Bylong was famous for breeding two Melbourne Cup winners while Rainlover was put to stud there. More recently it's been in the news as the valley where the family of disgraced former MP Eddie Obeid have a farm and also a secret interest in a coal exploration licence that was investigated by the Independent Commission against Corruption.

That project – Mt Penny – has now been halted by the NSW government, but Kepco's proposal for an open cut and underground mine, to the east of the Obeid's farm, is now seeking planning approval.

DPI's submission, which was initially classified as an "objection" but later changed to a "comment" says the company's Environmental Impact statement "lacked an assessment of the potential impact to agriculture from loss of ground water" .

The company has already purchased farms with water entitlements for 43.4 per cent of the valley's total available water of 5843ML a year. While the department noted it was up to Kepco how it used that entitlement, it said "this project represents a significant change in how water is used in the areas where previously 100 per cent was used for irrigation."

DPI also queried whether there is adequate water for the mine during drought and said Kepco should apply for a permit to take water out of the aquifer now, so DPI can assess whether that can accommodated.

DPI was also critical of the company's calculations on how much Biophysical Strategic Agricultural Land (BSAL) would be lost to the project. In 2012, the NSW government began mapping the most valuable farming land in the state, amid an outcry over it loss to mining and coal seam gas extraction.

Being classified as BSAL does not prevent it being mined but raises the bar for mining companies to establish the impacts.

One controversial part of the company's plans is to stockpile the rich soil and "reinstate" 227 hectares of BSAL land disturbed by the open cut operations.

"The evidence provided within the documents is insufficient to demonstrate that the BSAL can be reinstated or that the proponent is capable of successful reinstatement of BSAL," DPI said.

A further 3800 ha of land would be lost from agricultural production due to offsets, DPI said. It recommended that land other than agricultural land should be used.

A spokesman for the company said: "Like all other water licence holders KEPCO will operate under the rules of the relevant Water Sharing Plans. KEPCO's water entitlement exceeds its mining activity needs and surplus surface and groundwater allocation will continue to be used for KEPCO's agricultural enterprises."

"KEPCO will continue to work closely with the Department of Primary Industries, consider their recommendations and provide a detailed response to their submission in the first quarter of 2016."

But critics of the project say the DPI comments prove the mine will be a disaster for the valley.

"This mine will catastrophically impact on the best agricultural land and suck the valley dry for coal that the world does not need and that must stay in the ground to avoid climate change. The fact that the Department has strongly objected to this mine must be treated seriously," NSW Greens mining and agriculture spokesman, Jeremy Buckingham said.