Weather and Climate Risk in Agriculture

Introduction

This resource focuses on risks associated with climate and using climate information in agricultural risk management processes. This page introduces risk management concepts and climate risk factors. Linked sections (see tabs above) address risk management associated with El Niño and La Niña, Rainfall and Temperature risks while the Research section identifies climate and risk research areas, resources and links.

Australian weather and climate

Australian farmers are often said to operate in one of the riskiest environments in the world. While farming businesses face many sources of risk, the variability of Australian weather and climate is one of the most difficult risks to manage. Indeed most activities in Australian agriculture have at least some climate-related risk component.

Risks are obviously different for different agricultural industries - the type of risk, the size of the risk and the form of the impacts. Nevertheless all parts of agriculture can benefit from understanding ways and means of managing the risks that they have, particularly when it comes to climate.

What is risk?

Risk can be defined as the chance of an event occurring, multiplied by the damage or loss should that event take place, For instance, a high risk activity (say, going over a waterfall in a barrel) is one that has both a significant chance of a negative outcome (e.g., it is likely the barrel will break), and a large impact if that outcome occurs (the person inside is severely injured). In agriculture, risk could mean the likelihood of a dry year, an extreme frost or even a sudden rise in fuel costs that in turn will result in a substantial loss of crop or income. Sometimes people describe risk and opportunity as the opposite ends of the spectrum. Similarly, what may be a risk for some may actually be an opportunity for others. For instance, a La Niña event may increase the chance of flooding or water logging in some areas and thus significantly reduce crop yield, while in other areas it may in fact create the right conditions for a bumper crop.

What is risk management?

Risk management is the activity when we:

• identify various risks and assess their significance;
• develop methods to minimise or avoid some risks using available resources;
• develop strategies to manage the risk that remains.

Climate risk management involves being proactive in tackling the risks that Australia's highly variable climate can raise, rather than simply taking what comes. The best way to do this is by the strategic use of climate information when planning and making on farm decisions. A broad range of actions are possible to combat those times when climate becomes a risk. These may include:

• using early warning and response systems, such as seasonal outlooks or weather forecasts;
• strategic diversification to spread the risk;
• whole-farm planning and resource allocation to activities or seasons or years;
• careful assessment and use of relevant financial instruments such as insurance, sales contracts, hedging etc, and;
• infrastructure design, e.g., dams, wind breaks, animal shelters, land contours, drip irrigation and so on.

Climate change presents new risks and therefore new challenges in risk management. In a country as large as Australia, there could also be new opportunities. It is therefore increasingly useful to understand how your climate may already be changing, and to plan for future risks.  It is a cost-effective strategy to consider actions that can be taken today that will improve current options as well as help buffer against future climate change.

Risks from climate and climate change are related to:

• the extent and duration of weather and climate events (see diagram below);
• the type, relevance and skill of information that is available about the risks (e.g., current monitoring forecasts, outlooks, scenarios);
• the vulnerability such changes may expose to a farm's bottom line.

Dealing with climate risk

One fairly easy to use tool to assess your climate risk is a simple risk matrix (sometimes called a risk table). In such a matrix, + denotes a unit of profit, − denotes a unit of loss and = denotes break even. In place of these symbols, dollar values could be used, or expected percentage change from some reference year, if estimates are available.

Opportunities to benefit and vulnerability to loss are concentrated at opposite corners of the matrix. Thus if early indicators are available of likely market conditions or likely climate conditions, then you can consider the possible costs and benefits of factoring the early indicators into the season's operations. In most cases, early indicators, including seasonal outlooks, are cast in terms of likelihood (or chance of occurring). When planning ahead it's worth considering both the confidence of the outlook and the 'pay-off' that may occur.

For longer timescale considerations, it is useful to look at how often the various categories of risk occur.

In this risk matrix the farmer can expect on average three favourable climate years per decade and about 2.5 (two to three) good market years. When these advantageous conditions occur in the same year, profits are high. Market prices can vary due to factors other than climate, some of which may be known in advance (e.g., acreage planted) and others not (e.g. an outbreak of disease).

It is best to compare this table with actual records of return for the farm. Do profits split into around 3 good years, 4 years of marginal profitability and 3 years of break-even (or something different), and can you identify to what degree the climate and markets are responsible? How many years of loss could be anticipated over a ten or twenty year period and what combination of events lead to the worst losses?

Other tools that can help include decision trees and tailored software packages. Information on software packages that include cropping and pasture risk management are available from the Managing Climate Variability program.

Climate change and changing risk

Climate change will alter the balance of years experiencing optimal, average and poor conditions for the typical crops and pastures that are grown today. In some locations, the balance has already altered. Given that climate change may affect agricultural regions in other parts of the world, it may also affect markets. Therefore, the risk matrixes shown above may have slightly different weightings in a warmer world. For example, in 2008 market prices for agricultural commodities were high due to a number of factors, while at the same time the Murray Darling basin was under extreme water stress.

The Bureau of Meteorology and CSIRO have produced a series of climate change projections for Australia based on the latest (2007) report by the United Nations Intergovernmental Panel on Climate Change. Some state departments have also produced in depth analyses of the state based impacts of climate change. These are the recommended sources of information for the likely impacts of climate change upon Australia.

Different rural industries will be affected differently by climate change, and on different time scales. This schematic illustrates the case for two quite different situations, namely a short rotation and a long rotation crop.

As a location warms, a short rotation crop such as wheat can be managed by a process of adjustment and adaptation, while a long rotation crop may need a more long-term view.

Outside of the tropics, many crops benefit from slightly warmer temperatures, especially when coupled with more available carbon dioxide. However climate is more than just temperature, and such increased growth is dependant upon little change in the available water. The water available for use by a crop is a function of the balance between rainfall and evaporation, both over the farm and in the catchments.

With climate change, rainfall may decrease over large parts of Australia due to changes in the large-scale drivers of the climate system (e.g., El Niño), changes in broad scale weather patterns, or both. Temperatures will also rise and evaporative demand is likely to increase. For agricultural systems that function on decadal scales or longer, managers would need to consider a range of likely climate scenarios. For the example of the olive grove in the previous diagram:

• a moderate warming may not be a significant issue if adequate and reliable water supplies continued;
• if water became limited or its availability became highly variable from year to year, then crop water needs in the warmer climate may not be met and crop productivity may be affected.

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