A financial analysis of the effect of the mix of crop and sheep enterprises on the risk profile of dryland farms in south-eastern Australia – Part 1

This study presents a method of simulating longer-term cash flows that reflect the cumulative effects of variation in seasons, prices, enterprise sequences and mixes and other management decisions. It can be used to develop full risk profiles on a whole-farm or individual-component enterprise basis for most dryland farms in southern Australia, at gross margin, profit or cash flow levels. This analysis concentrates on the cash flow implications of these various scenarios because cash flow is the indicator which includes all costs, and therefore demonstrates affordability and the long-term viability of the farm business entity. This study shows that the role of sheep in the mixed farming enterprise in south-eastern Australia is to reduce the exposure of the business to the relatively high cash flow variability associated with dryland cropping. In all districts studied, sheep have a cost of production about half that of cropping, and crop margins are more sensitive to rainfall variability. Sheep therefore reduce the risk of loss when compared with continuous cropping.