Financial Risk Analysis of Lucerne Pasture

4 Feb Nordblom, Hutchings et al AARES 2016 slides

Financial risk analysis of lucerne pasture establishment: Under-sowing vs Direct sowing TomTom NordblomNordblom1,31,3 TimTim HutchingsHutchings 3,4 Guangdi LiLi 2,32,3 RichardRichard HayesHayes 2,3 John FinlaysonFinlayson 5 5

1. Economics & Analysis, DPI Strategy & Policy, NSW DPI, WWAI 2. Pasture Systems, DPI Agriculture, NSW DPI, WWAI 3. Graham Centre for Agricultural Innovation (an alliance of CSU and NSW DPI), Albert Pugsley Pl, Charles Sturt University, Wagga Wagga, NSW 2650 Australia 4. Meridian Agricultural Consulting, Yendon, VIC 3352 5. John Finlayson Research Ltd, Whangarei, 174, New Zealand

NSW DPI = NSW Department of Primary Industries New South Wales, Australia WWAI = Wagga Wagga Agricultural Institute, Pine Gully Road, Wagga Wagga, NSW 2650 Australia 1 Contributed paper, 60th AARES Annual Conf., Canberra, ACT, 2-5 February 2016 Lucerne, direct-sown

2 Wheat, under-sown with Lucerne

3 Wheat, under-sown with Lucerne Despite consistent messages on reduced pasture performance, due to competition between the cover-crop, and the lucerne, farmers in the mixed-farming zone of south-eastern Australia continue to rely on the practice

— McCormick, Hayes, Li and Norton (2014)4 Cropping phase of rotation 5 years of Canola cropping Wheat Barley Lupin Wheat + under-sown Lucerne Pasture phase of rotation first grazing year Lucerne 4 years of Lucerne pasture Lucerne Lucerne

5 Cropping phase of rotation 5 years of Canola cropping Wheat Barley Lupin Wheat Pasture phase of rotation first grazing year Lucerne directly sown 4 years of Lucerne pasture Lucerne Lucerne

6 Initial findings from field experiments over four years along a 200 km North-South transect from Ariah Park to Brocklesby, NSW (Li et al., 2015) seeding

7 Actual v. predicted Dry Matter Year 2, all sites R2 = 0.86 6000

5000

4000

Actual DM 3000 kg/ha

2000

1000

0 0 1000 2000 3000 4000 5000 6000 Predicted DM, kg/ha Comparison of observed and predicted pasture DM yields in the first year of grazing 8 Comparison of annual energy yield of established lucerne pastures (Li et al. 2014) 90000

80000

70000

60000

50000 MJ/ha Undersown 40000 Direct sown 30000

20000

10000

• In energy production, Direct-sown is ahead of Undersown in 40 out of 60 years (1950-2010).

• In years of lucerne establishment failure, the pasture in that paddock is assumed to revert to an annual pasture.

9 Direct sown lucerne pasture ThousandsHundreds $350

$300

Probability $250

Highest $200 10% Annual supplementary feed cost $150 Median

$100 Lowest 10% $50

$0 5 10 15 20 Stocking rate dse/ha. 10 Figure 1: Effect of stocking rate (dse/ha) on cost of supplementary feed requirement Annual whole-farm gross margin profiles for Sheep and Crop enterprises

. Cumulative Sheep probability CV 18% 100% Crop 90% CV 50% 80% 70% All crops 60% 50% 40% 30% 20% Sheep 10% 0% $0.0 $0.1 $0.2 $0.3 $0.4

Gross margin (millions) Similar gross margins, but cropping has higher variability

-- about three times riskier than Sheep -- 11 Dynamic budgeting for risk 10 year cash margin estimates for dynamic analysis 15 dse/ha, 80% equity, direct sown pasture Effect of starting equity on decadal cash margin Cum. Direct sown lucerne, 15 dse/ha Probability 100% Starting 90% equity 80% 100% 70% 60% 80% 50%

