Integrating El Nino-Southern Oscillation information and spatial diversification to minimize risk and maximize profit for Australian grazing enterprises

Nguyen-Huy, Thong ORCID: https://orcid.org/0000-0002-2201-6666 and Kath, Jarrod ORCID: https://orcid.org/0000-0003-2391-1264 and Mushtaq, Shahbaz and Cobon, David and Stone, Gordon and Stone, Roger (2020) Integrating El Nino-Southern Oscillation information and spatial diversification to minimize risk and maximize profit for Australian grazing enterprises. Agronomy for Sustainable Development, 40:4. pp. 1-11. ISSN 1774-0746


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.


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Item Type: Article (Commonwealth Reporting Category C)
Refereed: Yes
Item Status: Live Archive
Faculty/School / Institute/Centre: Current - Institute for Life Sciences and the Environment - Centre for Applied Climate Sciences (1 Aug 2018 -)
Faculty/School / Institute/Centre: Current - Institute for Life Sciences and the Environment - Centre for Applied Climate Sciences (1 Aug 2018 -)
Date Deposited: 12 Mar 2020 05:57
Last Modified: 08 Jun 2021 02:06
Uncontrolled Keywords: copula, portfolio optimization, conditional value-at-risk, agricultural risk management, geographical diversification, Australia, grazing, ENSO
Fields of Research (2008): 07 Agricultural and Veterinary Sciences > 0701 Agriculture, Land and Farm Management > 070108 Sustainable Agricultural Development
04 Earth Sciences > 0401 Atmospheric Sciences > 040107 Meteorology
04 Earth Sciences > 0401 Atmospheric Sciences > 040105 Climatology (excl.Climate Change Processes)
Fields of Research (2020): 30 AGRICULTURAL, VETERINARY AND FOOD SCIENCES > 3002 Agriculture, land and farm management > 300210 Sustainable agricultural development
37 EARTH SCIENCES > 3701 Atmospheric sciences > 370108 Meteorology
37 EARTH SCIENCES > 3702 Climate change science > 370202 Climatology
Identification Number or DOI: https://doi.org/10.1007/s13593-020-0605-z
URI: http://eprints.usq.edu.au/id/eprint/38509

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