The line was temporarily reopened in 2010 but was last used to regularly haul grain in 2006.

GrainCorp will also spend up to $2 million to upgrade the Rainbow grain handling site.

Hindmarsh Shire Council Mayor Cliff Unger said the news was fantastic for the region.

"It is something we have been working on for years," he said.

"All the farmers up the line need to get their grain to market and of course when we had floods last harvest the roads were cut and farmers were not able to transport grain.

"That makes it even more important to have a rail service instead of having trucks coming down our highway and wrecking the roads."

Cr Unger said he never gave up hope the line would reopen.

"The governments have always said they would do this one day and it was just a matter of when they had the money," he said.

"It is great this government has come on board. I've had some farmers say to me it would never happen, so they will certainly be very surprised.

"It will also make it safer for people travelling from Rainbow and Jeparit to Horsham because they will not have to pass so many trucks to get there.

"It is all positive and we as the Hindmarsh Shire are elated."

V-Line spokesman James Kelly said a start date for the project had not been set.

"At this stage we are looking to start around mid-October," he said.

"We estimate there are about 450 sleepers for every kilometre of the track that need to be replaced.

"But it is not just the sleepers. We also have to repair a lot of flood damage and restore embankments."

GrainCorp corporate affairs manager David Ginns, who helped negotiate the deal with the government, said the line was due to open around Christmas.

He said the line would help move 120,000 tonnes or more of grain during harvest.

“The railway will mean we can be more efficient, it lessens the cost burden on councils because trucks are not cutting up their roads and exhausting their repair budget and it is also a good safety measure by getting trucks off the roads,” Mr Ginns said.

He said the news has taken many by surprise.

“Farmers in these towns thought they wouldn’t see the railway operating again. We certainly applaud the State Government for making the commitment – it shows this new government is fair dinkum about infrastructure in regional areas,” he said.

Mr Ginns said an upgrade to the Rainbow grain handling site would allow for more grain storage and would increase the efficiency of out-loading to rail.

Member for Lowan Hugh Delahunty said the project was a win for rail and the Hindmarsh community.

“There has been a lot of work going on behind the scenes with Terry Mulder, Peter Ryan and myself and GrainCorp. It has been a good co-operative approach,” he said.

“We want to get as much heavy freight on rail as we can. Last year there was a lot of grain being transported by road and this year it is looking like there will be another big crop, so it is important to get the railway operating again.”

Mr Delahunty said the announcement sent a positive message to the community.

“It tells them we are serious about getting more freight on rail and it tells the Rainbow, Jeparit and Dimboola communities that their roads should be safer this harvest,” he said.

“I am really pleased this has happened – it is a great outcome.”

Jeparit farmer Peter Werner said he was pleased with the announcement.

“The Jeparit-Rainbow Road is not good after the floods so it will be good to get trucks off the road,” he said.

Rainbow farmer Don Fisher said the return of rail was a good thing for the region.

Mr Mulder said the government would retain the 17-kilometre section between Rainbow and Yaapeet but it would not be reopened.