Chickpeas in NE Montana

David BuschenaMSU Department of Agricultural Economics and EconomicsDecember 19, 2005

Collaborating Partners: Billings RMA Regional Office Fort Peck Community College

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

Diversification and RiskDiversification and Specialty Crops Rotational Effect: Can Enhance Returns And ProductivityImprove Soil CharacteristicsBreak Weed/Insect Cycles Reduce Disease Vectors Source of Nitrogen

Diversification and RiskDiversification Effects: Additional Enterprises Can Reduce The Variation Of Returns While Maintaining Average ReturnsBut, Diversification Can Increase Costs Machinery ComplementsTimelinessLearning Curves

Summary Of Diversification1. Many Crops Face Similar Production Risksa.Must Consider The Ability To Manage Production RiskCrop Insurance? Herbicides?b.Must Consider Opportunities To Manage Price RiskFutures Markets? Contracting? Storage?

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

Summary Of DiversificationThese 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)

Marketing Specialty crops:

Production often contracted

Many crops are food grade

Importance of Canadian markets

Trucking to remote buyers

Extensive record keeping requirementsSummary Of Diversification

CropRisk MeasureBarley15.2%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: 1992-2000

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 TimeDo Additional CropsReduce Price Risk?

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

Do Additional CropsReduce Price Risk? 45% Spring Wheat, 45% Winter Wheat, 5% Flaxseed, 5% Dry Peas19.6%Equal Amounts of All 10 Crops15.3% 50% Spring Wheat, 50% Winter Wheat19.7%

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 KabuliAnd Desi Chickpeas To ATraditional Rotation

Chart1

43.8

15.614.8

28.823.5

31.518

12.79.6

3.23

2.22.1

planted

harvested

Chickpeas in Montana

Sheet1

yearplantedharvestedhar/planted

199843.80.95

199915.614.80.9487179487

200028.823.50.8159722222

200131.5180.5714285714

200212.79.60.7559055118

20033.230.9375

20042.22.10.9545454545

Sheet1

planted

harvested

Chickpeas in Montana

Sheet2

Sheet3

Chart2

43.8

15.614.8

28.823.5

31.518

12.79.6

3.23

2.22.1

planted

harvested

Chickpeas in Montana

Sheet1

yearplantedharvestedhar/planted

199843.80.95

199915.614.80.9487179487

200028.823.50.8159722222

200131.5180.5714285714

200212.79.60.7559055118

20033.230.9375

20042.22.10.9545454545

Sheet1

planted

harvested

Chickpeas in Montana

Sheet2

Sheet3

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

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

Per Acre ROVC By RotationROVC$/acreStandard Deviation

Probability Of Receiving At Least $30 Per Acre ROVCProbability

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

Summary Of Research4. The Rotation with Desi Chickpeas Has A Smaller Average ROVC Than The Rotation With KabulisThe Rotation with Desi Chickpeas Has A Smaller Standard Deviation Than The Rotation With Kabulis6. Your Mileage Will Vary

QUESTIONS?