Grains Research and Development

Date: 02.09.2013

Lifting the odds of backing a winner

Author: Melissa Williams
Map of GRDC Western Region Thumbnail


KEY POINTS

  • Risk is a necessary part of making returns
  • Everyone has a different position on risk and the
    right level of risk for each grower is what they
    are prepared to live with
Grain growers are being challenged to start balancing the odds of likelihood versus consequence when dealing with the big risks in their businesses.

GRDC Western Panel deputy chair Mike
Ewing (left), Grain & Graze 2 relative
advantage project officer Danielle England, and
risk management program manager Cam
Nicholson at a recent @RISK Masterclass
seminar in Perth.

PHOTO: Cox Inall Communications

Grain & Graze 2 risk management program manager Cam Nicholson says the major grain production risks are:

  • yield volatility;
  • grain prices and marketing;
  • input costs;
  • climate variability;
  • financial equity;
  • rules and regulations; and
  • human relationships and health.

He says the industry has traditionally managed these risks using average and static values in business planning and sensitivity analyses.

“But a new, more effective approach is to focus closely on the ‘range’ of values of these key profit drivers,” he says. “This shows what happens at the ‘extremes’, especially at low extremes of yield and price and high extremes of costs.”

Why investigate range values?

Mr Nicholson says range values show vital information about how likely and how frequently certain yields, prices and costs occur.

“For example, when looking at grain prices leading up to harvest 2013, it is best to base marketing decisions around knowing the most frequent price you might achieve [the mode], rather than your average price,” he says.

This can also highlight the risk exposure of the business to price extremes at each end of the spectrum.

Decision support

The GRDC has recently funded research to boost the capabilities of the @RISK tool – which maps business risk and profit based on range values – through the Grain & Graze 2 Adaptive Management initiative.

@RISK uses Monte Carlo simulation (bell curves) to show:

  • how big or small profit is when extremes in yields, prices and costs occur;
  • how often these extremes occur;
  • which of the variables is contributing most to volatility and business exposure; and
  • deciles for profitability and loss.
For example, Mr Nicholson says if a grower knows the return per hectare or grain price needed to make a profit, @RISK can calculate how often this is likely to occur and start developing some ‘odds’ to help with contingency plans.

@RISK at work

In Western Australia, four farm consultancy companies are starting to incorporate @RISK modelling into farm business analysis and planning with grower clients.

Six major banks in the state have been exposed to the program – with varying degrees of interest.

Planfarm consultant and Grain & Graze 2 relative advantage project officer Danielle England says @RISK now allows advisers to link yield curves to the Agricultural Production Systems sIMulator (APSIM) wheat model to get a more accurate record of base yield history for specific farm locations and to understand differences between soil types and climate.

Ms England says the program also uses historical grain prices from regional ports to get a more accurate bell curve for specific selling ports and more localised pricing information.

Planfarm consultant Glen Brayshaw has used @RISK in individual farm analyses and says its price distribution analyses shows the best and worst 10, 50 and 90 per cent of grain prices received by a business, which is useful to help identify selling points.

“The program can also analyse operating profit by graphing the mean [average] operating profit for a business, the mode [frequency] of that profit level occurring and identifying the best and worst performances,” he says.

Mr Brayshaw says using average values when planning and budgeting can be limiting, as WA growers have not experienced an ‘average’ season in the past decade.

He says studying the frequency of anomalies in yields, prices and costs on the @RISK bell curve had potential to better show the overall profitability of a farm business and help plan for high and low-return years.

It is expected @RISK training will be available for interested consultants, agronomists and growers during 2013-14.

More information:

Cam Nicolson,
03 5258 3860,

nicon@pipeline.com.au;

Danielle England,
08 9881 1422,
danielle@planfarm.com.au;

Grain & Graze 2,
www.grainandgraze2.com.au
,

www.facebook.com.au/GrainandGraze

@RISK trial version: www.palisade.com/risk

For information about Optimising Farm Business Risk Workshops contact:

 

Janelle Smith, Planfarm,

0410 233 903,

janelle@planfarm.com.au

GRDC Project Code FGI00007, SFS00020

Region West