40% 60% 30% 20% 10% 0%

12 Decadal cash margin (millions) Effects of sowing methods and stocking rates on whole- farm decadal cash margins, given starting equity of 80% Comparing direct and under-sown lucerne pasture 80%Median equity, values median onlyvalues $200,000

-$200,000

-$400,000

Decadal -$600,000 cash Direct sowing margin -$800,000 Undersowing

-$1,000,000

-$1,200,000

-$1,400,000 5 10 15 20 Stocking rate, dse/ha 13 Effects of sowing methods and stocking rates on whole- farm decadal cash margins, given starting equity of 80%

Direct sowing,Direct 80% sowing equity Under - sowing,Under 80%-sowing equity $1,500,000 $1,500,000

$1,000,000 $1,000,000

$500,000 $500,000

$0 $0 High 90%

-$500,000 -$500,000 High High Decadal Decadal cash cash Median Median -$1,000,000 -$1,000,000 margin margin Low Low

-$1,500,000 -$1,500,000 Low 10% -$2,000,000 -$2,000,000

-$2,500,000 -$2,500,000 5 10 15 20 5 10 15 20 Stocking rate, dse/ha Stocking rate, dse/ha

14 Effects of sowing methods and stocking rates on whole- farm decadal cash margins, given starting equity of 80%

Direct sowing,Direct 80% sowing equity Under - sowing,Under 80%-sowing equity $1,500,000 $1,500,000

$1,000,000 $1,000,000

$500,000 $500,000

$0 $0 High 90%

-$500,000 -$500,000 High High Decadal Decadal cash cash Median Median -$1,000,000 -$1,000,000 margin margin Low Low

-$1,500,000 -$1,500,000 Low 10% -$2,000,000 -$2,000,000

-$2,500,000 -$2,500,000 5 10 15 20 5 10 15 20 Stocking rate, dse/ha Stocking rate, dse/ha

15 Effects of sowing methods and stocking rates on whole- farm decadal cash margins, given starting equity of 80%

Direct sowing,Direct 80% sowing equity Under - sowing,Under 80%-sowing equity $1,500,000 $1,500,000

$1,000,000 $1,000,000

$500,000 $500,000

$0 $0 High 90%

-$500,000 -$500,000 High High Decadal Decadal cash cash Median Median -$1,000,000 -$1,000,000 margin margin Low Low

-$1,500,000 -$1,500,000 Low 10% -$2,000,000 -$2,000,000

-$2,500,000 -$2,500,000 5 10 15 20 5 10 15 20 Stocking rate, dse/ha Stocking rate, dse/ha

16 Effects of starting equity on decadal ending cash balance (15 dse/ha) Cum. Cum. Probability Probability 100% 100% Starting Starting 90% 90% equity equity 80% 80% 100% 100% 70% 70% 60% 60% 80% 80% 50% 50% 60% 60% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0%

Decadal cashDecadal margin (millions)cash margin (millions) Effects of starting equity on decadal ending cash balance (15 dse/ha) Cum. Cum. Probability Probability 100% 100% Starting Starting 90% 90% equity equity 80% 80% 100% 100% 70% 70% 60% 60% 80% 80% 50% 50% 60% 60% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0%

Decadal cashDecadal margin (millions)cash margin (millions) Conclusions • Advice to farmers based on average years, average prices and gross margins, can be very misleading.

• It masks the wide range of whole-farm outcomes possible due to price and yield variations and the effects of debt on viability

• Chasing higher production alone can drive farmers into unsustainable debt

• Reducing debt is often more important than raising production, particularly for those with low equity

20 4 Feb Nordblom, Hutchings et al AARES 2016 slides

NSW DPI = NSW Department of Primary Industries, New South Wales, Australia WWAI = Wagga Wagga Agricultural Institute, Pine Gully Road, Wagga Wagga, NSW 2650 Australia 21 Contributed paper, 60th AARES Annual Conf., Canberra, ACT, 2-5 February 2016