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Agriculture

Mixing in the right circles

Associate Director Agribusiness Research, ANZ

2024-10-08 00:00

The agricultural revolution of the 20th century – driven by changes in cultivation and mechanisation – drove higher and higher crop yields.

"Should Australian farmers consider mixed production systems – combining crops and livestock and even fisheries - as a response to challenges including weather and volatile price cycles?”

One crop over a large farming area has characterised this revolution and has helped create the modern global agricultural industry.

But should Australian farmers consider mixed production systems – combining crops and livestock and even fisheries - as a response to challenges including weather and volatile price cycles?

To specialise or diversify is perhaps one of the central questions for any farming operation today. Is it better to focus on one production system alone and work towards perfecting the production of one or two commodities?

Or is it better to hedge your bets and rely on a poor season for one commodity being balanced out by a stronger season in another?

Engine room of growth

It is worth looking at how the prices and production volumes of some of our major commodities change in relation to each other – and whether farmers can effectively manage price risk on farm.

In the world of increasingly volatile commodity prices, a question facing many farmers is - do they embrace the volatility? Do they accept that profit from good years will need to be applied in poorer years?

Or do they structure their production systems around several commodities in the hope a poor season in one may be balanced by another?

Over the last 30 years the growth in profit, volume and productivity in cropping has been the headline story for the sector.  

Cropping enterprises have dominated broadacre agriculture, commanding the highest profits, income and costs while also being the primary category of broadacre farming to increase area operated.

In short, the cropping side of broadacre farming has been the engine room for industry growth and profit for many years.

Behind the headlines

Sitting behind the cropping category, mixed farming is sharing the benefits from the growth in cropping and strong crop prices and harvest. It does this by sitting between the cropping and livestock sectors.

According to the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES), cropping has the highest quantum of profit, costs and income – but also has the highest variance in profitability.

Sheep farmers, on average, have the lowest costs and lowest return and beef producers have slightly higher costs and income. Mixed farming, unsurprisingly, sits in between livestock and cropping on all these metrics.

Perhaps the most surprising thing about the headline figures for financial performance by type of farming is the relatively low variability in the costs of mixed farming. This may be partly due to the continued growth of this type of farming.

While sheep farming has the lowest variability in costs over the past 30 years, mixed farming comes has the second lowest variability in costs. This may indicate that diversification in production also creates more scope for cost control.

Reducing price risk

One of those key benefits of mixed farming comes from the reduction in price risk –the decline in the price of one commodity being offset by a better price for another.

Which raises the question – do any commodity prices move contrary to others? Or are they all relatively correlated and move higher or lower together?

It turns out there is a high correlation in prices between major Australian commodities.

Prices for most Australian crops move quite closely together, with the strongest correlations between wheat and barley. The relationships between wheat-sorghum, canola-sorghum and canola-wheat are also very strong.

Conversely, chickpeas have the lowest correlation with other major cropping products – suggesting they are less likely move in tandem with wheat, barley, canola or sorghum.

The possibilities of livestock

At the core of the mixed farming proposition is how strongly livestock and crop prices are linked? The answer provides solid support for the mixed farming price risk management proposition.

Livestock prices are less closely aligned than grains prices are with each other. But the two grains the least correlated with cattle, lamb and sheep prices are wheat and barley.

Lamb is slightly less connected to grains prices than cattle, with sheep prices being even less correlated. In addition to this, wool prices, generally led by the fine wool segment, sees one of the lowest correlations with the grains sector.

Mixing in the right circles

So, what’s the moral of the mixed farming story?

Producers looking to reduce their commodity price risk should look to chickpeas, wheat, barley, sheep and wool – which have historically provided the greatest chance of offsetting price falls in one commodity.

On the other hand, for producers content to take the good years and self-insure against the poorer years, a different model might be in order.

This is a version of an article that first appeared in ANZ Agri Infocus Commodity Insights Spring report 2024.

 

Madeleine Swan is Associate Director Agribusiness Research at ANZ

anzcomau:Bluenotes/Agriculture
Mixing in the right circles
Madeleine Swan
Associate Director Agribusiness Research, ANZ
2024-10-08
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The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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