Abstract

The management of native grass pastures occurs in a farm business context. Native grasses are just one of the resources available to the land manager.

Results from a case study show how the management of native grass pastures can be usefully considered alongside management of other parts of the farm. In the case study, particular attention is given to the economics of fertilizing native pasture compared to replacing that pasture with introduced species.

Other development and conservation management options across the farm are also considered. The principles can be applied to the study of other farms.

Introduction

Management decisions frequently have to be made about native pasture - to do this, not to do that. These decisions will vary with the rainfall zone, the type of pastures, the enterprises, and other aspects of the farm operation. Farm business analysis can help inform these decisions.

The aim of this paper is to highlight aspects of the profitability and cash flow of grazing native pastures on a particular farm. It will be shown how the farm scale context, rather than the stand-alone merits of native pasture, is all important in determining its contribution and future role. The aim is not to present conclusive results about native pasture, but more to show how to evaluate its role in any particular farming situation.

The paper is organized as follows. Background is presented about the case study farm, the pasture types, and their utilization. The profitability and cash flow effects of fertilizing native pasture or alternatively sowing an introduced pasture in its place are outlined. The results are compared to the other farm investment options, and a new farm strategy is proposed. The extent to which this farm strategy can accommodate conservation management is then considered. More information about the method used, and case studies in several regions, can be found in Crosthwaite and Malcolm (2000) and on the web site http://www.landfood.unimelb.edu.au/research/grass_eco/ ¹

The current farming system

Background

This farm of 1,130 hectares is located in north-east Victoria. Rainfall averages 600mm a year. Topography is variable, but mostly undulating to steep country on largely granitic soils that are slightly acidic. The farm is split into six different blocks, all some distance from each other. Dryland salinity is a problem in the region, and some of the hill country locally may be contributing to the dryland salinity problem on nearby footslopes and flats. Soils across most of the property are slightly acidic. Most of the property has been cleared; some patches of remnant woodland remain.

The farm supports two generations of the farm family. Both male partners work on the farm, the younger female partner works off-farm, while the older female partner does limited office work. There are as yet no dependent children. The farm needs to provide sufficient income to support both families for some time into the future. Adequate cash flow is therefore a major requirement. The families are very active in Landcare. The family is concerned to implement forms of land management that will maintain the long-term productivity of the farm.

Enterprises are a self-replacing merino flock (1,000 ewes), first cross lambs (500 ewes), a wether enterprise (500 wethers), beef cattle (100 cows), a merino stud (275 ewes) and a Border Leicester stud (40 ewes). The farm carries an estimated 8,000 dry sheep equivalents (DSE).

Pasture types across the farm

The predominant pasture type on the farm is native pasture. Native pasture is defined here as any pasture in which native grasses are the main perennial species, though annual grasses and legumes may be the main species during winter and spring. The main native grasses are Wallaby Grasses (Danthonia spp.), Weeping Grass (Microlaena stipoides), and Spear Grass (Stipa spp.). Native pasture is mostly found on the two large hill blocks (see Table 1) that are more difficult to manage due to topography and soil type. Introduced pasture is mainly found on the four smaller blocks on flatter land.

The relationship between pasture type and land class is shown in Figure 1 (see Simpson and Langford 1996 for the definitions of land class). Virtually all of land classes one and two have been sown to introduced pasture, though a high proportion are now dominated by naturalized annual grasses. Land class three has a mix of native and introduced species. Pastures on land classes four and five are mostly native. Some of these pastures are on the steeper slopes of paddocks in which flatter areas are regularly fertilized from the ground.

Figure 1 Area of pasture - pasture type by land class ²

The contribution of native pasture to feed supply

Table 1 shows feed value derived from pastures on each block of land in the property, after deducting supplementary feed. The livestock month (LSM) measure used in this study accounts for pregnancy status and lactation unlike the dry sheep equivalent (DSE) standard.³ This required information on stock movements from one paddock to another, livestock numbers by type, livestock weights by month of the year, and supplementary feed given out in each paddock.

These results would undoubtedly differ in other years; they reflect the difficult seasonal conditions prevailing in 1996-97, as well as the management strategies adopted at that time. Nevertheless, they give a sense of the relative importance of each pasture type. Native pastures on Hills and Far Hills blocks make up the largest pasture type on the farm. Further, the pastures on Hills block, which is nearly all native pasture, provided more feed per hectare than introduced pasture on House and Davids blocks. The pastures across the whole property supplied an average 62 livestock months (LSM) worth of feed per hectare per year (LSMs/ha). This is approximately 5.2 dry sheep equivalents (DSE/ha).

