A financial analysis of the effect of the mix of crop and sheep enterprises on the risk profile of dryland farms in south-eastern Australia
AbstractThis study analyses the financial risk faced by representative mixed-enterprise farm businesses in four regions of south-eastern Australia. It uses discrete stochastic programming to optimise the ten-year cash flow margins produced by these farms, operating three alternative farming systems. Monte Carlo simulation analysis is used to produce a risk profile for each scenario, derived from multiple runs of this optimised model, randomised for commodity prices and decadal growing season rainfall since 1920. This analysis shows that the performance of the enterprise mixes at each site is characterised more by the level of variability of outcomes than by the mean values of financial outputs. It demonstrates that relying on mean values for climate and prices disguises the considerable risks involved with cropping in this area. Diversification into a Merino sheep enterprise on 60% of the area marginally reduced the probability of financial loss at all sites. This study emphasises the fact that the variability, or risk, associated with all scenarios far exceeds the likely change in cash margins due to innovation and good management. This analysis shows that innovations need to be assessed more on their ability to reduce costs rather than to increase income, especially when the farms are achieving near the maximum practical water-limited productivity. Further analysis shows that the current static measures of financial performance (gross margins, profit and cash margins) do not characterise the risk-adjusted performance of the various farming systems and almost certainly result in a flawed specification of best-practice farm management in south-eastern Australia.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Australasian Farm Business Management Network in its journal AFBM Journal.
Volume (Year): 08 (2011)
Issue (Month): 1 ()
Farm management; financial risk; climate risk; price risk; variability; Farm Management;
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Villano, Renato & Fleming, Euan & Fleming, Pauline, 2010. "Evidence of farm-level synergies in mixed-farming systems in the Australian Wheat-Sheep Zone," Agricultural Systems, Elsevier, vol. 103(3), pages 146-152, March.
- Kingwell, Ross S., 2011. "Revenue volatility faced by Australian wheat farmers," 2011 Conference (55th), February 8-11, 2011, Melbourne, Australia 100572, Australian Agricultural and Resource Economics Society.
- Lien, Gudbrand, 2003. "Assisting whole-farm decision-making through stochastic budgeting," Agricultural Systems, Elsevier, vol. 76(2), pages 399-413, May.
- Cacho, O. J. & Bywater, A. C. & Dillon, J. L., 1999. "Assessment of production risk in grazing models," Agricultural Systems, Elsevier, vol. 60(2), pages 87-98, May.
- John M. Antle & Susan M. Capalbo, 2001.
"Econometric-Process Models for Integrated Assessment of Agricultural Production Systems,"
American Journal of Agricultural Economics,
Agricultural and Applied Economics Association, vol. 83(2), pages 389-401.
- Antle, John M. & Capalbo, Susan M., 2000. "Econometric-Process Models For Integrated Assessment Of Agricultural Production Systems," Trade Research Center Research Discussion Papers 29234, Montana State University, Department of Agricultural Economics and Economics.
- Peck, Dannele E. & Adams, Richard M., 2010. "Farm-level impacts of prolonged drought: is a multiyear event more than the sum of its parts?," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 54(1), March.
- Dannele E. Peck & Richard M. Adams, 2010. "Farm-level impacts of prolonged drought: is a multiyear event more than the sum of its parts?," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 54(1), pages 43-60, 01.
- Chambers,Robert G. & Quiggin,John, 2000.
"Uncertainty, Production, Choice, and Agency,"
Cambridge University Press, number 9780521785235, December.
- Pannell, David J. & Stewart, Vanessa & Bennett, Anne & Monjardino, Marta & Schmidt, Carmel & Powles, Stephen B., 2004. "RIM: a bioeconomic model for integrated weed management of Lolium rigidum in Western Australia," Agricultural Systems, Elsevier, vol. 79(3), pages 305-325, March.
- Donnelly, J. R. & Freer, M. & Salmon, L. & Moore, A. D. & Simpson, R. J. & Dove, H. & Bolger, T. P., 2002. "Evolution of the GRAZPLAN decision support tools and adoption by the grazing industry in temperate Australia," Agricultural Systems, Elsevier, vol. 74(1), pages 115-139, October.
- Oliver Mußhoff & Norbert Hirschauer, 2007. "Improved program planning with formal models? The case of high risk crop farming in Northeast Germany," Central European Journal of Operations Research, Springer, vol. 15(2), pages 127-141, June.
- Adamson, David & Mallawaarachchi, Thilak & Quiggin, John C., 2002.
"Water use and salinity in the Murray–Darling Basin: A state-contingent model,"
Australian Journal of Agricultural and Resource Economics,
Australian Agricultural and Resource Economics Society, vol. 51(3), September.
- Adamson, David & Mallawaarachchi, Thilak & Quiggin, John, 2006. "Water use and salinity in the Murray-Darling Basin: a state contingent model," Risk and Sustainable Management Group Working Papers 149861, University of Queensland, School of Economics.
- David Adamson & Thilak Mallawaarachchi & John Quiggin, 2006. "Water use and salinity in the MurrayÐDarling Basin: a state-contingent model," Murray-Darling Program Working Papers WP5M06, Risk and Sustainable Management Group, University of Queensland.
- David J. Pannell, 2006. "Flat Earth Economics: The Far-reaching Consequences of Flat Payoff Functions in Economic Decision Making," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 28(4), pages 553-566.
- Jones, Carol Adaire & El-Osta, Hisham S. & Green, Robert C., 2006. "Economic Well-Being of Farm Households," Economic Brief 34095, United States Department of Agriculture, Economic Research Service.
- Keating, B. A. & McCown, R. L., 2001. "Advances in farming systems analysis and intervention," Agricultural Systems, Elsevier, vol. 70(2-3), pages 555-579.
- Mishra, Ashok K. & El-Osta, Hisham S. & Johnson, James D., 1999. "Factors Contributing To Earnings Success Of Cash Grain Farms," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 31(03), December.
- Kaine, G. W. & Tozer, P. R., 2005. "Stability, resilience and sustainability in pasture-based grazing systems," Agricultural Systems, Elsevier, vol. 83(1), pages 27-48, January.
- Klose, Steven L. & Outlaw, Joe L., 2005. "Financial and Risk Management Assistance: Decision Support for Agriculture," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 37(02), August.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (AgEcon Search).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.