Diversification and policy options for risk management in arable farming

Background: Agricultural production is highly susceptible to weather-related uncertainties, which are expected to increase due to climate change. While most studies address production risks, market risks are often overlooked despite their growing impact on farm income. Crop diversification is a strategy to reduce both production and market risks. Objectives: This study investigates how temporal and spatial diversification strategies influence farm incomes and risk exposure across different arable farm types in Eastern Germany. Methods: A stochastic bio-economic farm model (MODAM) was implemented to optimize decision-making. The farm model integrates yield variability from a crop growth model and market volatility through Monte Carlo simulations of crop and fertilizer prices. Nine showcase farms were analyzed under three diversification strategies: temporal diversification, subfield division, and strip cropping, against narrow rotations with sole cropping. All diversification strategies included (among other crops) soybean cultivation. The model assessed two climate scenarios (1990-2020 and 2020-2060) and two policy environments: the CAP 2023 area payment system and a novel premium, paid based on the field perimeter, promoting smaller field units. Results: Soybean integration into cereal dominated cropping systems was limited under temporal and subfield diversification but increased with strip cropping. Expected gross margins improved under future climate conditions compared to historical conditions across all strategies. Diversification consistently reduced economic risk relative to narrow rotations and sole cropping, with subfield division and strip cropping showing the most substantial effects. Strip cropping reduced economic risk but involved higher trade-offs. Subfield division significantly reduced economic risk without sacrificing gross margins, especially under risk-averse behavioral preferences and future climate scenarios. A modest perimeter-based payment (1.5 & euro;/100 m length of field edge) replacing area-based premiums helped maintain gross margins under strip cropping while significantly reducing the conditional-Value-at-Risk. Conclusions: Spatial diversification like subfield division and strip cropping, are effective in mitigating farm income risks under climatic and market uncertainty. Policy instruments such as perimeter-based payments can enhance these effects.