Profitable Sheep Farming in South-west Victoria: Specialisation or Diversification Under Volatile Prices, Costs and Climate

Changes in seasonal and market conditions and the cost-price squeeze have implications for the profit and risk of a farm business. Farming a range of activities is a common approach for reducing exposure to risk, whilst still making reasonable profits. Such diversification spreads yield and price risk across several activities. The effectiveness of diversification in reducing risk and maintaining satisfactory profit depends on the correlations between yields and prices of the various activities, complementarities between enterprises, and the ability of the farmer to manage the various systems. Alternatively, specialisation by producing one commodity well has the potential to generate higher profits than the diversified system, but also has higher exposure to price risk. A case study farm running prime lamb, Merino fine wool and cropping in south-west Victoria, was analysed to compare choices about diversification and specialisation in the farm system, and to examine the impact on profit and risk. The biophysical, economic, financial, wealth and risk dimensions of the business were simulated to examine how six different farm systems were likely to perform under volatile seasonal, price and cost conditions over a seven-year planning period. The study focused on changes to the farm business that would increase profits from producing either one or a combination of different commodities - prime lamb, fine wool, beef and cereal crops - and evaluating the profit and the risk of making these changes. The six changes analysed were: (C1) increase soil fertility and develop all pastures to improve the base farm; (C2) all prime lamb; (C3) prime lamb and beef breeding cow and calf; (C4) prime lamb and cropping; (C5) lambing later and finishing all lambs in a feedlot; and (C6) lambing later and finishing all lambs on forage crops. Options that involved diversification of livestock enterprises, such as farming multiple sheep enterprises, or sheep and beef cattle, were sound approaches for managing risk, whilst achieving reasonable net profits and returns on capital ($254,000, 6.1 per cent and $275,000, 6.5 per cent, respectively). If higher profits are sought, then specialisation and focusing on a single enterprise, such as prime lamb, appeared the best option ($320,000, 7.2 per cent), but there was greater variation associated with the average profit over a run of years. For this analysis, farming a prime lamb enterprise based on pasture supply to finish the majority of lambs was generally more favourable than lambing later to maximise reproduction performance and finishing lambs in a feedlot ($294,000, 6.8 per cent) or forage crop system ($276,000, 6.5 per cent). Cereal cropping ($196,000, 5.2 per cent) was not a profitable option for this farm business when compared with prime lamb production. Finally, analysis of the factors contributing to variability of profit indicated that the price, particularly of lamb, was the substantial contributor to overall risk.