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Research articles · Aug 31, 2016

A microsimulation model for risk in Irish tillage farming

Jason Loughrey, Fiona Thorne, Thia Hennessy

Rural Economy and Development Programme, Ireland

Volume 9(2) Summer 2016

Cite as: J. Loughrey, F. Thorne, T. Hennessy; 2016; A microsimulation model for risk in Irish tillage farming; International Journal of Microsimulation; 9(2); 41–76. doi: 10.34196/ijm.00135

Abstract

Tillage farmers must manage numerous economic risks including uncertain yields and prices. Despite the presence of government payments, these factors can generate a relatively high variability in farm income. The improved management of farm income variability can contribute towards stability in household consumption, support for farm investments, further investment in child education and a reduction in the mental stress associated with variable incomes. In this paper, we develop a new farm-level stochastic microsimulation model to simulate the degree of risk attached to the production of Ireland’s main tillage grain crop i.e. spring barley for animal feed usage. Forward contracting is the main available risk management tool for Irish tillage farmers. Our microsimulation model is extended in order to estimate the impact of forward contracting on farm income risk. Our results show that forward contracting can reduce farm income risk significantly but that other stable sources of income are probably necessary to contain the exposure to the income risk attached to cereal production. The model is capable of addressing the income risk associated with multiple crops although this version of the model is confined to one particular crop. The model can be further extended to accommodate other risk management tools such as crop insurance or a farm management deposit scheme. This will allow policymakers, farmers and other interested parties to assess the impact of alternative risk management policies on the heterogeneous pool of Irish tillage farmers.

This article contains 6 figures and 7 tables.

Figures

Figure 1. Historical price trends for selected grain crops (€).
Figure 2. Cost indices for key inputs at sowing time (Index 2000)1.
Figure 3. Actual and linear predicted spring barley price (€) 1995–2013.
Figure 4. Cumulative distribution function of the feed barley price in 2014.
Figure 5. Cumulative distribution of the variability in barley yield in 2014.
Figure 6. Cumulative distribution of the variability in market gross revenue.

Tables

Table 1. Statistics for the selected sample and other tillage producers.
Other Tillage Producers The selected sample
No Spring Barley Less than Five Years of Spring Barley Five Years Plus of Spring Barley
Spring Barley Yield [Animal Feed] N/A 5.69 6.04
Average Spring Barley [Animal Feed] Hectares 0.00 6.54 10.45
Average Malted Spring Barley Hectares 5.69 1.37 0.34
Farm Size [Number of Hectares 59.23 54.03 69.71
Land Owned 51.97 44.44 59.25
Land Rented In 11.02 14.45 15.01
Total Pasture Hectares 30.43 30.63 38.50
Total Tillage Hectares 24.28 20.36 27.97
Number of Crops in Each Year 1.11 1.38 1.59
Mainly Tillage (0,1) 0.37 0.47 0.51
Specialist Dairy (0,1) 0.20 0.13 0.06
Livestock Units 59.48 56.80 69.73
Livestock Units Per Hectare 1.07 1.01 0.97
Farm Operator Age 50.99 51.90 55.98
Mean Farm Income 38,353 31,140 36,750
Mean Market Farm Income 19,790 15,446 11,780
Mean Single Farm Payment 17,482 14,722 23,991
Off-Farm Employment Operator 0.34 0.38 0.24
Off-Farm Employment Spouse 0.23 0.31 0.28
Sample size 49 240 138

Source: Authors Calculations using Teagasc National Farm Survey Data 2005–2013.

