Ross Kingwell

Are we risking too much? Perspectives on risk in farm modelling

Risk and uncertainty have been extensively studied by agricultural economists. In this paper we question (a) the predominant use of static frameworks to formally analyse risk; (b) the predominant focus on risk aversion as the motivation for considering risk and (c) the notion that explicitly probabilistic models are likely to be helpful to farmers in their decision making. We pose the question: for a risk-averse farmer, what is the extra value of a recommendation derived from a model that represents risk aversion, compared to a model based on risk neutrality? The conclusion reached is that for the types of the decision problems most commonly modelled by agricultural economists, the extra value of representing risk aversion is commonly very little.

A mathematical programming model of a crop-livestock farm system

Abstract A whole-farm mathematical programming model has been built for dryland crop-livestock farms in Western Australia. The multidisciplinary approach used for model building is presented and the resulting model structure is described. It is a mixed integer programming model which represents, in some detail, the biological, technological and financial relationships of the farming system and stresses the interdependencies of enterprises. The model is used to investigate the extent to which positive interactions between different enterprises influence the optimal farm plan. The management issue considered is the division of land between crop and pasture production. It is concluded that, for the farming system considered, interactions do have an influence on profit and the optimal farm plan.

Managing complexity in modern farming

Modern farming in Australia is no longer simple. Farms are large, multi-enterprise businesses underpinned by expensive capital investments, changing production technologies, volatile markets and social challenges. The complexity of modern broadacre farming leads to the question: what is the nature of the relationship between farm business complexity and farm profitability? This study uses bioeconomic farm modelling and employs eight measures of complexity to examine the profitability and complexity of a wide range of broadacre farming systems in Australia. Rank order correlations between farm profitability and each measure of complexity show inconsistent relationships, although the most profitable farming systems are found to be reasonably complex on several criteria. Among the set of highly profitable systems are found some characterised by less complexity. A commonly acknowledged feature of farm business complexity is the annual workload of the farmer, yet the trade-off between farm profit and this workload is found not to be large. A case is outlined where the farmers annual hours worked could be reduced by 9 per cent for a 3 per cent reduction in farm profit. If farmers workloads are proving problematic now, and in the future, then agricultural R&D, service delivery and policy development will need to focus more on being highly attractive to increasingly time-poor farm managers.

The effect of climatic risk on dryland farm management

Abstract A model of the dryland farming system in the eastern wheatbelt of Western Australia is briefly described. The model, named MUDAS, explicitly accounts for climatic risk and dryland farm management responses to such risk. Results from this model are compared with those from a model based on expected values and which therefore excludes climatic risk. The performances of the models are compared assuming two price scenarios. Results from the models show that climatic risk and its associated farm management responses lead to decisions often different from those generated by sole consideration of expected values. Levels of activities selected, in the model based on expected values, are often substantially different from those generated in MUDAS. However, the expected value model that ignores climatic risk and tactical responses to such risks still correctly identifies the desirable direction of strategic response to a change in price regime. Tactical decision-making, in response to climatic risk, is shown importantly to contribute to farm profit and to influence production decisions including the mix of enterprises. Profitable tactical decision-making in response to climatic risk causes wide variation across seasons in crop and pasture areas and crop and livestock management, and overall greatly modifies the farm management decisions that might otherwise be based on expected values. Results from MUDAS show that rigid adherence to rotations is not the most profitable managerial response to climatic risk. Instead managerial flexibility causing marked changes in crop and pasture areas across seasons is more profitable. The value of tactical decision-making and managerial flexibility illustrated in the MUDAS results points to a potentially profitable area of research and extension, this being the development of information or innovations that facilitates tactical decision-making.

Sheep animal welfare in a low rainfall Mediterranean environment: a profitable investment?

