Financial returns, stability and risk of cacao-plantain-timber agroforestry systems in Central America O. A. Ramírez 1, * , E. Somarriba 2 , T. Ludewigs 3 & P. Ferreira 2 1 Department of Agricultural and Applied Economics, Texas Tech University, Box 42132, Lubbock TX 79409-2132, USA; 2 CATIE 7170, Turrialba, Costa Rica; 3 Projeto Arboreto – Parque Zoobotanico, Universidade Federal do Acre BR-364 km 4 s/n, Distrito Industrial C.P. 1035-CEP 69908-210 (*Author for correspondence: E-mail: Octavio.Ramírez@ttu.edu) Key words: Cordia alliodora, financial analysis, Musa, price modeling, risk and uncertainty, Theobroma cacao Abstract Diversification of agroecosystems has long been recognized as a sound strategy to cope with price and crop yield variability, thus increasing farm income stability and lowering financial risk. In this study, the financial returns, stability and risk of six cacao (Theobroma cacao L.) – laurel (Cordia alliodora (R&P) Oken) – plantain (Musa AAB) agroforestry systems, and the corresponding monocultures, were compared. Production and cost data were obtained from an on-going eight-year old experiment. The agroforestry systems included a traditional system and a replacement series between cacao (278, 370, 556, 741 and 833 plants ha –1 ) and plantain (833, 741, 556, 370 and 278 plants ha –1 ) with a constant laurel population (timber tree; 69 trees ha –1 ). An ex-post analysis was conducted using experimental and secondary data to build a simulation model over a 12-year period under different price assumptions. The probability distribution functions for the three commodity prices were modeled and simulated through time, accounting for their possible autocorrelation and non-normality. The expected net incomes from the agroforestry systems were considerably higher than from monocultures. The agroforestry systems were also less risky. Agroforestry systems with proportionally more cacao than plantain were less risky, but also less stable. The timber component (C. alliodora) was a key factor in reducing farmer’s financial risks. Methodologically, the study illustrates a technique to evaluate both expected returns and the corresponding financial risks to obtain a complete, comparable profile of alternative systems. It shows the need to allow for the possibility of non-normality in the statistical distributions of the variables entering a finan- cial risk and return analysis. Agroforestry Systems 51: 141–154, 2001.  2001 Kluwer Academic Publishers. Printed in the Netherlands. Introduction The stability of production and income has been used as a criterion to compare diversified cropping systems with monocultures and to justify their adoption by farmers (Eberhart and Russell 1966; Marten 1988; Dubin and Wolfe 1994). It has been argued that agroecosystem diversity results in ecological and financial stability, and that a stable system reduces uncertainty and risk for farmers. Stability is the degree of constancy of production through time, while subject to disturbing forces and changes in local environmental variables (Conway 1985). This definition of stability can be applied to income as well. The concept of risk is very practical in nature (Mead et al. 1986). Farmers seek to reduce the probability of not achieving a minimal net income. This probability can be calculated from the cumulative probability distribution function of the farmer’s net income