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Chickpeas in NE Montana

Chickpeas in NE Montana. David Buschena MSU Department of Agricultural Economics and Economics. Collaborating Partners: Billings RMA Regional Office Fort Peck Community College. December 19, 2005. Diversification and Risk. Diversification Issues.

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Chickpeas in NE Montana

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  1. Chickpeas in NE Montana David Buschena MSU Department of Agricultural Economics and Economics Collaborating Partners: Billings RMA Regional Office Fort Peck Community College December 19, 2005

  2. Diversification and Risk Diversification Issues • . Actions Which Reduce Risk Without Loss Of Mean Returns • . Is The Adoption Of An Additional Crop A Diversification Strategy? • . Maybe: • . Stock Portfolio Example

  3. Diversification and Risk • Diversification and Specialty Crops • Rotational Effect: Can Enhance Returns And Productivity • Improve Soil Characteristics • Break Weed/Insect Cycles • Reduce Disease Vectors • Source of Nitrogen

  4. Diversification and Risk • Diversification Effects: • Additional Enterprises Can Reduce The Variation Of Returns While Maintaining Average Returns • But, Diversification Can Increase Costs • Machinery Complements • Timeliness • Learning Curves

  5. Summary Of Diversification • 1. Many Crops Face Similar Production Risks • a. Must Consider The Ability To Manage Production Risk • Crop Insurance? • Herbicides? • b. Must Consider Opportunities To Manage Price Risk • Futures Markets? • Contracting? • Storage?

  6. Summary Of Diversification • . Many Traditional And Alternative Crop Prices Move Together Over Time • . Some Alternative Crops Prices Are Quite Variable • . Some Alternative Crops Have Additional Inherent Risks • . Yields • . Expected Net Returns • . Labor & Machinery Utilization

  7. Summary Of Diversification • These crops are often riskier than wheat or barley, but are not always so. • Increased risk from: • Price risk (Less developed markets) • Production risk (newness of the crop, disease)

  8. Summary Of Diversification • Marketing Specialty crops: • Production often contracted • Many crops are food grade • Importance of Canadian markets • Trucking to remote buyers • Extensive record keeping requirements

  9. Do Alternative Crops Have Less Price Risk Than Wheat? U.S. Average Prices: 1992-2000 Crop Risk Measure Barley 15.2% Canola 18.5% Dry Beans 15.4% Dry Peas 27.8% Flaxseed 20.8% Lentils 19.9% Mustard 19.3% Safflower 13.4% Sunflower 20.3% Wheat – Spring 16.7% Wheat – Winter 23.3%

  10. Do Additional Crops Reduce Price Risk? Depends On The Correlation Of Crop Prices Correlation – A Measure Of Co-Movement Of Prices Over Time +1.00 => Two Prices Move Exactly The Same Over Time 0.00 => Two Prices Have No Relationship Over Time -1.00 => Two Prices Move In Opposite Directions Over Time

  11. Do Additional Crops Reduce Price Risk? • . To Reduce Overall Price Risk • . Want Crop Prices To Have Low Correlations • . Better Yet, Negative Correlations • . Alternative Crop Prices Tend To Be Relatively Highly Correlated With Wheat Prices • . +0.43 (Mustard Seed) • . +0.81 (Dry Peas)

  12. Do Additional Crops Reduce Price Risk? 50% Spring Wheat, 50% Winter Wheat 19.7% 45% Spring Wheat, 45% Winter Wheat, 5% Flaxseed, 5% Dry Peas 19.6% 15.3% Equal Amounts of All 10 Crops

  13. Adding Chickpeas To A Traditional Rotation • . Diversifies A Rotation • . Does It Increase Income? • . Does It Diversify Income? • . Many Specialty Crops Offer High Returns In Some Years • . Often Adds More Risk • . We Evaluate Adding Large Kabuli And Desi Chickpeas To A Traditional Rotation

  14. Research Methodology • . Whole Farm Net Return-Over-Variable Costs Of Three-Year Rotations On 1,500 Acres In Northeast Montana • . Consider Only Operating Costs • . Use Surveys Of Standard Practices • . Base Budgets On 2004 Input And Output Prices • . We Estimate Price And Yield Distributions Using Historical Data • . Account For Loan Rates And Crop Insurance

  15. Research Methodology • . Consider Four Rotations • . HRS – Barley – Chem Fallow • . HRS – Desi – Chem Fallow • . HRS – Kabuli – Chem Fallow • . HRS – HRS – Chem Fallow • . Simulate ROVC Using 1,000 Random Draws Of Yields And Prices

  16. Per Acre ROVC By Rotation ROVC $/acre Standard Deviation

  17. Probability Of Receiving At Least $30 Per Acre ROVC Probability

  18. Summary Of Research • . We Evaluate Risk/Return Trade-offs Of Adding A Chickpeas To More Traditional Rotations • . The Rotation with Desi Chickpeas Has A Slightly Larger Average ROVC Than The Rotation With HRS Recrop • . The Rotation with Desi Chickpeas Has A Slightly Smaller Standard Deviation Than The Rotation With HRS Recrop

  19. Summary Of Research 4. The Rotation with Desi Chickpeas Has A Smaller Average ROVC Than The Rotation With Kabulis • The Rotation with Desi Chickpeas Has A Smaller Standard Deviation Than The Rotation With Kabulis 6. Your Mileage Will Vary

  20. QUESTIONS?

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