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

2 Diversification and Risk 1. Actions Which Reduce Risk Without Loss Of Mean Returns 2.Is The Adoption Of An Additional Crop A Diversification Strategy? 3.Maybe: a.Stock Portfolio Example Diversification Issues

3 Diversification and Specialty Crops 1.Rotational Effect 1.Rotational Effect: Can Enhance Returns And Productivity »Improve Soil Characteristics »Break Weed/Insect Cycles » Reduce Disease Vectors » Source of Nitrogen Diversification and Risk

4 2.Diversification Effects 2.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 2. Many Traditional And Alternative Crop Prices Move Together Over Time 3. Some Alternative Crops Prices Are Quite Variable 4.Some Alternative Crops Have Additional Inherent Risks a. Yields b. Expected Net Returns c. Labor & Machinery Utilization

7 Summary Of Diversification 5.These crops are often riskier than wheat or barley, but are not always so. a.Increased risk from: Price risk (Less developed markets) Production risk (newness of the crop, disease)

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

9 CropRisk Measure Barley15.2% Canola18.5% Dry Beans15.4% Dry Peas27.8% Flaxseed20.8% Lentils19.9% Mustard19.3% Safflower13.4% Sunflower20.3% Wheat – Spring16.7% Wheat – Winter23.3% Do Alternative Crops Have Less Price Risk Than Wheat? U.S. Average Prices:

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

11 1.To Reduce Overall Price Risk a.Want Crop Prices To Have Low Correlations b. Better Yet, Negative Correlations 2.Alternative Crop Prices Tend To Be Relatively Highly Correlated With Wheat Prices a (Mustard Seed) b (Dry Peas) Do Additional Crops Reduce Price Risk?

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

13 Adding Chickpeas To A Traditional Rotation 1.Diversifies A Rotation 2.Does It Increase Income? 3.Does It Diversify Income? 4.Many Specialty Crops Offer High Returns In Some Years a. Often Adds More Risk 5.We Evaluate Adding Large Kabuli And Desi Chickpeas To A Traditional Rotation

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15 Research Methodology 1.Whole Farm Net Return-Over-Variable Costs Of Three-Year Rotations On 1,500 Acres In Northeast Montana 2.Consider Only Operating Costs 3.Use Surveys Of Standard Practices 4.Base Budgets On 2004 Input And Output Prices 5.We Estimate Price And Yield Distributions Using Historical Data a.Account For Loan Rates And Crop Insurance

16 Research Methodology 6.Consider Four Rotations a. HRS – Barley – Chem Fallow b.HRS – Desi – Chem Fallow c. HRS – Kabuli – Chem Fallow d. HRS – HRS – Chem Fallow 7.Simulate ROVC Using 1,000 Random Draws Of Yields And Prices

17 Per Acre ROVC By Rotation ROVC $/acre Standard Deviation

18 Probability Of Receiving At Least $30 Per Acre ROVC Probability

19 Summary Of Research 1.We Evaluate Risk/Return Trade-offs Of Adding A Chickpeas To More Traditional Rotations 2.The Rotation with Desi Chickpeas Has A Slightly Larger Average ROVC Than The Rotation With HRS Recrop 3.The Rotation with Desi Chickpeas Has A Slightly Smaller Standard Deviation Than The Rotation With HRS Recrop

20 Summary Of Research 4. The Rotation with Desi Chickpeas Has A Smaller Average ROVC Than The Rotation With Kabulis 5.The Rotation with Desi Chickpeas Has A Smaller Standard Deviation Than The Rotation With Kabulis 6. Your Mileage Will Vary

21 QUESTIONS?