Using @ RISK modelling to examine risk in Mallee cereal and legume rotations

Visual representation of risk in nine northern Mallee rotation sequences over six years.

Richard Saunders, James Hillcoat and Tony Craddock

“Take calculated risks,

That is quite different from being rash.”

General George Patton

@RISK analysis – the benefits for growers…

• Do Grain Legumes reduce or increase the risk in a rotation? What about Fallow? Canola? Pasture? Hay? Can we get a better answer to these questions for each region that accounts for risky variables?

• This is a tool – it is not a prescription. The devil is in the detail so there is an ability to tailor to individual situations. The better the information in the better the analysis. Growers can line up their own risk profile.

• Growers tend to be more visual - @RISK is a method of visually showing the good/bad and everything in between. Risk traditionally tends to focus on downside but what about the upside?

• Provides a robust level of analysis to at least ask questions as to “why” or “why not”.

@RISK – simulating the gross margin risk of grain legumes

• @RISK is an add-in to Microsoft Excel which allows you to analyse risk using simulation model.

• @RISK uses ‘Monte Carlo simulation’, also known as multiple probability simulation. Each ‘roll of the dice’ is random and unaffected by previous events.

• @RISK model randomly samples the different combinations of inputs (including the ‘risky’ inputs) and calculates ‘000’s of possible future outcomes and the chances they occur.

• @RISK modelling provides a means to better assess the risk of a rotation – the rotations to avoid and which ones to examine further.

• Growers can better match rotations and crops to their own particular risk profile

How the model works for each crop

Yields P10,50,90

Prices P10,50,90

Variable costs (From gross

margins)

Yield x price minus VC’s =

Yield benefits Overheads

Gross margin minus

overheads =Net Profit

Rotation builder

Assumptions - Price input ($/t) –deciles (farm gate price)

Price ($/t)P10 P50 P90

Wheat 180 230 280Barley 140 190 240Canola 450 490 530Lentils 415 660 1000Chickpeas 620 1000 1400Peas 200 320 485VeHay 120 200 300Vetch seed 300 650 1000MePast 70 79 90VePast 70 79 90

Percentiles

Yield Assumptions (t/ha) for rainfall deciles (Northern SA Mallee)

YieldP10 P50 P90

Wheat APW 0.36 1.20 2.64Barley - Malt 0.39 1.30 2.86Canola TT 0.15 0.50 1.10Lentils 0.15 0.50 1.10Chickpeas 0.18 0.60 1.32Peas 0.21 0.70 1.54Vetch Hay 0.75 2.50 5.50Vetch seed 0.21 0.70 1.54MePast 2.20 2.50 2.80VePast 2.50 2.80 3.20

Percentiles

Variable costs and gross margins for each crop …

Variable Costs and Gross MarginsVCs GM

Wheat APW 222.20 95.00Barley - Malt 213.98 69.89Canola TT 326.95 -45.37Lentils 232.42 163.68Chickpeas 311.67 382.09Peas 250.82 17.78VeHay 298.61 293.63Vetch seed 224.93 297.99Vetch BM 107.11 -107.11Fallow 50.00 -50.00MePast 42.60 156.50VePast 111.61 113.72

Assumptions - Fixed Costs

Fixed Costs - Loxton Farm Assumptions Loxton 3000 ha3000 ha $/haOverhead Costs 150,000$ 50$ Depreciation 120,000$ 40$ Finance Costs 40,000$ 13$

103$

Northern Mallee Rotations – 9 rotations, 2 cycles of 3 year rotations

Rotations To Model - LoxtonYear 1 Year 2 Year 3 Year 4 Year 5 Year 6

1 Lentils Wheat APW Barley - Malt Lentils Wheat APW Barley - Malt2 Chickpeas Wheat APW Barley - Malt Chickpeas Wheat APW Barley - Malt3 Canola TT Wheat APW Barley - Malt Canola TT Wheat APW Barley - Malt4 VePast Wheat APW Barley - Malt VePast Wheat APW Barley - Malt5 VeHay Wheat APW Barley - Malt VeHay Wheat APW Barley - Malt6 Wheat APW Barley - Malt Wheat APW Barley - Malt Wheat APW Barley - Malt7 Fallow Wheat APW Barley - Malt Fallow Wheat APW Barley - Malt8 Peas Wheat APW Barley - Malt Peas Wheat APW Barley - Malt9 Fallow Wheat APW Wheat APW Fallow Wheat APW Wheat APW

