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Dirk L. Godyn

Senior Economist, NSW Department Of Agriculture. Wagga Wagga. 2650


Farmers ‘live with the changes in relative profitability of crops and livestock/pastures. Many farmers find gross margin comparisons useful in helping to determine the relative profitability of various crops. But what if a change of plan is required, which puts emphasis on your pasture enterprises? The information from a simple gross margin may not be adequate.

Have you considered that crops and livestock/pasture complement each other in relation to soil fertility, breaking disease cycles and the feed demand and supply pattern, or that the change in enterprise emphasis may involve a change in livestock and machinery investment?

This paper will provide an overview of the factors that need to be considered before making a major change from crops to livestock.

Complementing Crops And Pastures

(a) Stubble

Cereal stubble is a valuable source of feed during summer. There are at least three ways in which livestock can obtain nutrients from a stubble paddock.

A proportion of grain is spilled during harvest. Depending on the efficiency of harvesting equipment, the cereal crop, time of harvesting and other factors, significant quantities of grain may be left after harvest. Kingwell et al. (1985) allowed for a 3% spillage, whereas J. Mulholland (1987, pers. comm.) estimates the spillage factor for the Wagga area to be between 3 to 5%.

Stubble itself can be a valuable source of nutrients. Livestock graze stubble selectively, so the higher quality parts,, such as the stubble leaves, are consumed before the stem. The proportion of leaf to stem is cereal crop or variety specific.

There is always a quantity of green pick available during the summer/autumn period that livestock will utilise. This will vary greatly from paddock to paddock depending on seasonality, seed spillage, the weed history of the paddock and other factors.

Estimates for the Wagga region suggest that, in an average season, wWeat stubble can be grazed for a 6 week period at a stocking rate of 6 dry sheep equivalents (DSE) per hectare (J. Mulholland, 1987, pers. comm.).

There are various ways of estimating the value of stubble. Roberts (1983) suggests that stubble can be valued for agistiment. Assuming an agistment value of 10 to 15 cents per DSE per week over the summer period, the stubble grazing value of 6 DSE over 6 weeks would be between $3.60 to $5.40.

Another way to value stubble is to buy and sell wethers to graze on the stubble, and estimate their value. Godyn and Brennan (1984) estimated the gross margins from wethers running on stubble over the summer/autumn period to be $3.66 per hectare.

Lastly, it is possible to estimate the effect that using stubble for grazing has on the average stocking rate of the farm by using a farm model. Comparing farming systems of a 4 year crop and 6 year pasture with and without stubble, stocking rates in the absence of any stubble were reduced resulting in a reduction in livestock income of $4.29 per hectare. Given the above, I have assumed the value of stubble to be between $4 and $5 per hectare.

(b) Crops for grazing and grain

Not every crop is equally affected by low cereal prices. Some crops, such as oats and barley, can provide high grain yields as well as extra grazing. This extra grazing has a high value as autumn/winter is a period of feed shortage. Figure 1 shows that after April, feed supply is severely reduced due to cold temperatures, whereas the. feed demand may increase with the onset of lambing or calving and subsequent needs of ewes, cows and their offspring.

Crop grazing, however, will usually lead to yield losses. Trials conducted at Temora by Dr E. Wolfe and Mr R. Southwood between 1973 and 1981 showed that yield losses, after 6 to 8 weeks of grazing, averaged 15%. Using a farm model, the value of grazing crops can be estimated. Including 60 hectares of grazed oats in the rotation increases the average stocking rates significantly and the average value of grazing dual purpose crops was an estimated $53.45/ha (Godyn, 1987).

(c) Nitrogen

Legume pastures play an important role in farming systems as a net supplier of nitrogen. Dear (1986) estimated that vigorous clover pastures can increase nitrogen levels by 50 to 80 kg nitrogen/ha/year (Pastures also help to restore soil structure after the cropping phase.).

