Mitigating economic risk from climate variability in rain-fed agriculture through enterprise mix diversification

Climate variability, and its increase with climate change, pose substantial economic risks to agriculturalists and hence, limit their ability to respond to global challenges such as food security. Enterprise mix diversification is the most common, and is widely regarded as the most effective, strategy for mitigating multiple sources of short-term economic risk to agricultural enterprises.In this study, the CSIRO team assessed the ability of enterprise mix diversification to mitigate climate-induced variability in long-term economic net returns from rain-fed agriculture. We leave the application and operationalization of diversification to future work.  Variability was assessed based on historical data. Using a case study in the 11.8 million hectare Lower Murray region in southern Australia, we fitted probability density functions to modelled long term crop and livestock yield data.  Climate variability, and its increase with climate change, pose substantial economic risks to agriculturalists and hence, limit their ability to respond to global challenges such as food security. Enterprise mix diversification is the most common, and is widely regarded as the most effective, strategy for mitigating multiple sources of short-term economic risk to agricultural enterprises. However, assessments of enterprise mix diversification as a strategy for mitigating climate risks to ensure long term viability of agricultural enterprises are sparse. Using the Lower Murray region in southern Australia as a case study, we combined APSIM modelling with Monte Carlo simulation, probability theory, and finance techniques, to assess the extent to which enterprise mix diversification can mitigate climate-induced variability in long term net returns from rain-fed agriculture. We found that diversification can reduce the standard deviation by up to A200 ha− 1, or 52% of mean net returns; increase the probability of breaking even by up to 20%, and increase the mean of 10% of worst probable annual net returns (Conditional Value at Risk) by up to A100 ha− 1. We conclude that enterprise mix diversification can also be an effective strategy for hedging against climate-induced economic risk for agriculturalists in marginal areas

Quantifying the extent to which enterprise mix diversification can mitigate economic risk in rainfed agriculture

Climate variability can induce uncertainty in yields, and threaten long term economic viability of rainfed agricultural enterprises in the absence of effective adaptation strategies. Enterprise mix diversification has been found to be an effective adaptation strategy for mitigating multiple sources of farm business risk in some contexts. The extent to which enterprise mix diversification can mitigate climate induced variability in long term net returns from rainfed agriculture is assessed in this paper. Building on APSIM modelling, the assessment applies 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 rainfed agriculture. Five alternative farm enterprise types comprising three non-diversified farm enterprises and two diversified farm enterprises consisting of a correlated mix of rainfed agricultural activities were considered. The 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 was analysed. 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 yields. Results show that whilst diversification can reduce the standard deviation of net returns by up to A$122ha-1 and increase the worst probable net loss by A$99ha-1, diversification can reduce the expected net returns by up to A$96ha-1 and reduce the maximum probable net gain by up to A$602ha-1. Further, under non-diversified enterprises, the likelihood of realising net losses higher than the maximum probable net loss under the diversified enterprise was estimated at up to 6%. Conversely, under the non-diversified enterprise, the likelihood of realising net gains higher than the maximum probable net gain under diversified enterprises was estimated at up to 16%

Irrigation revenue loss in Murray-Darling Basin drought:An econometric assessment

This article presents an econometric analysis of irrigation commodity area and revenue responses to varying commodity prices, water availability and climate conditions for the second half of a decade long drought in the Murray-Darling Basin, Australia. We find statistically significant evidence of irrigation area decline with reductions in water allocations and irrigation revenue shrinking with area irrigated. Results also indicate hotter drier weather conditions experienced in the drought effected crops differently: some crop revenues suffered, while higher evapotranspiration and yield potential appeared to support higher revenue outcomes for other crops. Comparison revealed that marginal revenue changes in response to water allocations estimated are much less than those implicit in other economic assessments of water scarcity impacts for the same basin that used different methods. We find that triangulation of results between methods provides confidence in consistent results and reveals possible avenues for future research and methodological development