@RISK Output – Visual representation of risk – Wht Bar Wht Bar Wht Bar…

61.7% 38.3%

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Rotation Gross Margin / $/ha

Whe-Bar-Whe-Bar-Whe-Bar / $/ha

Mean 82.13Mode -81.06

Std Dev 198.9110% -133.6325% -67.4175% 185.8990% 346.48

Grain legumes - Lentils

61.7% 38.3%49.1% 50.9%

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Rotation Gross Margin / $/ha

Whe-Bar-Whe-Bar-Whe-Bar / $/ha

Mean 82.13Mode -81.06

Std Dev 198.9110% -133.6325% -67.4175% 185.8990% 346.48

Len-Whe-Bar-Len-Whe-Bar / $/ha

Mean 155.09Mode -48.52

Std Dev 220.1110% -80.5325% -10.2775% 272.9690% 451.15

Lentils and Chickpeas

61.7% 38.3%49.1% 50.9%41.6% 58.4%

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Rotation Gross Margin / $/ha

Whe-Bar-Whe-Bar-Whe-Bar / $/ha

Mean 82.13Mode -81.06

Std Dev 198.9110% -133.6325% -67.4175% 185.8990% 346.48

Len-Whe-Bar-Len-Whe-Bar / $/ha

Mean 155.09Mode -48.52

Std Dev 220.1110% -80.5325% -10.2775% 272.9690% 451.15

Chi-Whe-Bar-Chi-Whe-Bar / $/ha

Mean 219.64Mode -3.89

Std Dev 286.4310% -88.2325% 4.2875% 369.8490% 607.23

Field Peas

61.7% 38.3%57.7% 42.3%41.6% 58.4%

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Rotation Gross Margin / $/ha

Whe-Bar-Whe-Bar-Whe-Bar / $/ha

Mean 82.13Mode -81.06

Std Dev 198.9110% -133.6325% -67.4175% 185.8990% 346.48

Pea-Whe-Bar-Pea-Whe-Bar / $/ha

Mean 106.39Mode -38.78

Std Dev 193.4110% -101.1025% -37.1675% 206.7290% 364.98

Chi-Whe-Bar-Chi-Whe-Bar / $/ha

Mean 219.64Mode -3.89

Std Dev 286.4310% -88.2325% 4.2875% 369.8490% 607.23

Vetch Hay

61.7% 38.3%42.6% 57.4%

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Rotation Gross Margin / $/ha

Whe-Bar-Whe-Bar-Whe-Bar / $/ha

Mean 82.13Mode -81.06

Std Dev 198.9110% -133.6325% -67.4175% 185.8990% 346.48

VeH-Whe-Bar-VeH-Whe-Bar / $/ha

Mean 205.02Mode 125.79

Std Dev 271.3810% -83.3625% 6.6875% 343.7090% 561.10

Vetch Hay and Vetch Pasture

61.7% 38.3%42.6% 57.4%45.5% 54.5%

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Rotation Gross Margin / $/ha

