THE recovery of northern Victoria's and the Riverina's crippled dairy industry is under threat from a Federal Government water buyout of irrigators' entitlement for the environment.
Drought has already slashed the regions' milk production from three billion litres in 2001-02 to 1.67 billion litres last season, equal to a farmgate loss of $532 million or $971 million at port and warehouse.
The regions' irrigators and dairy processors have warned they have no hope of regaining their drought-driven losses if the Federal Government accepts the Murray Darling Basin Authority's call to recover 3000-4000 gigalitres for the environment.
Victorian Department of Primary Industries figures show southern basin dairy irrigators are already struggling with debt levels that have skyrocketed, from an average $367,000 in 1999-2000 to $538,000 in 2009-10.
Two of the regions' largest dairy processors, Tatura Milk and the Murray Goulburn Co-operative, have warned the mere mention of a Federal Government water buyout is already stifling investment in any recovery.
Tatura Milk milk supply general manager Stuart Brown warned the regions' communities faced a "tipping point", when the loss of water meant many towns would no longer be sustainable.
"Uncertainty is what's upsets the industry," Mr Brown said.
"It makes sure people don't invest in dairying.
"We had pricing uncertainty, now water uncertainty."
Murray Goulburn chief executive Stephen O'Rourke said cuts of up to 37 per cent on the Goulburn and Murray would make it difficult to maintain the current scale of the southern basin's dairy industry, let alone grow it.
"Dairy farmers have much higher debt levels compared to 10 years ago and now have to deal with the uncertainty created by the MDB Authority's Guide and high levels of proposed cuts to irrigation volumes," Mr O'Rourke said.
Fonterra Sustainability manager Bruce Donnison was more guarded in his response, saying the company was still reviewing the potential impact of any changes to water availability on its plants and farmer suppliers.
Fonterra employs about 300 people at its Stanhope, Echuca and Wagga Wagga plants, with MG employing another 960 at Kiewa, Cobram and Rochester, while Tatura Milk employs another 300 staff.