Assessing the potential for beneficial diversification in rain-fed agricultural enterprises
Climate change and climate variability induce uncertainty in yields, and thus threaten long term economic viability of rain-fed agricultural enterprises. Enterprise mix diversification is the most common, and is widely regarded as the most effective, strategy for mitigating multiple sources of farm business risk. We assess the potential for enterprise mix diversification in mitigating climate induced variability in long term net returns from rain-fed agriculture. We build on APSIM modelling and apply Monte Carlo simulation, probability theory, and finance techniques, to assess the potential for enterprise mix diversification to mitigate climate-induced variability in long term economic returns from rain-fed agriculture. We consider four alternative farm enterprise types consisting of three non-diversified farm enterprises and one diversified farm enterprise consisting of a correlated mix of rain-fed agricultural activities. We analyse a decision to switch from a non-diversified agricultural enterprise with the highest expected return to a diversified agricultural enterprise consisting of a mix of agricultural enterprises. Correlation analysis showed that yields were not perfectly correlated (i.e. are less than 1) indicating that changes in climate variables cause non-proportional impacts on yield production. We conclude that at best, diversification can reduce the standard deviation of net returns by up to about A$110 Ha-1, or 52% of mean net returns; increase the probability of below-average net returns by up to about 4% and increase the mean of 10% of worst probable annual net returns by up to A$54/ha. At worst, diversification can reduce the mean of net returns by up to about A$95 Ha-1, or 46%.
|Date of creation:||2011|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: 0409 032 338
Web page: http://www.aares.info/
More information through EDIRC
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.:
- Hardaker, J. Brian & Lien, Gudbrand, 2010. "Probabilities for decision analysis in agriculture and rural resource economics: The need for a paradigm change," Agricultural Systems, Elsevier, vol. 103(6), pages 345-350, July.
- Bharat Ramaswami & Shamika Ravi & S.D. Chopra, 2003. "Risk management in agriculture," Indian Statistical Institute, Planning Unit, New Delhi Discussion Papers 03-08, Indian Statistical Institute, New Delhi, India.
- Pannell, David J. & Malcolm, Bill & Kingwell, Ross S., 2000.
"Are we risking too much? Perspectives on risk in farm modelling,"
Blackwell, vol. 23(1), pages 69-78, June.
- Pannell, David J. & Malcolm, Bill & Kingwell, Ross S., 2000. "Are we risking too much? Perspectives on risk in farm modelling," Agricultural Economics of Agricultural Economists, International Association of Agricultural Economists, vol. 23(1), June.
- Lien, Gudbrand & Hardaker, J. Brian & Asseldonk, Marcel A.P.M. van & Richardson, James W., 2009.
"Risk programming and sparse data: how to get more reliable results,"
Elsevier, vol. 101(1-2), pages 42-48, June.
- Hardaker, J. Brian & Lien, Gudbrand D. & Van Asseldonk, Marcel A.P.M. & Richardson, James W. & Hegrenes, Agnar, 2008. "Risk programming and sparse data: how to get more reliable results," 2008 International Congress, August 26-29, 2008, Ghent, Belgium 44051, European Association of Agricultural Economists.
- Rockafellar, R. Tyrrell & Uryasev, Stanislav, 2002. "Conditional value-at-risk for general loss distributions," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1443-1471, July.
- Temesgen Tadesse Deressa & Rashid M. Hassan, 2009. "Economic Impact of Climate Change on Crop Production in Ethiopia: Evidence from Cross-section Measures," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 18(4), pages 529-554, August.
- Fulco Ludwig & Stephen Milroy & Senthold Asseng, 2009. "Impacts of recent climate change on wheat production systems in Western Australia," Climatic Change, Springer, vol. 92(3), pages 495-517, February.
- Chan, Louis K. C. & Karceski, Jason & Lakonishok, Josef, 1998. "The Risk and Return from Factors," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(02), pages 159-188, June.
- Chan, Louis K C & Karceski, Jason & Lakonishok, Josef, 1999. "On Portfolio Optimization: Forecasting Covariances and Choosing the Risk Model," Review of Financial Studies, Society for Financial Studies, vol. 12(5), pages 937-74.
- Louis K.C. Chan & Jason Karceski & Josef Lakonishok, 1999. "On Portfolio Optimization: Forecasting Covariances and Choosing the Risk Model," NBER Working Papers 7039, National Bureau of Economic Research, Inc.
When requesting a correction, please mention this item's handle: RePEc:ags:aare11:100568. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (AgEcon Search)
If references are entirely missing, you can add them using this form.