A Framework for Modelling Whole-Farm Financial Risk.

Selected paper presented at the 59th AARES Annual Conference at Rotorua, New Zealand from 10th-13th February, 2015

25 Pages Posted: 23 Jul 2015

See all articles by Thomas L. Nordblom

Thomas L. Nordblom

Graham Centre for Agricultural Innovation (Charles Sturt University & NSW DPI)

Tim Hutchings

Charles Sturt University - Graham Centre for Agricultural Innovation

Richard Hayes

Government of New South Wales - Department of Primary Industries

Guangdi Li

Government of New South Wales - Department of Primary Industries

Date Written: Feb 13, 2015

Abstract

We consider the limitations of optimisation analyses that ignore farm-level financial risks arising from combinations of high fixed costs, including debt burdens and highly variable local weather and prices. A sequential multivariate analysis method is used to compute cumulative distribution functions of decadal whole-farm cash balances for a farm facing highly variable prices and weather, and a level of opening debt. This enables direct probabilistic projections of long-term whole-farm financial viability typical of the Coolamon area in New South Wales. We contrast this with a partial-budgeting linear programming study using average annual prices and weather for the same farm. Our focus is on the effects of varying sheep stocking rates, given different pasture compositions in rotation with cropping under weather and price variations over time and different levels of starting debt. We show how best practice recommendations based on partial costing might mislead by ignoring the powerful cumulative effects of input variability and compounding debts. Increasing production, often already near the achievable water-limited potential, can be of far lower priority than reducing costs and lowering heavy debt burdens. We demonstrate that whole-farm financial risk profiles of a farm’s options provide a richer, more meaningful basis for sound advice.

Keywords: Farm management, Financial risk, Perennial pastures, Rainfed mixed farming, Weather and price variations

Suggested Citation

Nordblom, Thomas L. and Hutchings, Timothy and Hayes, Richard and Li, Guangdi, A Framework for Modelling Whole-Farm Financial Risk. (Feb 13, 2015). Selected paper presented at the 59th AARES Annual Conference at Rotorua, New Zealand from 10th-13th February, 2015. Available at SSRN: https://ssrn.com/abstract=2634854

Thomas L. Nordblom (Contact Author)

Graham Centre for Agricultural Innovation (Charles Sturt University & NSW DPI) ( email )

Albert Pugsley Place
Wagga Wagga, NSW 2650
Australia
+61419290428 (Phone)

HOME PAGE: http://www.csu.edu.au/research/grahamcentre/our-people/members2/tom-nordblom

Timothy Hutchings

Charles Sturt University - Graham Centre for Agricultural Innovation ( email )

EH Graham Centre (CSU+NSW DPI)
Pine Gully Road
Wagga Wagga, 2650
Australia

Richard Hayes

Government of New South Wales - Department of Primary Industries ( email )

Wagga Wagga Agric Institute
Pine Gully Road
Wagga Wagga, NSW, New South Wales 2650
Australia
+(614) 48231704 (Phone)
+(614) 48231809 (Fax)

Guangdi Li

Government of New South Wales - Department of Primary Industries ( email )

WWAI
Pine Gully Road
Wagga Wagga, NSW, New Sout Wales 2650
Australia
+(612) 6938 1930 (Phone)
+(612) 6938 1809 (Fax)

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