Likewise, lupins can play an important role in the nitrogen budget. Although lupins remove nitrogen through grain and stock grazing stubble (see Table 1), it is on balance a net producer of nitrogen. Evans and Simmons (1986) estimated that lupins near Wagga could fix approximately 79 kg nitrogen/ha/year.

It is assumed in the following analysis that average pastures and lupin crops in southern NSW increase nitrogen levels by 50 kg/ha, so that between 5 to 6 years of pasture (or lupins) are required to produce sufficient nitrogen for 4 years of crop (depending on the crops selected). Where the pasture phase is extended, the nitrogen status will continue to increase, functioning as a bank of nitrogen in years to come.

There are different ways of valuing this build - up of nitrogen in the soil. According to Reilly (1986), any surplus of nitrogen in the soil at the end of the planning period is valued at 7O~/kg of nitrogen. For example, 50 kg of nitrogen fixed per hectare of pastures is worth $35. Because the nitrogen is not available till cropping takes place 6 or more years later, it is discounted at a constant rate of 5%.

Cropping provides a net loss in nitrogen. Nitrogen leaves the system through seed removal and residue removal. Assuming that the stubble is not incorporated into the soil, the cost of nitrogen through crop removal can be estimated. Table I gives details when the value of nitrogen is assumed at $0.70/kg.

Table 1. The value of nitrogen removed by various crops (Bacon and Osborne, 1986).




VALUE $/ha





















(d) Break in disease cycle

Good stands of legume - based pasture will also help crops by controlling plant diseases such as take - all, crown rot and yellow leaf spot. Even where good rotations are used, these diseases can still lead to losses of 3 to 5% per year. Without control, losses could be much greater (Brennan, 1986).

Because many subclover pastures in southern NSW include grasses which can also transmit soil - borne diseases, the benefits that other pasture rotations provide in disease control are not included in the analysis.

The Economics Of Livestock Pastures And Crops

A comparison of the profitability of crop and livestock enterprises usually should not be done on a gross margin. Where the area of pasture is to be increased, establishment and maintenance costs are to be considered as well as any extra capital invested in livestock in the short term. In the longer term changes in machinery investment and perhaps fences, dams and yards may need to be considered. All these costs are farm specific. Cash flow comparisons are used in this analysis to compare several options open to farmers. Although the analysis is based on regional data, conditions will vary from farm to farm. For the individual farmers it is therefore the method of analysis that is important rather than the conclusions drawn at the end of the analysis. However, the estimates used indicate the order of magnitude of the costs and returns of the systems compared.

Based on regional averages, a ratio of 4 years crop to 6 years pasture is assumed in the first cash flow analysis (Table 5). Many of the overhead costs, such as general overheads and interest on loan repayments are excluded from the analysis as they will not be affected by the changes examined.

The system of rotation in Table 5 is firstly compared with the option of moving out of cropping into a pasture dominant system of farming. The possibility of selling equipment and using contractors to establish pastures is explored in this analysis. Extra costs and benefits in terms of machinery sales, pasture improvement costs, extra livestock and soil fertility costs are included in this comparison.

The first system is also compared with a system of extended pastures where machinery is retained. Again, only extra costs and benefits are measured in terms of soil fertility, extra pasture establishment costs and livestock costs as well as changes in depreciation costs.

It is assumed throughout the comparisons that the relative profitabilities of crops and pastures will have changed to the extent that a reassessment of the pasture/crop ratio is needed at the end of year 4 (see Appendix I for crop and livestock prices in the medium term).

(a) Price increases and inflation, interest, discounting and terminal values

An inflation rate of 10% was assumed to apply to all costs. The “discounted cash flows” in Tables 5, 6 and 7 were discounted at 15%. It was assumed that the gross incomes of livestock and crop increased or decreased by the index provided by the Bureau of Agricultural Economics

(RAE, 1987).

According to Makeham (1977) the market value (terminal value) of extra livestock, nitrogen or machinery on hand at the end of the cash flow (year 4) is regarded as cash received or spent at the end of the planning period.

Interest was assumed at 15% per year.

