The Commonwealth Environmental Water Holder has agreed to assess a proposal to release some of its allocation to northern Victorian dairy farmers.
Federal Murray Nationals MP, the Nationals Damian Drum called on the CEWH to loan up to 50 gigalitres of its allocation, to farmers.
The CEWH, Jody Swirepik, said she was looking at the proposal.
"The CEWH is required, by law, to use water first and foremost to get benefits for the environment," Ms Swirepik said.
" Water cannot be traded from the environmental portfolio unless certain environmental outcomes have been met."
Mr Drum said more water should be put onto the market to assist dairy farmers struggling with the high cost of temporary water.
"There is currently over 760,000ML of environmental water held between Victoria and the Commonwealth in Victorian water storages," Mr Drum said.
"Instead of carrying over all of this water to next year, both Victoria and the Commonwealth should look to make more water available to food producers, particularly dairy farmers who are in dire straits."
"The vast amount of environmental outcomes this year have been met as a result of the high river flows, because of water trading."
He said the dairy industry needed immediate assistance, with the cost of temporary water regularly hitting more than $500 a megalitre.
"Our farmers are desperate, and we are losing farmers from the dairy industry at unprecedented rates to the extreme conditions currently being endured," Mr Drum said.
Mr Drum said there was significant industry support behind the call, with letters from processors Australian Consolidated Milk, KyValley Dairy, Freedom Foods, and Fonterra.
A Fonterra spokeswoman said water security in northern Victoria was critical to dairy farmers, and the communities in which they lived.
"We must all work together, with every option on the table, to ensure that dairy farmers have the water they need to run their businesses and restore confidence in the Northern Victorian dairy industry," the spokeswoman said.
MDBA chief executive Phillip Glyde said it was of concern to him that many people continued to face hard times, due to the drought.
"When things are dry, every part of river system feels it-farmers and the environment alike," Mr Glyde said.
"The CEWH is bound by law to use her water allocations solely for building the health of the river.
"That was the very purpose of acquiring the water from farmers through purchase or through infrastructure investment as part of the Murray-Darling Basin Plan."
Mr Glyde said the Water Act did not allow for water earmarked for the environment to be explicitly returned to farming, either on loan or as a gift.
"However, there is provision for the CEWH to release environmental water onto the open market, for anyone to purchase, strictly on condition that the environment doesn't suffer as a result."
He said the CEWH was bound, by law, to ask the market price for the water.
"It would make no difference whether irrigators buy from an environmental water holder or from other farmers with water to sell," Mr Glyde said.
"It is really important that we all respect the right of people with water entitlements to use their water allocations as they see fit-whether it's environment managers supporting river ecosystems or irrigators sustaining production."
He said the Basin Plan worked in the interests of the MDB's environment and communities.
"It cannot sacrifice one for the sake of the other, neither in times of drought nor times of plenty.
"It's worth remembering that the environment's need for water is greater than the volume of water available, just as it is for farmers.
"The environment needs all the water it's got, including the planned use of water carried into the year ahead."
With the outlook continuing dry across the Basin, managing forward risk is in everyone's interest.
North Victorian Irrigators Council chairman Nick James said it was a small step forward, but ultimately a band-aid solution.
"We need some long term solutions, that are going to fix the problem, right into the future, for the sustainability of our region.
"It's a short term fix, and it's going to end up in the hands of speculators, then be onsold to farmers."
He said the whole region was affected by high water prices.
"It doesn't stop at farmers, and it stops at the local butcher's shop, the supermarket, everyone who is involved in these local communities, right across the board."
Ricegrowers' Association of Australia president Jeremy Morton said the CEWH wasn't tied to selling its water to a particular buyer.
"But they can only do one thing with the proceeds, which is to buy more water," Mr Morton said.
He said there was merit in allowing the manager of Commonwealth held water greater flexibility, to do whatever they wanted with their portfolio.
"If they want to use that money to invest in some infrastructure, which allows them to achieve an environmental outcome using less water, surely that's a sensible thing," Mr Morton said.
"It's all about getting the best outcome from the limited water we have got.
"I don't think it hurts to have the conversation, in the run-up to an election."