Integrating El Niño-Southern Oscillation information and spatial diversification to minimize risk and maximize profit for Australian grazing enterprises
Abstract
Climate strongly influences agricultural profitability. Climate risks on agriculture can be managed by moving production to other areas, but this may be costly and reduce profitability if climatic conditions are dynamic. Here, we test whether integrating spatial diversification and climate information could minimize climate risk, while not sacrificing profitability. We use 27 years of farm business profit and climate data (1991–2018) from four of Australia’s most climatically diverse regions where grazing underpins socioeconomic activity. We show that spatial diversification coupled with seasonal climate information from El Niño-Southern Oscillation (ENSO) provides better estimates of optimized risk-profit tradeoffs in different ENSO years compared to estimates without climate information. Conditional Value-at-Risk (CVaR) (a measure of financial risk) is lower when climate information is used in El Niño (1.23 $/ha), La Niña (1.19 $/ha), and Neutral years (1.22 $/ha), compared to when no climate information (1.57 $/ha) is used. When targeting high profits, CVaR is reduced by 15, 86, and 22% in El Niño, La Niña, and Neutral years, respectively, compared to a 5% reduction when no climate information is used. When aiming to minimize CVaR in drought (El Niño), profit is higher using climate-informed spatial diversification (expected profits of 2.71 $/ha), relative to when it is not (expected profits of 2.30 $/ha). Climate-informed spatial diversification also provides options to graziers to achieve much higher gains (expected profits of up to ~ 4.13 $/ha) under La Niña versus 2.62 $/ha when no climate information is used. Here, we show for the first time that seasonal climate information coupled with spatial diversification can provide strategies to help graziers reduce risk and increase profitability. Our approach is applicable to other parts of the world and could be used to decrease climate risk and increase profitability for other agricultural sectors exposed to variable climatic conditions.
Keywords
Copula Portfolio optimization Conditional value-at-risk Agricultural risk management Geographical diversification Australia Grazing ENSONotes
Acknowledgements
The authors would like to acknowledge constructive comments from the reviewers and the Editor-in-Chief.
Funding information
This study was funded by Meat and Livestock Australia Donor Company (MDC), the Queensland Government through the Drought and Climate Adaptation Program (DCAP), and the University of Southern Queensland. The projects involved are the “Northern Australia Climate Program” (NACP) and “Producing Enhanced Crop Insurance Systems and Associated Financial Decision Support Tools.”
Compliance with ethical standards
Conflict of interest
The authors declare that they have no conflict of interest.
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