Embedded risk management in dryland sheep systems II. Risk analysis

Abstract

Climatic variability is a major constraint to improved productivity and profitability in dryland grazing systems. This paper reports the physical and economic benefits obtained from incorporating tactical responses in risk management strategies for dryland sheep production systems constrained by climatic variability. A total of 112 potential risk management strategy: response combinations were evaluated using the simulation model LincFarm. The strategies differed in stocking rate (SR; stock units (SU) ha⁻¹), pasture type (legume or grass-based system), and stock classes. All strategies were evaluated at 10, 12, 14 or 16 SR, first without tactical responses and then with responses triggered when soil moisture levels fell to 10.0%, 12.5% or 15.0% in the top 25 cm soil. The results show that all strategies including tactical adjustments to management and marketing were economically superior to those that did not vary tactically. The difference in average returns between the best strategy with tactical responses and the best without is $336.04 ha⁻¹ year⁻¹, an increase of 40%. The value of including tactical responses in corresponding strategies ranged between 2.98% and 37.32%. This was in addition to tactical responses decreasing the variability of returns by between 19.74% and 67.38%. The combination of risk and return defines a risk-efficient frontier on which any individual farmer should find an optimal strategy which reflects their risk attitude. By including tactical adjustments additional strategies become risk efficient and the number on the frontier increased from 5 to 11. Comparing the two sets of strategies showed that failure to incorporate tactical adjustments may result in sub-optimal risk management strategies being chosen whereas failure to accommodate risk attitude may change the strategy chosen, but not necessarily to one that is sub-optimal. The results suggest conventional ryegrass: clover pastures are risk efficient when management is aggressive (high stocking rate and later climate response) and that either conventional pasture systems or those with high nutritive value species are superior when management is more conservative. In all cases, retaining a proportion of flexible stock classes such as 2 year old cattle or a mob of older ewes is essential. The results also emphasize the importance of maintaining high pasture quality to ensure fast lamb growth rates and early drafting.