UNE Business School and the Australian Agricultural and Resource Economics Society

presented on Thursday, 30 October from 12.30 – 2 pm in LT3, EBL Building (W40)

Dr Tom Nordblom

Principal Economist, Economic Research

NSW Department of Trade and Investment

A FRAMEWORK FOR MODELLING WHOLE-FARM FINANCIAL RISK

by

 Tom Nordblom^1,3,  Tim Hutchings¹,  Richard Hayes^1,2,   Guangdi Li^1,2

            1     Graham Centre for Agricultural Innovation (alliance between Charles Sturt University and NSW Dept. of Primary Industries), Wagga Wagga Agricultural Institute, NSW 2650

2     NSW Department of Primary Industries, Wagga Wagga Agricultural Institute, NSW 2650

3     Economic Research Unit,  Strategic Policy & Economics Branch, NSW Department of Trade and Investment, Wagga Wagga Agricultural Institute, NSW 2650

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.  Hutchings (2013) describes a Sequential Multivariate Analysis (SMA) method, which computes cumulative distribution functions (CDFs) of decadal whole-farm cash balances for a farm facing highly variable prices and weather, given any level of starting debt.  This enables direct probabilistic projections of whole-farm, long-term financial viability. We contrast this with an earlier partial budgeting LP study (Bathgate et al. 2010) on a farm typical of the Coolamon area in New South Wales. Our focus is on the effects of varying sheep stocking rates, and pasture composition in rotations with cropping under weather and price risks over time, given different levels of starting debt.  We demonstrate how “best practice” recommendations based on partial costing can mislead by ignoring the powerful cumulative effects of input variability and compounding debts. Increasing production, often already near the achievable water-limited potential, can often be a far lower priority than reducing costs and lowering the debt burdens.  A partial analysis, such as provided by the Coolamon LP, using “average conditions”, can be a poor, or incorrect, basis for advice.