(b) Pasture costs

It is assumed that the pasture phase is for the 6 years following a 4 year cropping phase. Pasture is undersown to crop so half of the sowing costs in the final crop year are allocated towards pasture. Owner - labour costs are not included in the analysis.

An average stocking rate of 8 DSE/ha is assumed which is slightly above the regional average but far below potential stocking rates. No herbicide or pesticide costs are charged. It is assumed that while two - thirds of the superphosphate is applied in the cropping phase, one - third is left for pastures. Where the cropping phase is shortened in the analysis, additional superphosphate costs are applied to pastures.

Table 2 gives details on the pasture costs charged in a 4 - year crop 6 - year pasture rotation.

Table 2. Pasture establishment and maintenance costs (based on fertiliser costs in Regional Budget Handbook, Reilly and Godyn, 1987).


Total costs


Annual average costs


Pasture establishment costs



Superphosphate fertiliser*



Total annual costs



(c) Livestock gross margins and pasture costs

Table 3 gives the gross margin for livestock used in the region. The table shows that at a. stocking rate of 8 DSE/ha average livestock gross margins are higher than the crop gross margins presented in Table 4. Even if average annual pasture costs are deducted, the livestock gross margins are higher. A net gross margin for livestock of $111.66 is used in the analysis.

Table 3. Returns (Livestock)


Gross $/DSE

Margin $/ha**

Average annual pasture cost $/ha

“Net” gross margin

Wethers Merino





Ewes Merino





Vealers Cattle





* Source: Reilly and Godyn, Regional Budget Handbook, 1987

** Assumes average regional stocking rate of 8 DSE/ha

(d) Crop gross margins

Table.4 gives the gross margins used for crops in the analysis. The gross margins are based on the Regional Budget Handbook for Eastern Riverina and Southwest Slopes (Reilly and Godyn, 1987).

Table 4. Crop gross margins (Reilly and Godyn, 1987)


Gross margin $/ha



Oats grazed


Barley (malting)




The extra values of stubble grazing, any extra autumn grazing or nitrogen fixation, reduction in superphosphate cost as part of these costs are allocated toward pasture costs (see section on pasture costs) and a reduction in tractor establishment cost of the undersown crop (see section on pasture costs) are benefits that are added to the gross margins in the analysis. A four year rotation consists of four crops. A three year rotation consists of wheat, lupins and oats.

(e) Money invested in livestock

If extending the area of pasture, more livestock will be required. Livestock numbers can be increased by withholding livestock from sale or by buying extra livestock. This loss of income or the extra costs of livestock purchase must be included in the analysis. It is often called the opportunity cost of extra money invested in livestock. For example, if the extra cost per weather equivalent is $30/DSE and the stocking rate is 8 DSE/ha, the extra investment per additional hectare is $240/ha. At an interest rate of 15% this represents $36/ha.

In the analysis extra livestock is purchased in year I of the cash flow analysis. In the final year of the analysis extra livestock on the farm is valued as a receipt (see section on price increases, etc) or as the salvage value of extra livestock.

(f) Investment in machinery

Two options are considered in this analysis.

(i) Mainly pasture - machinery sold

A radical option that some farmers may consider is to sell all equipment and then repurchase equipment after 4 years. It is assumed that the market for secondhand equipment is depressed and that after selling costs are accounted for, the machinery is sold at 70% of its present value. A similar set of machinery is then purchased at auction after 4 years. Its present value in constant dollars is the same but in nominal dollars it has increased at a rate of inflation of 10%.

Pastures will build up nitrogen levels at the rate specified (see section on nitrogen). High fertility levels could become a problem. It is assumed that every 8 years, pastures need to be resown. Pastures are undersown to wheat.

A contractor is used to sow and harvest the crop. Assuming I disc, 2 scarifiers, I wideline, I spray harrow and I sow and harvest operation, the cost would be $105.50/ha (Davies and Benson, 1987). Assuming regional costs for seed and chemicals (Reilly and Godyn, 1987) the total variable costs would be $148.53. At returns of $157.50/ha the gross margin would be $8.97, excluding any benefits of stubble/pasture grazing during summer.

