Milk production in Northern Victoria could halve again in five years

"Production is down 18 per cent this season so far, what happens if it doesn't rain?"

The dairy analyst believes that, in as little as five years' time, northern Victoria's milk production could halve to 800 million litres in a worst-case scenario with declining irrigation water availability.

The shortfall would risk many of Australia's key dairy processing plants running dry or trucking milk in over long distances.

Restructuring, including the closure of the former Murray Goulburn Rochester plant, has already shrunk processor capacity in northern Victoria.

Still, large cheese plants at Cobram and Stanhope coupled with new investment by Australian Consolidated Milk and Freedom Foods in the region puts capacity in excess of 2 billion litres annually.

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Prominent dairy farmer Daryl Hoey recently relocated from northern Victoria to Gippsland.

Mr Hoey said it would be hard for dairy farmers in the north to maintain production levels if farmgate prices fall below $6 a kilogram of milk solids.

"There could easily be a third of farmers leave the industry," he said.

"Some will persist with a grass-based system and there are some really good grass growers out there who can make that work.

"Most will likely move to a much more intensive system with bought-in feed, out-blocks and cropping and I struggle to see a cost of production of under $6kg/MS for a system like that.

"Processors pay a northern Victorian premium of about 25 cents a kilogram of milk solids but they're not likely to pay more if you accept the price in southern milk plus freight.

"You're not guaranteed of getting $6 and you have to ask whether these dry seasons are a one-off or whether they're becoming more and more normal."

The problem revolves around water and Mr Hoey worries about its future affordability for dairy farmers.

"Ten to 15pc of farmers don't own any water and are totally reliant on buying temporary water," he said.

"Some of them sold water to generate cashflow, reduce debt or participate in the on-farm efficiency programs.

"There's a whole generation who came into the industry in the last 10 to 15 years without the equity to buy water as well as the land.

"Research shows that dairy farmers are comfortable with water prices of up to $200 a megalitre.

"Anything over $250/ML will eat into the bottom line."

Mr Hoey said it was hard to see water flowing back to dairy farmers without government intervention.

"There isn't enough water for almonds, horticulture, dairy and the environment below Boundary Bend unless government prevents transfers downstream," he said.

"Delivery charges and the fixed charges on water also need to come down."

Ms Bills said the consequences for the industry as a whole would be significant.

"If it doesn't rain and farmers are left with no carryover water, fodder or financial reserves, it's easy to imagine a further drop of 20pc and heading rapidly towards 1b litres in the region," she said.

"That raises a lot of new questions - how high do prices have to be before the region is non-competitive in tradeable commodities like cheese and even nutritional powders?

"Does the industry take out more capacity to reduce exposure, maybe lose one of the companies from the region?

"Or will northern Victoria shrink back to simply supplementing NSW fresh milk and exporting UHT, which is being increasingly commoditised by the EU?"