Revenue volatility faced by Australian wheat farmers

This paper uses variance decomposition modelling to explore how wheat revenuevolatility in Australia has changed spatially and temporally. The components ofrevenue variance are the variances and covariances of wheat prices, the area of wheatharvested and the yield of wheat. The key finding is that the volatility of wheatrevenue (detrended) has more than doubled in every main wheat-growing State inAustralia over the last 15 years or so Changes in wheat areas are mostly a minorsource of revenue variance. The principal cause of volatility is yield changes withprice changes increasing slightly in absolute importance when compared to theiradjacent previous period. Greater downside yield risk is often the principal cause ofthe increased yield variance. The implications are that revenue variance, andespecially downside revenue risk, has posed major problems for wheat-dominant farmbusinesses over the last 15 years or so. How Australia’s wheat producers havemanaged this greater volatility of wheat revenue is likely to have greatly affected theviability of their farm businesses.