Native pastures on Hills are utilized throughout the year by sheep and cattle. Some are consistently used as lambing paddocks, and these provide the bulk of feed to nearly all ewes during and after lambing. At weaning, the lambs are taken to the House block where they are run on introduced pasture. Far Hills block is utilized mainly for cattle.

Table 1 Feed supply derived from each block on the farm - 1996-97

Block	Area (ha)	LSM	LSM/ha	Approx DSE/ha
House	101	5,804	57	5
Second House	49	5,806	118	10
Davids	77	3,634	47	4
Leased	162	13,728	85	7
Hills	406	29,472	73	6
Far Hills	336	11,603	35	3
Whole farm	1130	71,856	62	5.2

Economic and financial state of the current farm business

The total value of capital was an estimated $1,292, 000, which includes land valued at $1,059,000 (average value $1,112/ha). Equity was 92 per cent. The estimated total gross margin for the farm in 1996-97 was $116,000 with percentage contributions as follows: Self Replacing Merinos 42%, Wethers 11%, First Cross Lambs 18%, Sheep stud 6%, and Beef cattle 22%.

Expected operating profit after tax from the current farm system was $21,000 in 1996-97 - derivation is shown in

Table 2.⁴ Net cash flow was negative for the selected year as shown in Table 2; there was no room for equipment replacement or farm development expenses.⁵ Expected annual return to capital (after tax) from the current farm system was 1.9 per cent. Deducting interest costs and lease costs gives a negative return to the owners capital of an estimated -0.2 per cent.

Improvements in profitability and cash flow are required on this farm. The expected operating profit for the year means a low return to capital, and the negative net cash flow indicates looming liquidity problems. An extra $10,000 in net cash flow each year would be sufficient to avoid a cash deficit, while $30,000 would allow for replacement of aging equipment and other investment.

Table 2 Expected profit/loss and Expected uses of cash - 1996-97

Expected profit/loss	$'000	Expected uses of cash	$'000
Total gross margin	116	Cash in
		Sales	162
Costs
Whole farm variable costs incl fertilizer, weed control etc	29	Cash out
Overheads incl operator allowance & depreciation	58	Activity variable costs	46
Total costs	133	Whole farm variable costs	29
		Cash overheads	16
Operating profit before tax	29	Land lease costs	14
Estimated tax payable	8	Income tax	8
		Interest	9
		Principal on loan	7
		Consumption	40
		Total	169
Operating profit after tax	21	Net cash flow	-7

Options for meeting future farm income requirements

In this section, four options are investigated that might allow income needs to be met while managing native pasture sustainably. This is a whole farm analysis in which options across the whole farm, not just native pasture, are considered. Whether it is within the farmers’ resources to conserve areas of particular biodiversity interest on such farms is considered in a later section.

The first option for increasing production is to re-sow 100 hectares of previously sown pastures on land classes one and two.

The second option is to re-sow and irrigate 15 hectares. Stock now sold late in autumn will be fattened more quickly, thus saving on supplementary feed and freeing up pasture for other stock. The risks of holding stock over autumn will be reduced.

The third option is to increase production from 100 hectares of native pasture through more frequent fertilizer applications following the principles outlined in Simpson and Langford (1996). The owners have participated in programs aimed at increasing understanding of native pastures and how to better manage them.

The fourth option is to replace 100 hectares of native pasture with introduced pasture. While the owners regard native pasture as playing an important role in the farm system, and past replacement efforts have not succeeded, this option should be evaluated. Farm technologies change and it is reasonable to allow for the possibility that the owners may again try replacing native pasture with introduced pasture species over the next 10 years.

Other development options on this property are not investigated. Such options include:

• intensify management of already sown pastures through regular fertilizer applications, controlling undesirable species using spray, grazing? and spray topping, and direct drilling clover into the pasture base.
• adopt rotational grazing across the property to better match animal demands with pasture condition This might require replacing the stud sheep with flock sheep to increase management flexibility.

