A case study and spreadsheet modelling approach was used to examine options for two dairy farms in northern Victoria that would enable them to maintain profit, or ameliorate a decline in profit, under changes in irrigation water availability and price. Farm 1 obtained 43% of estimated metabolisable energy requirements for the milking herd from supplements, had a predominantly spring-calving herd, and used mainly owner/operator labour. Farm 2 obtained 54% of estimated metabolisable energy requirements for the milking herd from supplementary feeds, had a split-calving herd, and used owner/operator and employed labour.

When long-term allocation of irrigation water declined from 160% to 100% water right (WR), the ‘base farm’ system for both farms was maintained by purchasing temporary water. At a water price of $35/ML and allocation of 160% WR, the operating profit of Farms 1 and 2 was AU$52 000 and $315 000, respectively. This declined to $30 000 and $253 000 at a water availability of 100% WR.

In response to changes in water availability and/or price, Farm 1 could purchase more supplements (a mix of grain and fodder) or replace some irrigated perennial pasture with irrigated annual pasture. Purchasing more supplements was not as profitable as buying irrigation water on the temporary market in the long term. At an irrigation water allocation of 130% WR, a water price of $35/ML and assumed response to extra supplement of 1.4 L milk/kg, operating profit was $24 000 compared with $44 000 when the base farm system was maintained by purchasing temporary water. At an allocation of 100% WR, increased supplement use was not profitable as a long-term option, unless exceptionally high responses in milk production to extra supplement were achieved. For this farm, converting an area of perennial pasture to annual pasture slightly increased operating profit compared with maintaining the base farm system when water availability decreased or price increased.

The options analysed for Farm 2 involved converting some of the irrigated annual pasture to perennial pasture and, associated with this, additional options of reducing the area of maize grown or reducing the amount of nitrogen fertiliser applied to perennial pasture. Farm 2 had already implemented significant farm system changes to deal with reduced irrigation water availability in recent years, including increased supplementary feeding and growing annual pastures and maize. Hence, the options analysed for Farm 2 focused more on whether less significant changes would be more profitable. Converting 16 ha of annual pasture to perennial pasture, and growing 2.2 ha less maize appeared to be marginally more profitable than both the base farm system and the option of reducing nitrogen fertiliser use on the perennial pasture (operating profit $295 000 v. $291 000 or $292 000 at a water allocation of 130% WR and price of $35/ML). Reductions in irrigation water availability or increases in water price would need to be substantial to make the option of growing more perennial pasture and less maize unattractive. While the maize and annual pasture dry matter yield per megalitre of water were higher than for perennial pasture, the costs associated with harvesting, storing and feeding maize and annual pasture meant they were unlikely to be more profitable than a productive perennial pasture.