Empirical analysis of crop diversification in the 053 State of Colima Irrigation District

Abstract

Objective: To examine crop diversification’s potential as a risk management strategy in the 053 State of Colima Irrigation District in the period 1997/98-2021/22.

Design/methodology/approach: The relationship between yield, price and income risk levels and diversification degree of the annual agricultural portfolios in the autumn-winter (A-W), spring-summer (S-S) cycle and perennial crops was analyzed. Diversification was measured through the Herfindahl index (HI). Risk was interpreted as the variables’ instability, was represented by the standard deviation and was calculated according to Markowitz’s mean-variance methodology.

Results: It was found that agricultural portfolio diversification is an useful strategy to reduce price risk in the two agricultural cycles, as well as yield and income risk in perennial crops (significantly positive correlations) but unfavorable to manage these last two types of risk in the S-S cycle (considerably negative correlations). It was also observed that in the three crop groups, income risk is basically determined by the price variation (market risk).

Limitations on study/implications: The results of the study lose validity as soon as the elements of the variance and covariance matrix in the irrigation district change. The analysis can be complemented by calculating the optimal (analytical) portfolio for each crop group.

Findings/conclusions: It is concluded that in order to contribute positively to the income stability in the irrigation district, special attention should be paid to the management of price fluctuations (market risk) in the three crop groups and to increasing diversification mainly in perennial crops.