Table 2. Parameters for an empirical distribution of feed barley price in 2014.
Historical Ranking Deterministic Component P⌢ct Sorted Fractional Deviates Dct Cumulative Probability (F(Dc)
Min 156.736 −0.364135974 0
1 156.736 −0.346796166 0.0263
2 156.736 −0.200781935 0.0789
3 156.736 −0.19998511 0.1316
4 156.736 −0.19211783 0.1842
5 156.736 −0.12981906 0.2368
6 156.736 −0.12203359 0.2895
7 156.736 −0.10178267 0.3421
8 156.736 −0.08118956 0.3947
9 156.736 −0.03725432 0.4474
10 156.736 −0.01925512 0.5
11 156.736 −0.00869402 0.5526
12 156.736 −0.00817022 0.6053
13 156.736 −0.002380722 0.6579
14 156.736 0.038333195 0.7105
15 156.736 0.086928907 0.7632
16 156.736 0.219717674 0.8158
17 156.736 0.34089299 0.8684
18 156.736 0.405517738 0.9211
19 156.736 0.424213082 0.9737
Max 156.736 0.445423736 1
Table 3A. The variability of market gross margin across the distribution.
Coefficient of Variation Standard Deviation
25th Percentile Median 75th Percentile 25th Percentile Median 75th Percentile
Market Gross Revenue 23.31 25.25 27.76 1780.08 3420.50 6524.20
Market Gross Margin 54.96 69.77 119.43 1811.45 3531.71 6556.58
Table 3B. Effect of forward contracting on variability of market gross margin.
Coefficient of Variation (%) Standard Deviation
25th Percentile Median 75th Percentile 25th Percentile Median 75th Percentile
Market Gross Margin 54.96 69.77 119.43 1811.45 3531.71 6556.58
Margin with Forward Selling Option A 48.04 62.32 112.57 1639.82 3195.35 5474.91
Margin with Forward Selling Option B 42.11 57.20 97.93 1433.87 2812.42 4703.06

A-20% of expected production @ 150 euro per tonne B-35% of expected production @ 150 euro per tonne.

Table 4. Average coefficient of variation by farm system 2005–20137.
Farm system Total Farm Gross Margin (%) Total Farm Gross Margin (Excluding Subsidies) (%)
Cattle 28.75 57.29
Specialist Dairy 22.70 29.89
Specialist Tillage 23.86 42.38
Sheep 22.16 64.92
Dairy and Other 25.85 50.00
Total 26.23 52.20
Non-Specialist Tillage8 21.49 39.16
No. of observations 927 927

Source: Authors calculations using Teagasc National Farm Survey data.

Table 5. Correlation coefficient between livestock and crop returns.
Percentile Correlation Coefficient
10th Percentile −0.46
25th Percentile −0.16
50th Percentile (Median) 0.13
75th Percentile 0.39
90th Percentile 0.61

Source: Authors calculations using Teagasc National Farm Survey data.

Table 6. Intra-temporal correlation matrix.
Yields Prices
IR UK USA IR
Malt Feed Mill Feed Mill Feed
Oats Barley Wheat Barley Oats Rye Wheat Soybean Barley Wheat Oats
IR Oats Yield 1 0.72 0.69 0.23 0.03 −0.09 0.22 −0.20 0.18 −0.03 −0.03 −0.02 −0.04 −0.12
IR Barley Yield 1 0.84 0.24 −0.02 −0.07 0.27 −0.05 0.20 0.10 0.01 0.12 0.09 0.09
IR Wheat Yield 1 0.24 0.33 −0.16 0.51 −0.04 0.05 −0.10 −0.20 −0.08 −0.13 −0.11
UK Barley Yield 1 0.54 0.60 0.65 0.00 −0.11 −0.09 −0.09 −0.14 −0.04 −0.08
UK Oats Yield 1 0.23 0.69 −0.09 −0.22 −0.19 −0.27 −0.19 −0.19 −0.17
UK Rye Yield 1 0.51 0.29 −0.40 −0.35 −0.24 −0.44 −0.30 −0.33
UK Wheat Yield 1 −0.21 −0.17 −0.23 −0.23 −0.34 −0.20 −0.25
USA Soybean Yield 1 −0.59 −0.46 −0.47 −0.37 −0.47 −0.32
Price IR Malt Barley 1 0.85 0.83 0.81 0.86 0.78
Price IR Feed Barley 1 0.95 0.97 0.99 0.97
Price IR Mill Wheat 1 0.91 0.94 0.88
Price IR Feed Wheat 1 0.96 0.97
Price IR Mill Oats 1 0.96
Price IR Feed Oats 1