(ii) Increased area of pasture - machinery retained

A less radical option is to extend the area of pastures and retain all machinery. Under these circumstances machinery would continue to lose value but not at the same rate. Following Godyn and Brennan (1984) it is assumed that 50% of depreciation is due to obsolescence and is hence constant and 50% is due to wear and tear which may vary. According to Brennan and Reilly (1984) it is further assumed that Present Value of this equipment is $79,100 and that the depreciation cost for 240 hectares cropped is $34.10/ha. Where the area of crop is reduced the value of machinery in year 4 is reduced to a lesser extent due to a reduction in wear and tear depreciation.

The Analysis

(a) 4 years cropping compared to a pasture-based system.

Tables 5 and 6 provide a comparison between a system of 240 hectares of crop and 360 hectares of pasture and a predominantly grazing system of 75 hectares of crop and 525 hectares of pasture. Table 6 shows that all machinery is sold in year I and that extra livestock is purchased in year 1. Extra costs during year I include extra pasture establishment costs and extra superphosphate costs which, principally, no longer come from the cropping phase. Total receipts are increased in year I but cash payments have also increased compared with those in Table 5. Income in subsequent years is slightly lower due to low returns from wheat which is now established by a contractor and because crop gross margins are inclusive of complementarity benefits specified earlier (see section on crop gross margins), bringing them closer to livestock gross margins. In year 4 the value of nitrogen in the soil has increased considerably and the property has extra value in sheep. On the other hand, if the equipment has to be repurchased because of a change in relative prices of crops and livestock, the extra machinery costs are considerable, counter - balancing the previous advantages.

In terms of the accumulated cash flow the farmer who sold the equipment is worse off. Given all the risk and uncertainty involved in making such a change, this practice is not to be recommended at price and cost levels used in the analysis.

(b) A gradual increase in pastures

Tables 5 and 6 give a comparison of a 4 - year crop, 6 - year pasture system versus a 3 - year crop, 7 - year pasture system. Because of the higher gross margins for livestock, income in year I of the 7 - year pasture system is increased. In the. same year extra livestock has to be purchased and extra pasture establishment costs and superphosphate costs are increased. As a result the net cash flow is reduced and interest earned on the accumulated cash is reduced as well. Therefore, net cash incomes in years 2 and 3 remain similar. At the end of the 7 - year period, machinery values have not been reduced to the same extent because of reduced wear and tear due to the smaller cropping area. Net cash flow in year 4 of the extended pasture system described in Table 7 is $33,524 higher than ‘net income in the present system (Table 5), because of the extra assets in terms of the nitrogen build - up in the soil and increased sheep numbers that are realised in this year. The accumulative cash flows in year 4 differ by $20,031. Compared to the “sell machinery” option described in Table 6, the accumulated cash flow in year 4 differs $32,300 in favour of the more gradual increase in pasture areas.

So far all figures used have been conservative. Estimates for the build - up of nitrogen from pasture (Dear, 1986) and lupins (Evans, 1986) are probably conservative, and one would expect crop yield to be higher as the nitrogen status of the soil is increased and farmers can be more selective in choosing the best paddocks for cropping. This reduction in cropping phase leads to higher fertility and better paddock selection resulting in a 20% increase in crop ‘yields. Therefore, net cash income in years 1 to 3 will increase by between $7000 to $8500 per year. Lastly, the livestock gross margins used were conservative. So one would expect farmers to benefit even more by increasing their pasture area. The tables indicate, however, that the key to a profitable increase in the area sown to pasture lies in better pasture establishment and higher stocking rates. Good pastures can support double the stocking rate of the regional average and, clearly, this is where the challenge of increased farm profitability lies.

