Spreading risk to manage climate variability

At a glance

• Price per kilogram for dual purpose Merinos is now 95 per cent of that fetched for prime lambs, provided the Merinos are properly prepared and marketed.
• Computer modelling comparing intensive cropping with mixed cropping systems shows value over 13 years.
• Cumulative cash flow of the lucernebased mixed farm is substantially higher than an intensive cropping farm.
• Mixed farming reduces price risk by marketing three commodities; grains, meat and wool. The seasonal risk of winter crops can be reduced by profiting from unpredictable summer storms.

Extreme weather events are prompting management changes on Victorian farms.

In the state’s north central region, farmers are being encouraged to spread their financial risk and consider dual-purpose Merinos in the face of increasing climate variability.

DPI’s Kieran Ransom said dual-purpose Merino wether lambs were more than holding their own in the red-hot sheepmeat market, fetching similar prices to prime lambs (once skins, meat and wool were all taken into account).

And he said it was increasingly important for farmers to run mixed-farming enterprises to spread their risk.

Mr Ransom investigated a range of options for north central farmers to better manage the seasons as part of the Climate Change Adaptation in Southern Australian Livestock Industries project. Ultimately, he said mixed farms came out on top.

Modelling proves point

Modelling had shown profitability increased with breeding bigger-bodied Merinos indicating that Merino wether lambs are a profitable source of income.

“The most profitable flocks in northern Victoria have a lot of dual-purpose Merinos, which have plainer skins and better lambing percentages,” Mr Ransom said.

“When a Merino wether lamb is sold you get income from the carcase, income from the skin and then you’ve also got the wool returns,” he said.

And as the size of the Merino wether lamb has increased, so has its price tag.

Mr Ransom said its price per kilogram has gone from 70 per cent of a prime lamb up to 85 per cent two years ago.

In the past year, it got as high as 95 per cent if prepared and marketed correctly.

He suggested dual-purpose Merino wethers should be shorn in autumn and sold at 10 to 11 months of age.

Selling them later — at 18 months of age — would require two shearings, which meant an additional cost and little return from the first shearing.

He said getting the wether lambs off the farm sooner meant producers could change their flock structure to potentially stock more ewes and breed more lambs.

Backed up by figures

His advice was backed up by his research, comparing intensive cropping and mixedfarming enterprises.

The study used real cropping and sheep results from 1998 to 2011 and employed computer modelling — GrassGro to look at the cash flow from sheep on lucerne pastures, as well as other programs designed by Mr Ransom — to look at various climate and price scenarios for two farm types in the Loddon Valley.

One was sheep on lucerne-based pastures for 60 per cent of the farm, and crops on 40 per cent.

The other was an intensive cropping system, with 80 per cent cropped and the rest in annual pastures, which supported a sheep enterprise.

“Winter-cereal grazing and stubbles provided additional sheep fodder on both farms,” Mr Ransom said.

“Farm variable and overhead costs were standardised using available farm benchmarking information and local knowledge,” he said.

In both cases he took into account costs associated with cropping, including machinery, chemical, fertiliser and gypsumlime as well as prices of the most popular grains over the past few years, as outlined in Figure 1.

FIGURE 1 Grain prices over the last 13 years

The results of the cropping side of the businesses are presented in Figure 2.

FIGURE 2 Crop income, variable costs and gross margins for (a) lucerne based mixed farming system and (b) intensive cropping and sheep system

While incomes from intensive cropping were particularly high in some years, other years saw significant losses.

Mr Ransom said this was not just in times of drought.

“With intensive cropping systems, it’s all tied up with the price of grain,” he said.

“Often in good years, the price is actually down due to supply and over the past eight years, most of the grain has fetched feed prices.”

Sheep

Turning to sheep, it was assumed the intensive cropping property would run 1400 Dry Sheep Equivalents (DSE), or 630 Merino ewes joined to terminal sires on the intensive-cropping system with 20 per cent annual pasture.

In the mixed farm cropping and lucerne system, it was assumed there were 60 per cent pastures, which were mainly lucerne.

Prime lambs were sold in summer and Merino wether lambs at 10–12 months of age, in autumn to early winter.

The comparison took into account the cost of supplementary feed based on historic records and average husbandry costs (see Figure 3).

FIGURE 3 Sheep income; stock trading and wool, variable costs and gross margins for (a) the lucerne based mixed farming system, (b) the annuals pasture based mixed farming system

“The sheep enterprise gross margins were positive each year for both farming systems,” Mr Ransom said.

“The large variable costs in the dry years of 2002–03, 2006–07, 2007–08 and 2008– 2009 on the lucerne mixed-farm included supplementary costs around $50,000 annually.

“These results are consistent with previous case studies which found sheep on lucerne-based pastures have gross margins per hectare two-to-three times higher than sheep on annual pastures.”

Looking at the farm as a whole, Mr Ransom then applied the same overheads to both systems, and mapped the cumulative cash flow (see Figure 4).

FIGURE 4 Whole farm operating profi t and cumulative cash fl ows for (a) the lucerne based mixed farming system and (b) the intensive cropping and sheep system

So what did he find?

Ultimately, he said the cumulative cash flow of the lucerne-based mixed farm was substantially higher than the intensive-cropping farm.

“The mixed farm made a small loss in two drought years while the intensive cropping farm had substantial financial losses in four years due to droughts and a severe frost.”

He said the study underpinned the value of sheep on northern Victorian farms.

“It’s sometimes claimed the main role of sheep on a mixed farm is to prevent large financial losses in droughts.

“This is true on mixed farms when sheep are regarded as ‘stubble munchers and weed controllers’.

“However, the lucerne-crop farming systems developed by astute farmers in north central Victoria indicate some sheep enterprises are highly profitable.

“These lucerne-crop farming systems reduce price risk by marketing three commodities; meat, wool and grains, as well as reducing winter crop seasonal risk by profiting from unpredictable summer storms.

“The lucerne-crop farming systems are widely applicable over much of northern Victoria and the cropping areas of NSW where winter-spring rains are unreliable.”

Further Information - read more DPI information on weather and climate