As modeled, this only captures the diversification effects on returns minus feed and risk management costs. Diversification tends to average the coefficients of variation of the two separate enterprises. Addition of a hog enterprise to an existing crop enterprise increases variability, but the addition of a crop enterprise can have significant positive effects to an existing hog operation. This suggests that the diversification shifts the lower tail of the distribution to the right, reducing the chances of extremely low returns. Thus, there are limited risk management benefits of diversification when compared to a non-diversified farm operation.
Diversification also has a limited effect on the rankings of risk management strategies.
There are few changes in the rankings of the individual risk management strategies for the non-diversified and diversified farms. The risk management tools in the individual enterprise and diversified enterprise situations are ranked in the same basic order by the Sharpe Ratio. One of the most interesting results from this study is the effect of combining risk management tools. By using more than one risk management tool, a producer may be able to reduce more risk than with just one tool. Fourteen different combination strategies for the diversified farm are listed in the lower half of Table 2.