managing farm risk - data.daff.gov.au

1 managing farm riskthe role of preparing for droughtabare eReport Vernon Topp and Walter Shafronapril Commonwealth of Australia 2006 This work is copyright. The Copyright Act 1968 permits fair dealing for study, research, news reporting, criticism or review. Selected passages, tables or diagrams may be reproduced for such purposes provided acknowledgment of the source is included. Major extracts or the entire document may not be reproduced by any process without the written permission of the Executive Director, 1447-817 XISBN 1 920925 56 2 Topp, V. and Shafron, W.

2 2006, managing farm Risk: The Role of Preparing for Drought, ABARE eReport Prepared for the Department of Agriculture, Fisheries and Forestry, Canberra, Bureau of Agricultural and Resource EconomicsGPO Box 1563 Canberra 2601 Telephone +61 2 6272 2000 Facsimile +61 2 6272 2001 Internet is a professionally independent government economic research project 3031iiimanaging farm risk abare eReport recent drought in Australia has again highlighted the issue of how governments can best assist farmers to manage extreme climatic events. There is growing support for the view that governments should move away from providing assistance to farmers after droughts, and instead provide farm managers with new or additional incentives to improve the way they prepare for droughts in the fi rst has reviewed existing information on the nature and extent of drought preparedness in Australia, and has undertaken additional surveys to further explore the issue.

3 The analyses discussed in this report are based on observations of actual farmer behavior before, during and after the most recent drought in mainland Australia, along with information from farm managers on their preferred approaches to preparing for and managing results contained in this report will assist policy makers and others when considering how to promote greater fl exibility and resourcefulness among farm managers in anticipation of the next, inevitable, drought in this S. FISHERE xecutive DirectorApril 2006ivmanaging farm risk abare eReport authors acknowledge advice and assistance from Colin Mues of ABARE, and Matthew Koval and Leann Hart of the Australian Government Department of Agriculture, Fisheries and report draws heavily on data collected in ABARE s surveys of broad-acre, dairy and horticultural industries.

4 The success of these surveys depends on the voluntary cooperation of farmers, their accountants and marketing organisations in providing data. The dedication of ABARE s survey staff in collecting these data is also gratefully acknowledged. Without this assistance, the analysis presented in this report would not have been possible. vmanaging farm risk abare eReport 11 Introduction 52 Drought preparedness and general farm risk management 6 Risk and the role for government 7 Dynamic nature of farm risk 83 Drought preparedness and drought management strategies 10 Methods of assessing drought preparedness 104 Using farm performance data to review drought preparedness and management 12 Key results for broadacre farms 14 Key results for dairy farms 165 Using farmer self assessments to review drought preparedness and management 18 Broadacre and dairy farms in

5 Queensland 18 Drought preparedness on horticulture farms 21 One thing that could be have been done better 21 Horticulture producers in New South Wales and Victoria 226 Summary of drought preparedness results 26 Consistency of results 267 Farmer attitudes to risk 27 Views on farm business management strategies 27 Views on government support for improved risk management 27 AppendixesA farm performance measures in EC regions, by state 31B Drought preparedness survey 2005 (questionnaire) 43vimanaging farm risk abare eReport 46fi guresA Agricultural resource use 8B Fodder use on dairy farms 9maps1 Seasonal conditions 132 Exceptional circumstances declared or interim declared areas at 30 June 2004 14tables1 Proportion of farmers self assessing seasonal conditions in October each year as being in drought , by state andindustry 132 Drought preparedness in Queensland, by industry 193 Implementation of specifi ed drought preparation strategies in Queensland.

6 By industry 194 Implementation of specifi ed drought management strategies in Queensland, by industry 205 Importance of various farm management risks on horticulture farms 226 Preparedness of horticulture farm managers for identifi ed risks 237 Strategies used to manage drought on horticulture farms 248 One thing that horticulture farm managers could have done better to prepare for drought 249 Government assistance to better prepare for drought, as nominated by managers of horticulture farms 2410 Farmer attitudes to risk and government assistance, by industry group broadacre and dairy farms 2811 Farmer attitudes to risk and government assistance, by size category and longer term profi tability class broadacre farms 29appendix tables12 Broadacre farm performance in current EC declared regions, by state 3113 Dairy farm performance in current EC declared regions.

7 By state 391managing farm risk abare eReport Preparing for drought is a complex and dynamic process. For indi-vidual farm managers, successfully preparing for drought ultimately involves making tradeoffs between risk and return. In practice, the optimal strategies that farmers should use to prepare for drought are likely to vary from farm to farm , from industry to industry, from region to region, and from drought to drought. Nevertheless there are a number of drought preparation strategies that have been used widely in the past and are likely to continue to be used widely in the future.

8 For livestock producers, common drought preparedness strategies include having plans for destocking, building and maintaining stores of fodder, ensuring that there are adequate supplies of water for livestock, and building and maintaining fi nancial reserves. For dryland cropping farms, common drought preparedness strategies include developing moisture conserving crop management prac-tices (such as minimum tillage), using climate forecasts to guide crop planting decisions, and building and maintaining fi nancial reserves. For irrigated farms, particularly irrigated horticulture farms, common drought preparedness strategies include implementing improvements in irrigation systems and practices to improve overall water use effi ciency, and improving or increasing access to water of drought preparation strategies With the benefi t of hindsight, the majority of farm managers in drought affected regions and industries believed that they were reasonably well prepared for the recent drought.

9 However, a signifi cant minority of farm managers believed that they were underprepared for drought. While a relatively high proportion of farms have a risk management strategy in place to deal with drought, very few farms formalise their plans in written form. There is some evidence to suggest that larger farms (in terms of their gross value of production) are generally better prepared for drought and use more strategies to deal with drought when it occurs. However, the evidence to support this case is not overwhelming and it seems 2managing farm risk abare eReport to conclude that there are farms of all sizes in all industries that could do better to prepare for drought.

10 A higher proportion of larger farms (in terms of farm production) have written risk management plans that explicitly account for drought compared with the proportion of smaller farms with such a impact and drought management strategies farm surveys data provide empirical support for the views of farm managers about their state of preparedness for the recent drought, and the strategies used by farmers to manage drought. Most broadacre and dairy farmers went into the recent drought with reasonable levels of fi nancial reserves and on- farm stocks of fodder.