance are produced within a few weeks of completing survey collections. However, these may be updated several times at later

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dates. These subsequent versions will be more accurate, as they will be based on upgraded information and slightly more accurate input datasets.

The 2011–12 estimates are preliminary, based on full production and accounting information from farmers. However, these estimates are likely to change as further editing of sample farms is undertaken.

The 2012–13 estimates are provisional, based on data collected at the time of interview (June to September 2013). Provisional estimates include crop and livestock production, receipts and expenditure up to the date of interview together with expected production, receipts and expenditure for the remainder of the provisional year. Provisional estimates are subject to greater uncertainty than preliminary and final estimates.

Reliability of estimatesReliability of the estimates of population characteristics presented in this report depends on design of the sample and accuracy of the measurement of characteristics for the individual sample farms.

Sampling errorsOnly a small number of farms out of the total number of farms in a particular industry or region are surveyed. The data collected from each sample farm are weighted to calculate population estimates. Estimates derived from these farms are likely to be different from those that would have been obtained if information had been collected from a census of all farms. Any such differences are called sampling errors.

The size of the sampling error is most influenced by the survey design and the estimation procedures, as well as the sample size and variability of farms in the population. The larger the sample size, the lower the sampling error is likely to be. Therefore, national estimates are likely to have smaller sampling errors than industry and region estimates.

Sampling errors are a guide to the reliability of survey estimates and have been calculated for all estimates in this report. These sampling errors, expressed as percentages of the survey estimates and termed relative standard errors, are provided next to each estimate in parentheses.

Calculating confidence intervals using relative standard errorsRelative standard errors can be used to calculate confidence intervals; these indicate how close the actual population value is likely to be to the survey estimate.

The standard error is obtained by multiplying the relative standard error by the survey estimate and dividing by 100. For example, if average total cash receipts are estimated to be $100 000 with a relative standard error of 6 per cent, the standard error for this estimate is $6000. One standard error is equal to $6000 and two standard errors are equal to $12 000.

For a 66 per cent confidence interval, there is roughly a two-in-three chance that the census value (the value that would have been obtained if all farms in the target population had been surveyed) is within one standard error of the survey estimate. This range of one standard error is described as the 66 per cent confidence interval. In this example there is an approximately two-in-three chance that the census value is between $94 000 and $106 000 {$100 000 plus or minus $6000}.

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For a 95 per cent confidence interval, there is roughly a 19-in-20 chance that the census value is within two standard errors of the survey estimate (the 95 per cent confidence interval). In this example, there is an approximately 19-in-20 chance that the census value lies between $88 000 and $112 000 {$100 000 plus or minus $12 000}.

Comparing estimatesWhen comparing estimates between two groups, it is important to recognise that the differences are subject to sampling error. A conservative estimate (an overestimate) of the standard error of the difference can be found by adding the squares of the estimated standard errors of the component estimates and taking the square root of the result.

For example, estimates of farm cash income are $139 210 for farms in New South Wales and $162 020 for farms in Queensland; the relative standard errors are 33 per cent and 26 per cent, respectively. The difference between these two estimates is $22 810. The standard error of the difference is estimated as:

(33 x $139 210 / 100)2 + (26 x $162 020 / 100)2 = $62 330

A 95 per cent confidence interval for the difference is:

$22 810 +/–1.96 x $62 330= (–$99 357, $144 977)

Hence, if 100 different samples are taken, in 95 of them the difference between these two estimates would be between minus $99 357 and $144 977.

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GlossaryOwner–manager The primary decision-maker for the farm business. This person is

usually responsible for day-to-day operation of the farm and may own or have a share in the farm business.

Physical items

beef cattle Cattle kept primarily for the production of meat, irrespective of breed.

dairy cattle Cattle kept or intended mainly for the production of milk or cream.

hired labour Excludes the farm business manager, partners and family labour and work by contractors. Expenditure on contract services appears as a cash cost.

labour Measured in work weeks, as estimated by the owner–manager or manager. It includes all work on the farm by the owner–manager, partners, family, hired permanent and casual workers and sharefarmers but excludes work by contractors.

total area operated Includes all land operated by the farm business, whether owned or rented by the business, but excludes land sharefarmed on another farm.

Financial items

capital The value of farm capital is the value of all the assets used on a farm, including the value of leased items but excluding machinery and equipment either hired or used by contractors. The value of 'owned' capital is the value of farm capital excluding the value of leased machinery and equipment.

ABARES uses the owner–manager’s valuation of the farm property. The valuation includes the value of land and fixed improvements used by each farm business in the survey, excluding land sharefarmed off the sample farm. Residences on the farm are included in the valuations.

Livestock are valued at estimated market prices for the land use zones within each state. These values are based on recorded sales and purchases by sample farms.

Before 2001–02 ABARES maintained an inventory of plant and machinery for each sample farm. Individual items were valued at replacement cost, depreciated for age. Each year the replacement cost was indexed to allow for changes in that cost.

Since 2001–02 total value of plant and machinery has been based on market valuations provided by the owner–manager for broad categories of capital, such as tractors, vehicles and irrigation plant.

The total value of items purchased or sold during the survey year was added to or subtracted from farm capital at 31 December of the

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relevant financial year, irrespective of the actual date of purchase or sale.

change in debt Estimated as the difference between debt at 1 July and the following 30 June within the survey year, rather than between debt at 30 June in consecutive years. It is an estimate of the change in indebtedness of a given population of farms during the financial year and is thus unaffected by changes in sample or population between years.

farm business debt Estimated as all debts attributable to the farm business but excluding personal debt, lease financed debt and underwritten loans, including harvest loans. Information is collected at the interview, supplemented by information contained in the farm accounts.

farm liquid assets Assets owned by the farm business that can be readily converted to cash. They include savings bank deposits, interest bearing deposits, debentures and shares. Excluded are items such as real estate, life assurance policies and other farms or businesses.

receipts and costs Receipts for livestock and livestock products sold are determined at the point of sale. Selling charges and charges for transport to the point of sale are included in the costs of sample farms.

