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We aim to model the impact of variability in and changes to water availability in the Murray-Darling Basin on flows available to the environment and irrigation, and impact on the value of irrigated agricultural production. Our objective is to understand the opportunities for changed management of the basin, how they are constrained by climate change and other factors, and how they might affect the returns to irrigation and flows for the environment, so that we may provide information to help plan for the future. In this paper we describe the model: in other papers in this conference we describe analyses of water availability and use in the basin based on this model. The hydrology component of the model is based on a simple, monthly water balance stocks and flows model of the basin, subdivided into 58 catchments. In each catchment, the rainfall and potential evapotranspiration are used to partition the rain between actual evapotranspiration and runoff. Runoff accumulates in the rivers, and flows downstream; it is stored in dams, fills lakes and wetlands from which it evaporates, spills onto and is partly consumed on the floodplains, is diverted for irrigation, eventually (if enough water remains) flowing out of the mouth. This hydrology part of the model is calibrated against observations of flow at the downstream flow gauge of the 58 catchments (the records of which vary from a few years to the full 114 years of our typical simulation period from 1895-2009). It simulates reasonably well the full range of flows, and the development of dams and irrigation diversions. The economics part of the model is based on regressions with dependent variables: the observed areas, production, water use and gross value of production of irrigated agriculture. Each dependent variable is estimated as functions of water available, evaporation and rainfall, and crop prices, for ten major commodity groups. The regressions are based on data for 17 regions and four recent years during the drought: they cover a wide range of water uses, water availability, rainfall, evaporation and commodity price circumstances observed during the drought. We report separately in this conference on this statistical analysis (Connor et al, 2012a. In the integrated model, the hydrology model first determines the availability of water for irrigation in the 58 catchments and also calculates the flows, on a monthly cycle. Once per year, the water availability values are aggregated to the 17 economic regions, and the economic model determines the irrigation outcome in terms of areas under each commodity group in each region and the gross value of production. The integrated model has some unique features in comparison to existing MDB economics models: the coupling of economics with detailed hydrology; the ability to simulate active management of environmental flows and the resulting consumptive water use economic impacts; and, the ability to simulate the dynamics of the water balance and economic impact over 114 year historical and simulated future climate sequences.

Climate change and the proposed Murray-Darling Basin Plan both result in less water for irrigation. Climate change is projected to take water from all uses including the environment, whereas the likely sustainable diversion limit in the Plan aims (amongst other things) to return water to the environment. We examine the impact on flows and the returns to irrigation of potential reductions in irrigation allocations, and the interaction with projected climate change impacts. Our analysis is based on an integrated hydrology – economics model of the Murray- Darling Basin, described in Kirby et al. (2012a). The model can quickly and easily run new climate or other scenarios, accounting for flows at key environmental assets. It uses a statistically calibrated economic model that can closely predict drought outcomes accounting for allocation, climate and price circumstances. We examined a 2,800 GL reduction to diversions, and compared it to a base case of no reductions. We modelled the flows and irrigation returns for the no reduction and reduction cases under the assumption of historical climate, a median climate change and a more severe climate change. The climate change projections were those examined in the CSIRO Murray-Darling Basin Sustainable Yields project, slightly extended for more recent years. The broad results of this analysis are that: • The reduction of water available to irrigation under the sustainable diversion limit results in a less than proportional reduction in returns to irrigation. A 25 % reduction in water available on average over 114 years is estimated to reduce the gross value of of irrigated agricultural production by about 3 % on average. This is consistent with observation of reduced water availability in the drought (Kirby et al., 2012b, Conner et al., 2012). • Future droughts projected under climate change might be more severe that those experienced to date, with an expectation of greater economic impact; • A median climate change projection removes from the overall system slightly more water than is gained for the environment under the sustainable diversion limit. Under current sharing rules, this reduction in water comes primarily from the environment. The exact impact on flows varies from valley to valley. The impact of climate change is not considered in other analyses of the Murray-Darling Basin plan. 3 • The returns to irrigation are not much affected by a median climate change, with a 2 % reduction in gross value resulting from 3 % reduction in water availability (on top of the reductions due to the diversion limit). This detail in this result depends on the exact form of water sharing rules, and rules will change in the future; we used a default assumption that the behaviour resulting from the rules will be much as it is now.

In the last decade, the Murray-Darling Basin (MDB), Australia faced a severe drought which affected its agriculture production. Sustainable diversion limits as proposed in the Australian Government’s basin plan together with climate change is expected to impact on future agriculture production and development in the MDB. We developed a biophysical-economic mathematical model calibrated against the observed multi-period land use data utilising the positive mathematical programming (PMP) approach to evaluate the impacts on agricultural production activities of a range of climate events and policy options. This is an extension of our previous work where the model was calibrated against a single year and focus was on the southern MDB only. The multi-period calibrated model has strong predictive capacity as it matches simulated irrigated area, water use and gross value of irrigated agricultural product (GVIAP) well with the observed irrigated land, water use and GVIAP for all the crops in all the regions of the MDB across the highly variable climatic conditions from 2005 to 2009. The approach will be useful in assessing economic impacts of climate change on irrigation, farmers’ adaptation options and/or water policies including water markets and irrigation efficiency improvement.