In a farm business analysis, chosen options are evaluated for profitability, effects on cash flow, and riskiness. The assumptions underlying the partial budgets developed for each option are now outlined. Assumptions relevant to all options are that:

• Each analysis is run over 15 years.
• The gross margin per dry sheep equivalent (GM/DSE) for each of the major enterprises are relatively close, with an expected GM/DSE of $15-$16, not counting the $2-$3 cost of supplementary feed which is grown on the farm.
• Fertilizer costs $250 for each tonne spread. No lime is required.
• Each investment is funded with an overdraft at 12 per cent. For the financial analysis, an allowance must be made for interest payments on the extra investment funds required for the project, whether or not they are borrowed.
• Once debt is paid off, cumulative cash surpluses are invested at five per cent.
• An inflation rate of three per cent is assumed for the financial analysis of each investment option. The economic analysis is based on current prices i.e. real dollars.
• At the end of the 15 year project period, the remaining value of the pasture and the value of the extra livestock still being run is salvaged - salvage value is taken into account in estimates of profitability (i.e. NPV and IRR).

Results for all four options are summarized in Table 3. The specific assumptions for each option, and discussion of results in each case follow.

Table 3 Comparing all development options

	Native pasture		Rest of farm
	Replace	Fertilize	Re-sow	Irrigation
Economic analysis
Initial investment (year 1)	$10,964	$557	$10,964	$11,800
5% real	$22,072	$37,019	$40,473	$16,298
NPV 10% real	$8,618	$18,963	$21,458	$8,169
15% real	$1,005	$9,657	$10,373	$3,322
Internal rate of return	16%	32%	24%	21%
Steady state year	3	11	3	4
Extra operating profit in steady state	$4,663	$4,145	$6,818	$3,118
Financial analysis
Years of debt	9	8	6	7
Maximum debt	$27,194	$6,009	$26,341	$13,762
Year of peak debt	2	5	2	2
Cum net cash flow yr. 7	-$13,327	-$3,829	$3,004	-$665
Cum net cash flow yr. 15	$30,519	$50,282	$82,307	$38,879
Salvage value yr. 15	$16,111	$40,567	$17,126	$3,540

Resowing pasture. 100 hectares of pasture on land classes one and two are to be direct drilled with introduced grass seed and clovers after spraying out broadleafed weeds and undesirable annual grasses. It is estimated that stocking rate would increase six DSE/ha to 12 DSE/ha from the second year. Other assumptions are that:

• Pasture decline starts in year 12 at the rate of 10 per cent decline in carrying capacity per year.
• A 20 per cent chance of pasture establishment failure is assumed, and 20 per cent of the initial development cost, except for the fertilizer, is included in the second year costs.
• Pasture development costs are estimated at $150/ha.
• In the first year stock graze the existing pasture for only three months.
• Maintenance superphosphate is applied each year at 150kg/ha and at a cost of $250 spread.
• Other pasture management activities are costed at $12/ha every second year.

Sowing pasture by direct drilling on the rest of the farm, i.e. on class one and two soils is expected to be the most profitable option as measured by real return to capital - well over 15 per cent real (Table 3). It also contributes most to farm operating profit - over $6,000 p.a. It should be chosen first given that it also has the shortest pay-back period.

The irrigation option. This option involves re-sowing pasture and buying second-hand irrigation plant. Assumptions are not given as this option is only indirectly relevant to discussion of the farm-scale place of native pasture. Irrigating a small area of sown pasture is expected to be equally as profitable as the option of replacing native pasture by direct drilling grass and clover (Table 3).

Fertilizing native pasture. Assumptions for the option of fertilizing 100 hectares of native pasture on land class three are:

• 100kg superphosphate is applied to native pasture annually for 10 years, and then every second year. Higher rates of fertilizer application will lead to clover dominance and loss of native perennial grasses (Simpson and Langford 1996).
• Stocking rate will increase by four DSE/ha to eight DSE/ha. A linear rate of increase is assumed i.e. 0.4 DSE/ha per annum. The stocking rate does not increase after year 10.
• The native pasture already has a sufficient legume base to respond to the fertilizer.

Fertilizing native pasture is expected to be the next most profitable after sowing pasture on the rest of the farm (Table 3). The contribution to annual profit is expected to be nearly $4,000 in the steady state year, but this is not reached for over 10 years. Operating losses are expected for the first few years, while stocking levels build up to a level where extra wool and stock sales cover the annual fertilizer cost. The project is expected to be in debt (to the bank or the rest of the farm) for nine years. Thereafter, surpluses are rapidly accumulated. The option has a high salvage value in comparison to the initial investment.

The profitability of fertilizing native pasture annually is closely related to wool price and stocking rate increase over 10 years. As shown in Table , it is profitable for a range of scenarios.

