Identifying risk-efficient strategies using stochastic frontier analysis and simulation: An application to irrigated cropping in Australia

•A farm level bioeconomic model, using APSIM, is described.•The bioeconomic model is parameterised from data collected from farmer interviews.•Simulation experiments, involving changes to farm business risk, is conducted.•Stochastic frontier analysis allows current and risk-efficient strategies to be compared.•An expression is derived that quantifies the farm’s profit-risk trade-off.

In irrigated cropping, as with any other industry, profit and risk are inter-dependent. An increase in profit would normally coincide with an increase in risk, and this means that risk can be traded for profit. It is desirable to manage a farm so that it achieves the maximum possible profit for the desired level of risk. This paper identifies risk-efficient cropping strategies that allocate land and water between crop enterprises for a case study of an irrigated farm in Southern Queensland, Australia. This is achieved by applying stochastic frontier analysis to the output of a simulation experiment. The simulation experiment involved changes to the levels of business risk by systematically varying the crop sowing rules in a bioeconomic model of the case study farm. This model utilises the multi-field capability of the process based Agricultural Production System Simulator (APSIM) and is parameterised using data collected from interviews with a collaborating farmer.We found sowing rules that increased the farm area sown to cotton caused the greatest increase in risk-efficiency. Increasing maize area also improved risk-efficiency but to a lesser extent than cotton. Sowing rules that increased the areas sown to wheat reduced the risk-efficiency of the farm business. Sowing rules were identified that had the potential to improve the expected farm profit by ca. $50,000 Annually, without significantly increasing risk. The concept of the shadow price of risk is discussed and an expression is derived from the estimated frontier equation that quantifies the trade-off between profit and risk.