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Mitigating economic risk from climate variability in rain-fed agriculture through enterprise mix diversification

Kandulu, John M., Bryan, Brett A., King, Darran, Connor, Jeffery D.
Ecological economics 2012 v.79 pp. 105-112
Monte Carlo method, business enterprises, case studies, climate, climate change, finance, food security, models, rainfed farming, risk, Australia
Climate variability, and its increase with climate change, pose substantial economic risks to agriculturalists and hence, limit their ability to respond to global challenges such as food security. Enterprise mix diversification is the most common, and is widely regarded as the most effective, strategy for mitigating multiple sources of short-term economic risk to agricultural enterprises. However, assessments of enterprise mix diversification as a strategy for mitigating climate risks to ensure long term viability of agricultural enterprises are sparse. Using the Lower Murray region in southern Australia as a case study, we combined APSIM modelling with Monte Carlo simulation, probability theory, and finance techniques, to assess the extent to which enterprise mix diversification can mitigate climate-induced variability in long term net returns from rain-fed agriculture. We found that diversification can reduce the standard deviation by up to A$200ha⁻¹, or 52% of mean net returns; increase the probability of breaking even by up to 20%, and increase the mean of 10% of worst probable annual net returns (Conditional Value at Risk) by up to A$100ha⁻¹. We conclude that enterprise mix diversification can also be an effective strategy for hedging against climate-induced economic risk for agriculturalists in marginal areas.