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

This study analyses the financial risk faced by representative mixed-enterprise farmbusinesses in four regions of south-eastern Australia. It uses discrete stochastic programmingto optimise the ten-year cash flow margins produced by these farms operating three differentfarming systems. Monte Carlo analysis is used to produce a risk profile for each scenario,derived from multiple runs of this optimised model, randomised for commodity prices anddecadal growing season rainfall since 1920.This analysis shows that the performance of the enterprise mixes at each site is characterisedmore by the level of variability of possible outcomes than by the mean values of financialoutputs. It demonstrates that relying on mean values for climate and prices disguises theconsiderable risks involved with cropping in this area. Diversification into a Merino sheepenterprise marginally reduced the probability of financial loss at all sites.This study emphasises the fact that the variability, or risk, associated with all scenarios farexceeds the likely change in cash margins due to innovation and good management. It furthershows that farm managers should give a higher priority to adopting innovations which reducecosts, rather than increase productivity, in order to reduce risk.Further analysis shows that the current static measures of financial performance (grossmargins, profit and cash margins) do not characterise the risk-adjusted performance of thevarious farming systems and almost certainly result in a flawed specification of best-practicefarm management in south-eastern Australia.