The recent drought saw the lowest inflows on record in the Murray-Darling Basin in 2006. Water use by irrigation in 2007-8 and 2008-9 was about one third that of pre-drought levels. Understanding how irrigation adapted to less water is key both to provide information to help plan for the future and data for model calibration. Complicating this objective was the concurrent international food price crisis of 2008 and an increase in water trading in the basin. This presents a challenge in unpacking the effects of commodity price changes, input substitution, productivity gains and water trading from the effect of reduced water availability. In this paper we seek Our objective is to unpack the various effects. We used publicly available price and production data to calculate a price index and adjust gross value data in actual dollars using this index; some price and volume data are not available, so the adjustment is approximate for total irrigation. We calculated productivity both in terms of output volumes per unit of water and in terms of adjusted gross value per unit of water. In 2007-8 and 2008-9, overall water use in irrigation was down to about 31 % and 33 % respectively of the 2000-01 value. In 2008-9, the gross value of irrigated agricultural production was down to 86 % in unadjusted terms, but 80 % in commodity price adjusted terms. The gross value (adjusted) per unit of water more than doubled (at 241 %). The aggregated data obscure the variation of water use in different industries. Water use by cereals, grapes and fruit and nuts changed little. Rice, cotton, meat (pasture) and dairy all reduced their water use substantially (to as little as 1 % of the 2000-1 value in the case of rice in 2007-8). Dairy, cereals, rice and meat all experienced significant price rises in 2007-8, whereas prices of cotton and grapes fell. In cereals, the higher prices and the modest change to water use resulted in a large increase (to 187 %) in gross value; some of this was due to higher prices, the remainder to productivity gains. Cereal production increased in the north of the MDB and fell in the south; we speculate that cotton growers swapped to winter cereals, whereas rice growers did not. For rice, which is a high water use crop, the price rise was insufficient to outweigh the decline in water availability, and production fell. All industries show increases in productivity by value or by volume per unit of water. The greatest increase was in dairy: dairy farmers adapted to water scarcity and high water prices by substituting bought-in feed for irrigated pasture. Water trading increased after 2006; importantly, inter-regional trade increased greatly, from a few tens of gigalitres (GL) per year before 2006 to more than 500 GL/yr in 2008-9. The source of traded water was from the Murrumbidgee and to a lesser extent Murray NSW; buying regions were South Australia and to a lesser extent Murray Victoria. Much of this trade was away from rice and dairy and towards horticulture. Trade thus offset some of the impact of reductions in water availability, buffering South Australia and the Victorian Lower Murray from very low allocations.

This article evaluates irrigated agriculture sector response and resultant economic impacts of climate change for a part of the Murray Darling Basin in Australia. A water balance model is used to predict reduced basin inflows for mild, moderate and severe climate change scenarios involving 1, 2 and 4 C warming, and predict 13, 38 and 63% reduced inflows. Impact on irrigated agricultural production and profitability are estimated with a mathematical programming model using a two-stage approach that simultaneously estimates short and long-run adjustments. The model accounts for a range of adaptive responses including: deficit irrigation, temporarily following of some areas, permanently reducing the irrigated area and changing the mix of crops. The results suggest that relatively low cost adaptation strategies are available for a moderate reduction in water availability and thus costs of such a reduction are likely to be relatively small. In more severe climate change scenarios greater costs are estimated. Adaptations predicted include a reduction in total area irrigated and investments in efficient irrigation. A shift away from perennial to annual crops is also predicted as the latter can be managed more profitably when water allocations in some years are very low.

This article evaluates irrigated agriculture sector response and resultant economic impacts of climate change for a part of the Murray Darling Basin in Australia. A water balance model is used to predict reduced basin inflows for mild, moderate and severe climate change scenarios involving 10, 20, 40 Celcius warming, and predict 13%, 38% and 63% reduced inflows. Impact on irrigated agricultural production and profitability are estimated with a mathematical programming model using a two-stage approach that simultaneously estimates short and long-run adjustments. The model accounts for a range of adaptive responses including: deficit irrigation, temporarily fallowing some areas, and permanently reducing irrigated area and changing the mix of crops. The results suggest that relatively low cost adaptation strategies are available for moderate reduction in water availability and thus costs of such reduction are likely to be relatively small. In more severe climate change scenarios greater costs are estimated, adaptations predicted include a reduction in total area irrigated, investments in efficient irrigation, and a shift away from perennial to annual crops as the latter can be managed more profitably when water allocations in some years are very low.

This article is an economic analysis of reallocating River Murray Basin water from agriculture to the environment with and without the possibility of interregional water trade. Acquiring environmental flows as an equal percentage of water allocations from all irrigation regions in the Basin is estimated to reduce returns to irrigation. When the same volume of water is taken from selected low-value regions only, the net revenue reduction is less. In all scenarios considered, net revenue gains from freeing trade are estimated to outweigh the negative revenue effects of reallocating water for environmental flows. The model accounts for how stochastic weather affects market water demand, supply and requirements for environmental flows. Net irrigation revenue is estimated to be $75 million less than the baseline level for a scenario involving reallocating a constant volume of water for the environment in both wet and dry years. For a more realistic scenario involving more water for the environment in wet and less in dry years, estimated net revenue loss is reduced by 48 per cent to $39 million. Finally, the external salinity-related costs of water trading are estimated at around $1 million per annum, a quite modest amount compared to the direct irrigation benefits of trade.