Whe-Bar-Whe-Bar-Whe-Bar / $/ha

Mean 82.13Mode -81.06

Std Dev 198.9110% -133.6325% -67.4175% 185.8990% 346.48

VeH-Whe-Bar-VeH-Whe-Bar / $/ha

Mean 205.02Mode 125.79

Std Dev 271.3810% -83.3625% 6.6875% 343.7090% 561.10

VeP-Whe-Bar-VeP-Whe-Bar / $/ha

Mean 146.32Mode 87.81

Std Dev 142.5710% -8.3125% 39.1775% 223.0290% 335.35

Comparison of profitability across six years

Rotation sequence Av. GM Av. NP$/ha $/ha $ Rank

Len-Whe-Bar-Len-Whe-Bar 155.53 52.19 939,473.41 3Chi-Whe-Bar-Chi-Whe-Bar 220.66 117.33 2,111,941.32 1Can-Whe-Bar-Can-Whe-Bar 78.17 -25.16 -452,862.86 9VeP-Whe-Bar-VeP-Whe-Bar 146.54 43.21 777,705.59 4VeH-Whe-Bar-VeH-Whe-Bar 206.51 103.18 1,857,162.59 2Whe-Bar-Whe-Bar-Whe-Bar 82.45 -20.89 -375,939.68 8Fal-Whe-Bar-Fal-Whe-Bar 114.97 11.63 209,373.55 5Pea-Whe-Bar-Pea-Whe-Bar 106.89 3.56 64,028.85 7Fal-Whe-Whe-Fal-Whe-Whe 108.00 4.67 84,027.32 6

6 Year Cumulative Net ProfitLoxton Cumulative 6 year result

Customisable @ RISK model

• For each pulse check group it is possible to prepare an @RISK simulation based on prevailing rotations, local yield deciles, numbers of years, variable and fixed costs, etc.

• Run @RISK simulation very quickly and assess the results.

• Risk and Net Profit calculated for each rotation.

• Change any unreasonable inputs and quickly run again.

How have we used the @Risk analyses?

• @ RISK provides a reasonable means of comparing the future risks of crop rotations over time and season and markets.

• We have presented @RISK analyses at a number of Pulse Check groups with data (yield, benefits, variable costs and fixed costs) for each individual group.

• Gives opportunity to assess and weigh the risk profiles – is it high risk, low profit or moderate profit but low risk or other combination?

• Downside – cost of @RISK from Palisade is $2 785 for single-user, perpetual license.

“Take calculated risks,

That is quite different from being rash.”

General George Patton

@Risk analysis – the Assumptions used in this scenario…

• Rotational yield responses are best estimates for the northern Mallee,

• Yields are estimated Percentiles 10, 50 and 90 yields are inputs for the target Pulse Check Group district,

• Variable costs are built into the model and are tailored to each Pulse check group, in this case the Northern Mallee group

• Price percentiles are from Rural Directions historical pricing data and assumptions around a farm gate price

• Fertiliser prices are delivered to farm,• Barley - Malt refers to variety selection only - prices are based on F1.

@RISK analysis – the Assumptions in this scenario - #2…

• There is an increase in wheat yield after pulses.

• Fixed costs are calculated at $103/ha. Net profit is GM minus Fixed costs.

• Nine rotation sequences – including canola, grain legumes, cereal, vetch pasture and hay, and fallow options.

• Sequences were two rounds of the same three-year rotation.

• Based on a 3 000 ha farm.

Overlaying Fallow

61.7% 38.3%54.2% 45.8%

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Rotation Gross Margin / $/ha

Whe-Bar-Whe-Bar-Whe-Bar / $/ha

Mean 82.13Mode -81.06

Std Dev 198.9110% -133.6325% -67.4175% 185.8990% 346.48

Fal-Whe-Bar-Fal-Whe-Bar / $/ha

Mean 114.75Mode 37.26

Std Dev 136.1010% -31.5325% 12.4575% 186.5990% 295.30

Overlaying Canola

61.7% 38.3%62.6% 37.4%

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Rotation Gross Margin / $/ha

Whe-Bar-Whe-Bar-Whe-Bar / $/ha

Mean 82.13Mode -81.06

Std Dev 198.9110% -133.6325% -67.4175% 185.8990% 346.48

Can-Whe-Bar-Can-Whe-Bar / $/ha

Mean 77.97Mode -35.96

Std Dev 189.1210% -130.0925% -63.8575% 179.0090% 329.44