Farmers seeking financial incentives to quit irrigating will be unable to receive money from the Federal Government until Victoria removes a series of barriers to water trading.
In an aggressive play that was dropped on the states by surprise, Federal Water Minister Penny Wong declared that grants for small-scale farmers to cease irrigating will be paid only to those whose home state has agreed to the Commonwealth's demands over abolishing certain trading rules.
The move has renewed tensions between the Rudd and Brumby governments over reform in the Murray-Darling Basin and forces the Brumby Government to effectively choose between two groups of farmers.
In its quest to buy back irrigation water to boost the Murray-Darling river system, the Commonwealth has pressured Victoria to abandon a 4pc limit on the amount of water that can be traded outside irrigation districts.
The limit was imposed to prevent the dismantling of irrigation communities, but it has frustrated the Commonwealth's bid to buy back water as quickly as possible.
Pressure from the Commonwealth intensified over the weekend when Ms Wong declared that farmers could not access the grants — worth up to $150,000 — until their home state had met the Commonwealth's demands.
The incentive package has been offered only to "small block" farmers — those with less than 15 hectares of land — and is of most significance to farmers in Victoria's Sunraysia district.
It is believed the removal of another trade barrier — limiting the amount of water that can be bought from a region by a non-landholder to just 10pc — is also part of the Commonwealth's latest demands.
Ms Wong's move pits farmers seeking to leave the irrigation industry against those who wish to remain irrigating under the current trading protections, and politically wedges the Brumby Government between the two groups.
It sparked a rare bout of unity in Victorian politics yesterday, with National Party spokesman Peter Walsh accusing the Commonwealth of performing a disgraceful backflip, and he urged Ms Wong to provide the exit grants without conditions.
The Victorian Farmers Federation said imposing conditions on the exit grants was against the spirit of talks that were recently held between Ms Wong and VFF president Simon Ramsay.
The Brumby Government vowed to continue fighting to protect the 4pc trading cap until late 2009, when it is scheduled to rise to 6pc.
Meanwhile, one of Victoria's most controversial water bureaucrats has retained the confidence of the Murray Darling Basin Commission despite being investigated over his conduct when claiming reimbursement for expenses.
The commission confirmed that Don Cummins was still a member of an advisory committee despite his recent departure from several Victorian water bodies.
An investigation into Mr Cummins' expenses was conducted in September and he has since opted not to seek reappointment as chairman of Goulburn Valley Water and has resigned from the Goulburn Broken Catchment Management Authority.
His resignation from the authority was announced by Environment Minister Gavin Jennings last week.
Critics have dubbed Mr Cummins a "Labor mate".
Opposition scrutiny of government spokesman David Davis called on the Government to release details of the investigation into Mr Cummins' conduct, submitted in late September, by Goulburn Valley Water.
But the Government has refused to publicly release the findings.
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