Diversified crop-livestock farms are risk-efficient in the face of price and production variability

Abstract

ContextMixed crop-livestock farms are important production systems worldwide and dominate Australia's broadacre agricultural regions. While integration of crops and livestock can offer many benefits, these are often intertwined and are hard to quantify explicitly. ObjectiveThis paper set out to examine specifically the financial risk and return implications from operating a farm portfolio involving segregated crop and livestock enterprises considering both production variability and commodity price variability. MethodsCrop and livestock production from representative systems were simulated over 40 years at six locations spanning Australia's crop-livestock zone using coupled biophysical production simulation models, APSIM for cropping enterprises and GRAZPLAN for livestock enterprises. Time series of varying prices and costs for the same period were derived using historical data. Annual gross margins for each enterprise and different proportional land allocations to the farm were calculated either allowing both production and price to vary or keeping either constant at average values. Results and conclusionsAt all locations the livestock enterprise had less downside risk than the cropping enterprises (as measured by conditional value at risk). Across both enterprises, the impact of production variability was greater than price variability at 5 of the 6 locations. Annual gross margins from the modelled crop and livestock enterprises were not well correlated with each other. Hence, even in the absence of biophysical interactions, the risk-efficient frontier included mixtures of crops and livestock enterprises at most sites. At two sites, a mix of 20–40% crop resulted in the lowest downside risk, while at other sites there was a clear trade-off between maximising farm returns and minimising risk across a range of crop-livestock mixtures. SignificanceThis is the first study to explicitly quantify and show across a diversity of environments in Australia's mixed farming systems that operating a mixture of even segregated crop and livestock enterprises in a farming business can help farmers optimise their risk-return trade-off. Similar risk mitigation benefits may be achieved through crop-livestock systems in other agricultural regions exposed to high climate and price variability.