Table 5



Year 1

Year 2

Year 3

Year 4








GM wheat area (ha)






GM oats area (ha)






*GM barley area (ha)






Value N pasture



Value N lupins











Extra super

Extra livestock


Reduced value machinery



Value N used by crops


























*Barley undersown to pasture

Table 6


CROP (ha) 75.00


PASTURE (ha) 525.00


Year 1

Year 2

Year 3

Year 4







Cash GM.wheat

75 ha




- 192.23

Cash GM pasture

525 ha





Sale equipment




Interest %






Salvage extra sheep



Value N balance (net*)













Extra pasture establisment costs




Extra superphosphate






Extra livestock




Extra machinery purchase
































Net balance of N produced by pastures and used by wheat


A simple gross margin comparison of crops and livestock/pasture suggests that livestock is more profitable. Crop and livestock systems are, however, complementary in terms of different types of feed that crops may provide to livestock and other factors. These complementary factors bring the profitability of crops and pastures closer together, particularly where the extra costs in terms of extra purchase of livestock and pasture establishment costs are considered compared with high interest rates. Given the unpredictability of relative prices of crops and livestock, it is usually not recommended to sell all equipment and move into a pasture dominant system for a short period. The in and out costs for machinery and livestock will usually not warrant this and the risks and uncertainty are too large.

A gradual move into more pastures while retaining the most suitable areas for cropping is a system that offers farmers higher incomes. This applies particularly where there can be a more careful selection of cropping land, higher crop yields and when efforts are made to establish and maintain better pastures.


1. Bacon, P. and Osborne G. (1986). The Importance of Nitrogen. In “Nitrogen Management on the Farms of Southern NSW”. NSW Department of Agriculture, Wagga Wagga.

2. BAE (1987). Outlook ‘87 - World Markets Policy Challenges for Australia. Bureau of Agricultural Economics, Volume 9, Number 1.

3. Brennan, J.P. (1986). Economics of Replenishing Nitrogen. In “Nitrogen Management on the Farms of Southern NSW”. NSW Department of Agriculture, Wagga Wagga.

4. Brennan, J.P. and Reilly, T.L.C. (1984). Calculating Costs of Growing Wheat. Advisory Note No. 38/84.

5. Davies, L. and Benson, R. (1987). Guide to Contract Rates. NSW Department of Agriculture, Dubbo.

6. Dear, B.S. (1986). Meeting Cereal Nitrogen Needs with Pasture Legumes. In “Nitrogen Management on the Farms of Southern NSW”. NSW Department of Agriculture, Wagga Wagga.

7. Evans, J. and Simmons, K. (1986). Meeting Cereal Nitrogen Needs with Grain Legumes. In “Nitrogen Management on the Farms of Southern NSW”. NSW Department of Agriculture, Wagga Wagga.

8. Godyn, D.L. (1987). Cereals for Grazing and Grain. Paper presented at NSW Bankers’ Seminar, Wagga Wagga, 1987.

9. Godyn, D.L. and Brennan, J.P. (1984). An Economic Appraisal of Direct Drilling. Agricultural Economics Bulletin 4, NSW Department of Agriculture.

10. Kingwell, R.S., Pannell, D.J. and Morrison, D.A. (1985). Documentation of Whole - Farm Model for the Eastern Wheatbelt of Western Australia. WA Department of Agriculture.

11. Makeham, J.P.(1974). Farm Management Economics. Gill Publications, Armidale, NSW.

12. Reilly, T.L.C. (1986). Profitable Cropping Rotations. In “Nitrogen Management on the Farms of Southern NSW”. NSW Department of Agriculture, Wagga Wagga.

13. Reilly, T.L.C. and Godyn, D.L. (1987). Farm Budget Handbook, Eastern Riverina and South - West Slopes. NSW Department of Agriculture, Wagga Wagga.

14. Roberts, E.J. (1983). Economics of Agistinent. In “Stubble Utilisation”. Proceedings Stubble Utilisation Seminar. Department of Premier and Cabinet, Perth, WA.

