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Reducing risk through crop diversification: An application of portfolio theory to diversified horticultural systems

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  • Paut, Raphaël
  • Sabatier, Rodolphe
  • Tchamitchian, Marc

Abstract

In agricultural sciences, it is frequently stated that diversified systems are more likely to cope with risks, but rarely demonstrated in a quantitative way. On the theoretical perspective, risk reduction based on asset diversification is a well studied mechanism in economics that has been formalized in the Modern Portfolio Theory (MPT). In this paper, we thus explore the opportunities for application of MPT to quantify the benefits of diversification for risk reduction in a context of highly diversified horticultural systems. Our analysis relies on a model of the effect of crop diversification on risk and expected yield. It is based on a dataset obtained from a range of 44 species and over a period of 10 years. Results show that (i) the variability of expected crop yield can be reduced up to 77% by choosing the appropriate crop combination; (ii) most common crop classifications such as botanical classification or functional types do not make it possible to identify suitable diversification strategies. These results provide insight into how different horticultural crop combinations may shape the relationship between production and risk in diversified farming systems. Our findings also provide indications on new diversification strategies based on a quantification of risk reduction.

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  • Paut, Raphaël & Sabatier, Rodolphe & Tchamitchian, Marc, 2019. "Reducing risk through crop diversification: An application of portfolio theory to diversified horticultural systems," Agricultural Systems, Elsevier, vol. 168(C), pages 123-130.
    • Handle: RePEc:eee:agisys:v:168:y:2019:i:c:p:123-130
    DOI: 10.1016/j.agsy.2018.11.002
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