A Comparison of Risk and Return Characteristics of Efficient Crop Portfolios for the Brown Soil Zones Saskatchewan and Mecklenburg, Germany

Two efficient farms are constructed for the brown soils of Saskatchewan, Canada and for Mecklenburg, Germany based on producer panels. Both farms feature highly integrated cropping systems which take advantage of cropping synergies. However, farm risk is inherently different between the two because differences in 1) climate that gives rise to very different yield risk and cost structure, and 2) EU programs which offer fixed cash payments and stable sugar beet prices. As expected, risk is much higher for the Saskatchewan case farm - it has a chance of a negative cash flow of approximately one year in five. In sharp contrast, the Mecklenburg has very little chance of generating a negative cash flow. Hence, it is easy to understand why crop insurance and other risk reducing types of programs have long been popular in Saskatchewan grain and oilseed price and yield risk make for a very real possibility of cash shortfalls on even the most efficient farm with moderate debt. On the other hand, there is little need for such risk reducing programs by efficient German farms because risk remains relatively low unless he/she is financially imprudent. Moving to higher farmland rents associated with an equilibrated land market or removing government payments increases risk considerably, but still at levels well below those of the Saskatchewan case farm.