Analytical support for developing policies to enhance the resilience of Australian farm households to drought has been heavily dominated by rainfall analysis, whereas the impact of climate variability that matters to farmers and the community generally is the impact on farm incomes. With farm income as the key decision variable, analytical support for policy development dominated by rainfall analysis may not effectively enhance the resilience of farm households to the impacts of climate variability. This report is an intermediate step aimed at improving analytical support for policy makers seeking to reduce the vulnerability of Australian farm households to climate variability. A hybrid modeling system, the Agricultural Farm Income Risk Model (AgFIRM), was developed to bring together the best available biophysical models of Australian crop and pasture yield, together with ABARE's econometric model of farm incomes. The model provides a capacity to simulate the regional impact of climate variabilityon farm incomes. It can also provide conditional forecasts of the likely impact of climate variability on farm incomes one year into the future, using well established methods of seasonal climate forecasting. The development of analytical tools that distinguish climate from other sources of income risk will assist the development of relevant and efficient policies to improve the management of climate variability.