Drought Shocks and Gearing Impacts on the Profitability of Sheep Farming

Sosheel S. Godfrey, Thomas Nordblom, Ryan H. L. Ip, Susan Robertson, Timothy Hutchings and Karl Behrendt
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Sosheel S. Godfrey: Graham Centre for Agricultural Innovation (an Alliance between Charles Sturt University and NSW DPI), Albert Pugsley Place, Wagga Wagga, NSW 2650, Australia
Thomas Nordblom: Graham Centre for Agricultural Innovation (an Alliance between Charles Sturt University and NSW DPI), Albert Pugsley Place, Wagga Wagga, NSW 2650, Australia
Ryan H. L. Ip: School of Computing and Mathematics, Charles Sturt University, Locked Bag 588, Wagga Wagga, NSW 2678, Australia
Susan Robertson: Graham Centre for Agricultural Innovation (an Alliance between Charles Sturt University and NSW DPI), Albert Pugsley Place, Wagga Wagga, NSW 2650, Australia
Timothy Hutchings: Graham Centre for Agricultural Innovation (an Alliance between Charles Sturt University and NSW DPI), Albert Pugsley Place, Wagga Wagga, NSW 2650, Australia
Karl Behrendt: Graham Centre for Agricultural Innovation (an Alliance between Charles Sturt University and NSW DPI), Albert Pugsley Place, Wagga Wagga, NSW 2650, Australia

Agriculture, 2021, vol. 11, issue 4, 1-19

Abstract: The resilience and profitability of livestock production in many countries can be impacted by shocks, such as drought and market shifts, especially under high debt levels. For farmers to remain profitable through such uncertainty, there is a need to understand and predict a farming business’s ability to withstand and recover from such shocks. This research demonstrates the use of biophysical modelling linked with copula and Monte Carlo simulation techniques to predict the risks faced by a typical wool and meat lamb enterprise in South-Eastern Australia, given the financial impacts of different debt levels on a farming business’s profitability and growth in net wealth. The study tested five starting gearing scenarios, i.e., debt to equity (D:E) ratios to define a farm’s financial risk profiles, given weather and price variations over time. Farms with higher gearing are increasingly worse off, highlighting the implications of debt accumulating over time due to drought shocks. In addition to business risk, financial risk should be included in the analyses and planning of farm production to identify optimal management strategies better. The methods described in this paper enable the extension of production simulation to include the farmer’s management information to determine financial risk profiles and guide decision making for improved business resilience.

Keywords: copulas; farm financial management; production economics; multivariate distributions; risk and variability; sheep (search for similar items in EconPapers)
JEL-codes: Q1 Q10 Q11 Q12 Q13 Q14 Q15 Q16 Q17 Q18 (search for similar items in EconPapers)
Date: 2021
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