Appendix 1

Medium Term Outlook for Commodities*


Demand: World demand for wheat is affected by technological changes and changes in agricultural policy in importing countries. As a consequence of a combination of these two factors, the demand for wheat in importing countries, such as India and China, declined as these countries moved towards self - sufficiency. Major efforts by the USSR to increase wheat production through more intensive cultivation methods are also expected. The Soviets are further improving their post - harvesting activities. As a result, Soviet production is likely to move up in the early 1990s even though the 1987 harvest is expected to be depressed due to poor climatic conditions.

China, on the other hand, is expected to have reached a plateau in production. The incentive to wheat producers may even decrease as more conservative policies are implemented. Although the potential demand for wheat - derived products is large and could increa’se, Japan and Europe are projected to maintain imports at current levels.

Supply: Europe has ever - increasing surplus of wheat which is costing the European Community more every year. Strong European currency has made it increasingly difficult to sell this surplus. Some political manoeuvring is underway to restrict the area sown in order to maintain production levels. The United States is also expected to maintain current levels of exports. Productionlevels in Argentina, Canada and Australia are expected to be reduced.

Given high levels of wheat stocks of some 87 m tonne in 1986/87 and a modest growth in imports and a modest reduction in exports, it may take many years to clear current wheat stocks. The best prospects are in poor seasonal conditions such as occurred in 1972/73 and 1974/75. Wheat prices are expected to increase in the 1990s.

Coarse grains

The BAE expects a 3% reduction in world production of coarse grains and increased demand in response to low prices. As a result, world stocks, which were an unprecedented 404 intonne in 1987/88, are likely to fall which will provide some scope for recovery from then on.

Grain legumes

Only a very small proportion (7%) of grain legumes is traded on the world market. This means an inherently unstable situation so that relatively small increases in world supply have big effects on prices. Given the efforts by many grain legume importing countries to become self - sufficient and the interest taken by cereal importing countries in grain legumes, forecasts in the medium term are not optimistic.

*Source: BAE Outlook Conference, 1987, updated by recent discussions with BAE officers.


In 1986 prices of oilseed crops in the USA were underpinned by the US soybean loan rate. Although record oilseed stocks have overhung the world market, this build up in stock may come to an end in 1987/88. The US soybean loan rate will be lowered by a further 5% and areas sown to soybean could fall by 6%. Canadian plantings could also be cut back, but EEC plantings could rise. In the medium term, production in China, India and Brazil is expected to increase significantly. Therefore, present prices can be expected to be maintained for next year but real oilseed prices are expected to fall in the medium term.


Wool prices are expected to stay buoyant in the short term, but wool production is expected to expand in Australia in the medium term. As a result of this increase in production and a relatively stable demand, a downward pressure on prices is expected in the medium term at an average rate of some 4% per year. Stocks are presently low but depending on reserve prices, could be expected to increase towards the 1990s. Changes in exchange rates will influence prices and minimum reserve prices set by the Australian Wool. Corporation and, in turn, will influence wool stocks.


Beef, like most commodities, goes through production cycles. From the 1930s until about the 1960s these lasted some 10 to 12 years. The demand patterns have changed, however, affecting the cycle and hence its predictability. Forecasts for beef are good for the next two years because of a st’rong demand for beef in the USA, Japan and Korea. But the BAE warns that prices in the early 1990s could fall dramatically for a number of reasons. Low feed costs in the USA, in response to low cereal costs and high beef prices, will lead to herd buildups. By 1990 herd buildups in Australia, New Zealand, Canada and the USA may trigger US beef import restrictions, affecting the entire world market, including our expanding Japanese market and our potential Korean market.


The forecast for sheepineat is a mixed one. In response to high prices for wool and lamb, the sheep flock is expected to grow to 163 million by March 1988. Because producers are withholding stock from sales, mutton prices are likely to increase in the short term. Lamb slaughterings are expected to increase in response to higher prices, putting a slight downward pressure on lamb prices.

Beyond 1989, lamb prices are expected to fall more sharply in reaction to the expected lower beef prices and subsequent increased beef consumption. Mutton prices are expected to improve in the early 1990s in response to an expected recovery of oil prices in the Middle East.

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