Does establishing lucerne under a cover crop increase farm financial risk?

Rainfed farms in south-eastern Australia often combine annual cropping and perennial pasture phases with grazing sheep enterprises. Such diversity serves in managing diseases, pests and plant nutrition while stabilising income in the face of wide, uncorrelated variations in international commodity prices and local weather over time. We use an actuarial accounting approach to capture the above contexts to render financial risk profiles in the form of distributions of decadal cash balances for a representative 1000-ha farm at Coolamon (34 degrees 50'S, 147 degrees 12'E) in New South Wales, Australia. For the soil and weather conditions at this location we pose the question of which approach is better when establishing the perennial pasture lucerne (Medicago sativa L.): sowing with the final crop of the cropping phase, or sowing alone following the final crop? It is less expensive to sow lucerne with the final crop, which can provide useful income from the sale of grain, but this practice can reduce pasture quantity and quality in poorer years. Although many years of field research have confirmed that sowing lucerne alone is the most reliable way to establish a pasture in this area, and years of extension messages to this effect have gone out to farmers, they often persist in sowing lucerne with their final cereal crops. For this region, counting all costs, we show that sowing lucerne alone can reduce farm financial risk (i.e. probability of negative decadal cash balances) at stocking rates >10 dry sheep equivalents (DSE)/ha, compared with the practice of sowing lucerne with a cover crop. Establishing lucerne alone allows the farmer the option to profitably run higher stocking rates for higher median decadal cash margins without additional financial risk. At low stocking rates (i.e. 5 DSE/ha), there appears to be no financial advantage of either establishment approach. We consider the level of equity, background farm debt and overhead costs to demonstrate how these also affect risk-profile positions of the two sowing options. For a farm that is deeply in debt, we cannot suggest either approach to establishing lucerne will lead to substantially better financial outcomes.