Table 4 Net present value (10% real) by wool price and stocking rate increase by year 10

		Wool price ($/kg)
		$4.00	$5.00	$6.00
Stocking rate increase	2	$2,434	$4,567	$6,717
(DSE/ha)	3	$8,692	$11,676	$14,720
	4	$15,068	$18,963	$22,875

Replacing native pasture. Assumptions for the option of replacing 100 hectares of native pasture on land class three are:

• Stocking rate will increase by five DSE/ha from the current four DSE/ha to nine DSE/ha. This increase is one DSE/ha less than when pasture is sown on land class one and two.
• Other assumptions are the same as for the option of re-sowing pasture on land classes 1 & 2.

Replacing native pasture with sown pasture is likely to be rejected, even though it is expected to have a rate of return of 16 per cent (real). Replacing native pasture with sown pasture carries significant risks. For a pasture sown on the best land classes on the farm, it is reasonable to assume that the pasture will persist for 12 years. From Table 3 it is clear that returns to sowing introduced pasture using direct drilling are sensitive to the stocking rate increase achieved. If a five DSE/ha increase in stocking rate is achieved and maintained until year 10, a good rate of return can be expected, particularly if wool price is $5/kg or higher.

Table 5 Net present value (10% real) by wool price and stocking increase

			Wool price ($/kg)
		$4.00	$5.00	$6.00
SR increase (DSE/ha)	3	-$11,425	-$8,781	-$6,136
	5	$3,869	$8,618	$13,439
	7	$19,635	$26,623	$33,660

The importance of pasture persistence and maintenance of stocking rate in order to reach break-even and then generate profits is clear from Figure 2, which shows net cash flow over time. If the pasture only lasts until the break-even year, the owners will at best have recouped the capital outlay but will have foregone profits that could have been made by investing elsewhere. On poorer country, such as the light granite, acidic soils on this farm, there is uncertainty over whether an adequate stocking rate can be realistically maintained for the years until break-even.

Figure 2 Annual and cumulative net cash flow – fertilizing or replacing native pasture ⁶

‘Conservation management’ options

Pastures can be manipulated by resting at the appropriate time of year to allow seed set of species that are desirable (from a conservation, production or land protection perspective). Encouraging deep-rooted perennial native grasses can increase feed production in summer and autumn, and can also reduce offsite movement of water.

Management fencing of areas of land may be desirable to enhance biodiversity values. In some circumstances, resting native pastures may also increase the abundance of native glycines, lilies, daisies and other species that are vulnerable to grazing pressure. Retiring land from production may also help to control salinity and as a response to acidification. The owners have already fenced some areas of bush, although they are used for grazing.

Two conservation management options are investigated.

Resting 100 hectares for 6-12 weeks a year. Species composition in the paddock likely to be rested varies greatly with flatter areas having a lower proportion of native grasses. Resting native pasture in spring means an average reduction in stocking rate from four DSE/ha to three DSE/ha. Fertilizer is applied every four years as is the case now.

Retire 50 hectares from production. With this option 50 hectares would be fenced and allowed to regenerate to bush. Retiring land from production will reduce stocking from three DSE/ha to nil. This land is less productive than the land to be rested. Any extra costs of controlling pest animal and weeds are not included.

In Table the net loss after tax is shown for each option. Annually, the net loss from resting 100 hectares is approximately $1,700 ($17/ha) and from retiring 50 hectares is approximately $2,300 ($46/ha). There are minor gains associated with the annual interest earned on capital previously invested in the stock, and saved fertilizer cost in the case of retiring land. Losses relate to the gross margin foregone because fewer or no livestock are now run. There are limited tax savings.

Table 6 Foregone income from resting 100 hectares and retiring 50 hectares

Area involved - ha	100	50
Estimated stocking reduction in DSE/ha	1	3
Gross margin/dse	$21	$21
Capital value per dse	$14	$14
Sale value of stock	$1,392	$2,088
Gains
Interest earned on sale value of stock (after tax)	$59	$89
Saved fertilizer costs (one in four years)		$375
Total savings	$59	$464
Losses
Gross margin	$2,105	$3,158
Net gain/loss before tax	-$2,046	-$2,694
less Marginal tax savings @ 15%	-$307	-$404
Net profit/loss after tax savings	-$1,739	-$2,290

There are three caveats to these results:

• if the owners had alternative plans to increase production from these areas, the foregone income would be higher - assuming the plans are viable,
• if other areas of the farm can carry the displaced stock for the few months that the area is being rested, there may be no stocking reduction at all. This is more likely if the rest period is in spring when surplus feed is produced,
• the feed supply from the rested area may increase in autumn - often the season of shortest supply - due to the responsiveness of some native grasses to summer rain.

