Elsevier

Agricultural Systems

Volume 117, May 2013, Pages 35-44
Agricultural Systems

The relative profitability of dairy, sheep, beef and grain farm enterprises in southeast Australia under selected rainfall and price scenarios

https://doi.org/10.1016/j.agsy.2013.01.002Get rights and content

Abstract

Dryland farming and its profitability is directly affected by the amount and timing of rainfall that influence and consequently impacts on pasture and crop yields. Yet rainfall is not the sole determinant of farm enterprise profitability; prices of farm inputs and commodities produced also affect farm profits. This study draws on farm commodity prices and input prices from the past 9 years to form correlated price and cost datasets that are then used in examining the profitability of a range of farm enterprises in south eastern Australia under low, average and high rainfall scenarios. Fourteen representative farm enterprises were examined that included the production of Merino fine wool, prime lamb, beef cattle, milk, wheat and canola. The spread of profitability of these farm enterprises against the backdrop of price variability and rainfall scenarios was compared. The results show that profitability of the enterprises studied is currently affected more by changes in rainfall than by commodity prices and that dairy enterprises are the most profitable on a $/ha basis but that the profitability of wheat, steer and prime lamb enterprises are least affected by low rainfall scenarios. The self-replacing cow–calf beef systems, canola and dairy enterprises are the most vulnerable to reduced rainfall and may benefit by reducing profit risk through changes such as expanding the enterprise or diversifying across other types of enterprises. Farm diversification involving combinations of enterprises with negatively correlated profits will enable the variance in farm profits to be reduced. Such actions could form part of farms’ adaptation strategies to climate and price variability.

Highlights

► We compared enterprise profits using correlated rainfall and price scenarios. ► Profitability was affected more by rainfall than commodity prices. ► The most profitable enterprises were dairy and the least profitable cow–calf. ► Reduced rainfall affected wheat and steer enterprises the least and dairy the most. ► Negatively correlated enterprise operating profit may assist in risk management.

Introduction

Dryland farming and its profitability is directly affected by the amount and timing of rainfall (Nnaji, 2001, Sadras, 2002). This is especially true in Australia where dryland farming is commonplace and variation in rainfall across regions and years is marked (Alexander et al., 2007, Hennessy et al., 1999, Pearson et al., 2011). Changes in rainfall impact on soil moisture, pasture and crop growth, and thereby affect crop yields and livestock production. The variability in rainfall leads to variability in pasture and crop yields (Asseng et al., 2012, Petersen and Fraser, 2001) and this yield variability is particularly pronounced in Australia (Kingwell, 2012).

But rainfall and yields are not the only key factors affecting the profitability of dryland farms. Prices of farm inputs and commodities produced also play important roles. These prices fluctuate as a result of both local and international influences (FAO, 2011), and in many countries over the last decade these prices, and crop prices in particular, have fluctuated greatly (Kingwell, 2012).

Understanding the effect of changes in rainfall and prices on enterprise and farm profitability can enable farmers and their advisers to better manage these risks. With drier weather conditions and greater climate variability featuring in climate change projections for many places around the world, understanding the relationships between rainfall, commodity prices and enterprise profitability is increasingly important. Climate change projections for southern Australia point towards greater warming and a decline in annual rainfall, especially during autumn (CSIRO and Australian Bureau of Meteorology, 2007). These projections, that often include enhanced climate variability, mean that farmers may need to prepare and manage their systems and farm finances to accommodate additional environmental challenges. Understanding how different farm enterprises currently fare under existing environmental variability is the precursor to such studies. This paper provides such an initial appraisal of farm enterprise profitability under current climate and price conditions. This paper explores how rainfall and price variability affects different farm enterprises in a dryland agricultural region of southern Australia.

The study region (Fig. 1) in southern Australia currently includes a number of land uses including sheep, beef, dairy and grain farming. Aside from dairy farms, most farms are mixed enterprises, with farm managers tending to choose the mixture based on relative expected returns of enterprises, their management expertise, or environmental conditions such as soil type and expected rainfall. The wide range of enterprise types within the region provides a rich data set for comparing these enterprises.

The objectives of this paper are to (1) compare and contrast the profitability of 14 different types of enterprises based on sheep, beef, dairy and grain production in the study region (2) examine how enterprise operating profit changes with low, median and high commodity prices as well as low, average and high rainfall scenarios and (3) compare the performance of average and top enterprises based on operating profit. Inferences about the resilience to rainfall and price volatility of the different enterprises are made. We hypothesise that under selected rainfall and price scenarios, and using the metric of operating profit per hectare, there will be particular enterprises that are less vulnerable to rainfall and price volatility and that farms with higher productivity and profitability will have greater variation due to price and climate influences.

Section snippets

Modelled enterprises

Fourteen representative enterprises were examined that included the production of Merino fine wool, prime lamb, beef cattle, milk, wheat and canola. The enterprises were based on Browne et al. (2011) and their main attributes are typical of enterprises in the study area, as reported in regional benchmarking reports (English et al., 2008, Gilmour et al., 2009, Gilmour et al., 2010, Gilmour et al., 2011, Tocker et al., 2009, Tocker et al., 2010, Tocker and Berrisford, 2010, Tocker and Berrisford,

Results and discussion

The key results were that rainfall had a greater impact on enterprise profitability than commodity prices, except for the wheat enterprise, where the price had more influence (Table 4). The reliance of farm enterprises on rainfall for production and profitability has been demonstrated elsewhere (UNDP, 2007, Slegers, 2008, Maneta et al., 2009, Podesta et al., 2009, Biazin et al., 2012). The result for wheat is consistent with the finding of Kingwell (2012) who showed that, in Australia, wheat

Conclusion

This research compared the profitability of a range of wool, prime lamb, cow–calf, steer, dairy, wheat and canola enterprises in south eastern Australia under selected rainfall and commodity price scenarios. Among the enterprises were four different types of dairy enterprises and they were found to be the most profitable, although also in higher rainfall zones, earning considerably more than all the other enterprises. The most profitable enterprises, however, tended to also have greater

Acknowledgments

This work was supported by the University of Melbourne and the Future Farm Industries Cooperative Research Centre.

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