Agricultural Economics Department

 

Date of this Version

January 2001

Comments

Published in Cornhusker Economics. January 3, 2001. Produced by the Cooperative Extension, Institute of Agriculture and Natural Resources, Department of Agricultural Economics, University of Nebraska - Lincoln.

Abstract

Crop diversification is commonly regarded as a risk reducing strategy to moderate the impacts of variable crop prices and yields. The addition of one or more livestock enterprises may lead to still greater income stability for an agricultural producer. Diversification reduces income volatility whenever low returns in one enterprise are associated with relatively moderate or high returns in another enterprise. The reverse phenomenon (moderate or relatively high returns in the first enterprise, occurring during years of low returns for the second enterprise) is also necessary for diversification to be effective. The greater the tendency for enterprise returns from different enterprises to "offset" each other, the greater the effectiveness of enterprise diversification. The disadvantage of diversification lies in the likelihood for reduced average returns across time due to a) the loss of enterprise size efficiency due to engaging in more enterprises, and/or b) if when adding enterprises, the added enterprises have lower returns.

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