Rainfall a gauge for diversification gains
GroundCover™ Issue: 101 | Author: Asa Wahlqist
While crop diversification has well-established agronomic benefits, a new study has found that enterprise diversification does not always pay off
Diversification has been a catchcry of modern farming, but research by CSIRO economics research analyst John Kandulu has found enterprise diversification is not always the most profitable strategy.
Mr Kandulu found that while enterprise diversification – such as a cropping/livestock mix – can provide a more reliable farm income in moderate-rainfall areas, reliability can be quite different to profitability.
For the moderate-rainfall areas, his studies found that diversification can reduce the expected losses in bad years by up to 25 per cent, or increase the probability of breaking even by 20 per cent. But the flip side is that in good years, enterprise diversification can reduce expected profits by the same magnitude.
In drier and wetter regions, Mr Kandulu’s studies show the more profitable path is to concentrate on the main commodity suited to that circumstance.
“Diversification is not for gamblers,” he says, “but rather for growers who don’t like risk and uncertainty and prefer a lower risk/lower expected return, but more certainty.”
The biggest risk Australian grain growers face is variable climate, and the most common strategy to deal with this challenge is to build a mix of enterprises. Mr Kandulu says that although this is widely regarded as the most effective approach, he could not find any research actually measuring the amount by which variability could be reduced through diversifying.
He conducted his analysis on 116 years of yields in the Lower Murray dryland farming region.
“Agriculturalists had already modelled yields under a wide range of climates for 116 years for crops and pasture-grazing sheep, among other activities. I thought that was a good scientific basis for doing the economics,” he says.
The Lower Murray covers more than 11 million hectares, with rainfall ranging from 200 millimetres per year in the northern South Australian section, to 1400mm a year in the Wimmera. The main activities are dryland cropping of wheat, barley and pulses, as well as grazing sheep.
“What I found is that in the dry areas of this region, if a grower diversified they would have actually been worse off,” he says.
“In the extremely dry areas, they were better off sticking to dryland pasture and sheep, because that is a system adapted to dry conditions. By diversifying, you start to introduce water-intensive crops such as wheat, so your average income actually reduces significantly.”
Conversely, Mr Kandulu found that in the wetter areas, growers were better off concentrating on wheat, which was much more profitable than lower-earning options such as lupins and sheep.
It depends on where the farm is located, which simply means “diversification isn’t for everyone”.
His advice to growers is to look at their rainfall figures, look at the variety of cropping and other activities that are amenable to their conditions, then assess whether these are similar in the way they depend on rainfall.
“If they are similar, there is no need to diversify, but if there is a difference then, yes, it is beneficial to not put all your eggs in one basket.”
For example, Mr Kandulu noted that crops are similar in their dependence on climate variables such as rainfall and temperature. Wheat and canola, for example, are affected in the same way, therefore provide limited diversification benefits. By contrast, grazing sheep and cropping offer quite different responses to rainfall and temperature.
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