Regional impacts of climate change on dryland farm: or what characteristics make a farm vulnerable...

Regional impacts of climate change on dryland farms: or

what characteristics make a farm vulnerable or resilient?

Dept of Agriculture and Food, Western Australia &University of Western Australia

Ross Kingwell

Bio-economic modelling of farms in 3 regions

Scenario Analysis

Key Variable North-eastern low rainfall region

Northern high rainfall region

Southern high rainfall region

No. of characteristics

Farm size (ha) 3,600 4,800 6,000 2,475 3,300 4,500 1,650 2,200 3,000 3

Off-farm asset ($K) 160 1,000 2,000 355 710 1,420 375 750 1,500 3

Percentage of area cropped (%) 84 72 52 76 50 36 64 42 32 3

Starting debt ($K) 0 500 1,000 0 1,250 2,500 0 1,000 2,000 3

Terms of trade

% increase in returns 2 2 3 3

% increase in costs 4 3 2

Interest rates

If in debit (%) 8.5 10.5 11.5 3

If in surplus (%) 4.5 6.5 7.5

Livestock system Merino wool production Crossbred lamb production 2

Climate Current climate Climate change 2

Total number of treatments 2916

2916*30=87480 observations of 20 year sequences

Features of the farm simulation

• all prices were correlated

• all yields were correlated

• stocking rates were based on pasture production

• tactical changes (input levels, crop choice, crop area)

• farm profit calculated for each year in the 20-year sequence

Regression analysis

Farm characteristics (farm size, percentage of land allocated to crop production, starting debt, off farm assets, terms of trade and interest rates) were related to:

the NPV of farm profit and

the probability of the farm’s equity falling below 65%.

Low rainfall farms

All farms exposed to climate change exhibit higher levels of financial risk

Many farms that exhibit the greatest difference in risk between climates, are farms with relatively low levels of risk in the current climate (see red line).

Most farms under current climate (& related scenarios) have sound prospects of remaining viable.

Which farms are ‘at risk’?

The locus of ‘at risk’ conditions (80% chance of equity falling below 65%)

Characteristics of ‘at risk’ farms

Farms ‘at risk’ have: high initial debt levels, often small to medium sized farms, few off-farm assets and generally have low or moderate percentages of land

allocated to crop production.

The current livestock enterprise, if it is the dominant enterprise, increases the risk of insolvency of the farm business. This combination of farm characteristics creates a situation of low business equity and causes these farms to be unable to withstand more frequent seasons that produce low or negative profits.

Higher rainfall northern region farms

Some farms show a high risk of insolvency even under current climate (purple oval).

Fewer farms are greatly affected by climate change in comparison to those located in the low rainfall region (red line).

However there are still many farms that face considerable business risk (blue arrow).

Farms ‘at risk’ display high levels of debt, are small or medium in size, have low proportions of farm area allocated to crops and are exposed to medium or high interest rates.

These characteristics create a situation where the farm is in or develops a low equity position and is unable to generate profits to maintain or increase their equity position.

Characteristics of farms ‘at risk’

Higher rainfall southern region farms

Climate change provides more favourable production conditions.

Farm business risk is reduced but some farms still face considerable financial risk

Farms most vulnerable to insolvency are those farms that generally display high levels of farm debt and small farm size

Characteristics of ‘at risk’ farms

When some farms that are vulnerable under current climate then experience higher crop yields and high stocking rates under climate change these farms significantly reduce their business risk

The significant characteristics that lessen the risk of low farm equity are1. large farm size, 2. low initial indebtedness, 3. access to valuable off farm assets, 4. a high proportion of area of land allocated to crop production, 5. focusing livestock enterprises on lamb production, 6. favourable terms of trade and 7. low interest rates.

To some degree, a farm may have control over the first five characteristics.

Key Findings

Thank You

Projected changes in wheat yields

Bio-economic modelling

Case study farms in each region are constructed using an Excel® based simulation model (Bennett et al. 2003; Abrahams et al. 2008).

Model is known as STEP (Simulated Transitional Economic Planning) STEP can be tailored to describe a range of case study farms. STEP tracks a farm’s physical and financial performance over a 20 year period.

It integrates paddock level decisions into whole-farm financial analysis by linking information on enterprise options into a whole-farm analysis.

Essentially a whole-farm budgeting tool. It allows for some state-dependent tactical decision-making