Receipts for crops sold during the survey year are gross of deductions made by marketing authorities for freight and selling charges. These deductions are included in farm costs. Receipts for other farm products are determined on a farmgate basis. All cash receipt items are the revenue received in the financial year.

Farm receipts and costs relate to the whole area operated, including areas operated by on-farm sharefarmers. Thus, cash receipts include receipts from the sale of products produced by sharefarmers. If possible, on-farm sharefarmers’ costs are amalgamated with those of the sample farm. Otherwise, the total sum paid to sharefarmers is treated as a cash cost.

Some sample farm businesses engage in off-farm contracting or sharefarming, employing labour and capital equipment also used in normal on-farm activities. Since it is not possible to accurately allocate costs between off-farm and on-farm operations, the income and expenditure attributable to such off-farm operations are included in the receipts and costs of the sample farm business.

total cash costs Payments made by the farm business for materials and services and for permanent and casual hired labour (excluding owner–manager, partner and other family labour). It includes the value of livestock transfers onto the property as well as any lease payments on capital, produce purchased for resale, rent, interest, livestock purchases and payments to sharefarmers. Capital and household expenditures are excluded from total cash costs.

Handling and marketing expenses include commission, yard dues and

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levies for farm produce sold.

Administration costs include accountancy fees, banking and legal expenses, postage, stationery, subscriptions and telephone.

Contracts paid refers to expenditure on contracts such as harvesting. Capital and land development contracts are not included.

Other cash costs include stores and rations, seed purchased, electricity, artificial insemination and herd testing fees, advisory services, motor vehicle expenses, travelling expenses and insurance. While other cash costs may comprise a relatively large proportion of total cash costs, individually the components are relatively small overall and, as such, have not been listed.

total cash receipts Total of revenues received by the farm business during the financial year, including revenues from the sale of livestock, livestock products and crops, plus the value of livestock transfers off a property. It includes revenue received from agistment, royalties, rebates, refunds, plant hire, contracts, sharefarming, insurance claims and compensation, and government assistance payments to the farm business.

Financial performance measures

build-up in trading stocks

The closing value of all changes in the inventories of trading stocks during the financial year. It includes the value of any change in herd or flock size or in stocks of wool, fruit and grains held on the farm. It is negative if inventories are run down.

depreciation of farm improvements, plant and equipment

Estimated by the diminishing value method, based on the replacement cost and age of each item. The rates applied are the standard rates allowed by the Commissioner of Taxation. For items purchased or sold during the financial year, depreciation is assessed as if the transaction had taken place at the midpoint of the year. Calculation of farm business profit does not account for depreciation on items subject to a finance lease because cash costs already include finance lease payments.

farm business equity

The value of owned capital, less farm business debt, at 30 June. The estimate is based on those sample farms for which complete data on farm debt are available.

farm business profit

Farm cash income plus build-up in trading stocks, less depreciation and the imputed value of the owner–manager, partner(s) and family labour.

farm cash income The difference between total cash receipts and total cash costs.

farm equity ratio Calculated as farm business equity as a percentage of owned capital at 30 June.

imputed labour cost

Payments for owner–manager and family labour may bear little relationship to the actual work input. An estimate of the labour input of

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the owner–manager, partners and their families is calculated in work weeks and a value is imputed at the relevant Federal Pastoral Industry Award rates.

off-farm income Collected for the owner–manager and spouse only, including income from wages, other businesses, investment, government assistance to the farm household and social welfare payments.

profit at full equity Farm business profit, plus rent, interest and finance lease payments, less depreciation on leased items. It is the return produced by all the resources used in the farm business.

rates of return Calculated by expressing profit at full equity as a percentage of total opening capital. Rate of return represents the ability of the business to generate a return to all capital used by the business, including that which is borrowed or leased. The following rates of return are estimated: rate of return excluding capital appreciation; and rate of return including capital appreciation.

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ReferencesABARES 2013, Australian Commodities March quarter 2013, Australian Bureau of Agricultural and Resource Economics and Sciences, Canberra.

ABS 2013, Water use on Australian farms 2011–12, Australian Bureau of Statistics, cat. no. 4618.0, Canberra, May.

ABS & SNZ 2006, Australian and New Zealand Standard Industrial Classification 2006—ANZSIC, Australian Bureau of Statistics and Statistics New Zealand, cat. no. 1292.0, Canberra.

Bardsley, P & Chambers, R 1984, ‘Multipurpose estimation from unbalanced samples’, Journal of the Royal Statistical Society, series C (applied statistics), vol. 33, pp. 290–299.

CSIRO 2007, Overview of project methods: A report to the Australian Government from the CSIRO Murray–Darling Basin sustainable yields project, Commonwealth Scientific and Industrial Research Organisation, Canberra, September.

Lehtonen, R & Pahkinen, E 2004, Practical methods for design and analysis of complex surveys, 2nd edn, John Wiley & Sons, Finland.

Marsden Jacobs 2012, Survey of water entitlement sellers under the Restoring the Balance in the Murray–Darling Basin Program, Final report prepared for the Department of Sustainability, Environment, Water, Population and Communities, Marsden Jacob Associates, Melbourne.

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