Abstract Public concern over the welfare of animals used for agricultural production has grown over the last 20 years. This paper examines sheep animal welfare in a dryland farming system in a Mediterranean environment. The farming system examined is an integrated livestock–crop system in the Merredin region of Western Australia. A model of the farming system is used to examine the impact on farm profits of pursuing various management strategies that impact on sheep animal welfare. Results suggest that maintaining the animal welfare of sheep is the most profitable strategy. By contrast, neglect of animal welfare results in less farm profit. Hence, aside from ethical considerations, there are strong profit motives to maintain animal welfare in the dryland farming system reported here.

Effects of climatic and price uncertainty on the value of legume crops in a Mediterranean-type environment

Abstract This study investigates the impact of price and yield uncertainty on the value of new legumes and their place in a Mediterranean region of Western Australia. It uses the stochastic bioeconomic farming system Model of an Uncertain Dryland Agricultural System (MUDAS) to integrate climatic, agronomic and economic information. A robust finding is that chick peas in rotation with wheat on some clayey loam soil classes are a profitable addition to optimal farm plans, increasing the certainty equivalence of profit on a typical farm by 7%. By contrast, modelling results for field peas and faba beans suggest they are likely to form a minor role in the farming system, being occasionally selected under certain price and weather-year conditions. Modelling results highlight a farmers attitude to risk and the proportion of the farm area with suitable soils as important determinants of the role and value of the new legumes in the farming system. These findings, if supported by further investigations, have important implications for breeding and agronomic research. ©

Programming models of farm supply response: The impact of specification errors

Abstract This paper explores the influence of specification errors in a programming model of farm wheat supply response. Specification errors are introduced by excluding various characteristics of production activities and other features of the farming system. Often model misspecification causes large changes in production response with wheat area and output elasticities changing by 40 per cent or more. In many cases the changes are due to the slope effect ( d Q/ d P) dominating the shift effect (P/Q). The main inference from results is that unless the farming system, with its array of production technologies, resources and enterprise alternatives, is described in some detail, it is highly likely that specification errors will noticeably bias estimates of supply response. Advances in spreadsheet, database and solving algorithm software enable farming systems to be described in greater detail, and with greater ease, than has hitherto been possible, so often model builders have fewer excuses for misspecifying models.

Introducing Awassi sheep to Australia: an application of farming system models

Abstract Awassi sheep are large framed, fat tailed sheep mostly grown and consumed in Middle East countries. To provide an opportunity for Australian farmers to sell these sheep to Middle East countries, in 1983 an Awassi fat tail sheep importation program was initiated. This program has enabled many Awassi sheep to be raised in quarantine in Western Australia. For the first time Australian farmers now have an opportunity to produce Awassi sheep. To help administrators and farmers determine the likely place and profitability of these Awassi sheep in the farming systems of Western Australia, farming system models were employed. Models of the dryland farming systems in three regions of Western Australia were augmented with Awassi sheep production options. Modelling results suggest that only modest price premiums for Awassi cross sheep are sufficient to ensure the Awassi sheep enterprise is a profitable inclusion in the farming systems of the southern and western wheatbelt regions of Western Australia, providing particular Awassi flock options are adopted.

Measurement of Greenhouse Gas Emissions from Agriculture: Economic Implications for Policy and Agricultural Producers

If agriculture were to be included in Australia’s carbon price scheme, a key decision for government would be how to estimate greenhouse gas emissions. We explore the consequences of three different methods for measuring on-farm emissions: national accounting methods, an amended version of those methods and use of best-available local data. Estimated emissions under the three methods can vary widely; for example, on a case study farm in Western Australia, local data indicated 44 per cent lower emissions than did the national accounts method. If on-farm emissions are subject to an emissions price, the impact on farm profit is large and varies considerably with different measurement methods. For instance, if a price of

Can expected tax revenue be increased by an investment-preserving switch from ad valorem royalties to a resource rent tax?

23/t of CO2-e applies then farm profit falls by 14.4–30.8 per cent depending on the measurement method. Thus, the choice of measurement method can have large distributional consequences. On the other hand, inaccurate measurement results in relatively minor deadweight losses. On-farm sequestration through reafforestation may lessen the impact of an emissions price on farm businesses, although it will require a high carbon price to be viable, especially if sequestration rates are underestimated or low.