Effect of combined changes on the whole farm business

There are three issues to resolve:

• will the development options increase income sufficiently?
• can the farm afford the slow response of native pastures to fertilizer?
• are the conservation management options affordable?

Results in Table show how the current farm system compares to a different farm system which incorporates the above activities at different years in the future. Leaving aside the conservation management options, net profit after tax is expected to have increased by about $10,000 p.a., or 50 per cent, by year five with fertilizing native pasture contributing little to this result. By year 10, the increase is expected to be about $13,000 p.a., or 66 per cent, with the extra increase due to fertilizing the native pasture.

Table 7 Snapshots into the future - Current and New Farm Plans ⁷

	Expected Annual Net Operating Profit after Tax
Year	now	5	10	14
	$	$	$	$
Farm without investments	21,053	21,053	21,053	21,053
Re-sow pasture		6,691	6,429	4,937
Irrigation		3,090	2,936	2,763
Fertilize native pasture		491	3,598	6,326
Farm with investments	21,053	31,325	34,016	35,079
Rest land		-2,290	-2,290	-2,290
Retire land		-1,739	-1,739	-1,739
Farm with investments and conservation options	21,053	27,296	29,987	31,050

If the conservation measures are included in the plan, total farm profit is expected to increase by approximately $6,000 p.a., or 30 per cent, by year five and $9,000 p.a., or 47 per cent, by year 10. The increase in net profit after tax is expected to be about $4,000 lower than what it would have been in the absence of these measures.

Discussion

In this paper, we have shown how to document the contribution of native pasture to the farm business, as the business is now organized and how it might be in future. On this farm, the contribution is significant. The potential to increase farm income, and thus afford the conservation management options, may be underestimated. Firstly, resting native pastures may increase production in the season of shortest supply, and thus require no reduction in stocking. Secondly, the owners’ plans to improve genetic quality of the sheep flocks may generate extra income. Thirdly, there are other development options that can be pursued on this farm. There are other opportunities to change the management of native pasture alone or in combination with a fertilizer strategy (Simpson and Langford 1996).

The strategy of fertilizing native pasture is very different to other investments. It has a very low initial investment and a long period building up to maximum productivity which can then be maintained. Farmers with high equity are likely to be able to carry the costs of fertilizing native pasture in the short-term in order to realize the long-term dividends. With careful planning, farmers with lower equity may also be able to fertilize native pasture, but less of it.

The principles for studying the place of native pastures in the farm system, and for considering conservation management options, that have been outlined in this paper can be applied to other farms no matter what the specific circumstances.

References

Crosthwaite, J. and B. Malcolm (2000) Looking to the Farm Business : Approaches to Managing Native Grassland in South-Eastern Australia. National Research and Development Program on Rehabilitation, Management and Conservation of Remnant Vegetation Report 5/00. Land and Water Resources Research and Development Corporation: Canberra.

Simpson, P. and C. Langford (1996). Managing high rainfall native pastures on a whole farm basis, NSW Agriculture, Orange, NSW.

¹ The case studies on which this paper is based were undertaken as part of project UME25 jointly funded by LWRRDC and Environment Australia under the National R&D Program on Rehabilitation, Management and Conservation of Remnant Vegetation. The project was also supported financially by the Victorian Department of Natural Resources and Environment and by in-kind support from NSW Agriculture.

² Native pasture with legumes includes those pastures where the legume content exceeded five per cent at the time of survey. This low cut-off was used given the very dry conditions.

³ Livestock growth rate, temperature, and energy required to find pasture can also effect feed requirements.

⁴ Profitability is calculated without regard for who owns capital, hence land leasing and interest payments are not included as costs. Overhead costs include an operator’s allowance of $40,000 (relatively low given two people are engaged full-time). Tax is based on an average rate of 15 per cent.

⁵ This is based on a family consumption allowance of $40,000 and interest costs and principal repayments for a medium length term loan (15 year, 8% interest).

⁶ Sensitivity to different stocking rate responses over time have not been tested eg. an initial increase over two years which then plateaus out. The stocking rate increase achieved in the first few years and the rate of change thereafter are likely to be important influences on economic results.

⁷ Current prices, i.e. real not nominal dollars.