1. Economics of Improved Grazing Systems
Dr. Curt Lacy
Extension Economist-Livestock
University of Georgia
Economics of Improved Grazing Systems

2. Will Improved Grazing Management Pay??
It depends!!
Additional revenue
Reduced cost
Additional expense
Reduced income

3. Speaking of costs Variable Costs Fixed Costs
Aka direct costs  changing these impacts level of production.
Fertilizer
Seed
Feed
Vet
Aka Indirect costs  changing these has no impact on production
Depreciation/interest or principal and interest payments (prorated establishment costs)
Taxes
insurance

4. Partial Budgeting Form for Analyzing Grazing Profitability
Additional Costs
Additional Revenue
Additional fencing costs
Increased fertilizer costs
Increased labor costs
Additional Cow investment
Increased conception
Increased weaning weights
Higher stocking rate
EQIP/CSP???
Reduced Revenue
Reduced Costs
Reduced stocking rate
Reduced weaning weights
Lower fertilizer costs
Reduced equipment costs
Reduced feed needs
Total additional costs +reduced revenue = A
Total additional revenue +reduced costs = B
Total Profit = B-A

5. The One Question How do I figure fixed costs? Depreciation + Interest
Principal + interest

6. Depreciation + Interest
AKA “Economic” method of determining fixed costs.
Best way to calculate economic fixed costs.
Ignores cash position, requirements, and cash-flow.
Uses:
Purchase price
Salvage value
Useful life
Intermediate interest rate

7. Depreciation + Interest on Average Investment

8. Principal + Interest AKA Amortized payments
Utilized when considering cash flow requirements.
Uses:
Purchase price
Down payment
Years financed
Interest rate

9. Principal + Interest

10. Example for fixed cost

11. Purchase a $35,000 hay baler Economic Method Amortization Method
$35,000 purchase price
$10,000 salvage value
7 years useful life
Interest rate = 6%
$35,000 purchase price
$0 down
7 year financing
Interest rate = 6%

12. Depreciation + Interest

13. Depreciation + Interest

14. Amortized Payment

15. NUMBER OF YEARS TO PAYBACK
Annual Payments for $1,000 at Various Interest Rates and Payback Periods
INTEREST RATE
3.00%
4.00%
6.00%
8.00%
10.00%
12.00%
NUMBER OF YEARS TO PAYBACK 1
($1,030.00)
($1,040.00)
($1,060.00)
($1,080.00)
($1,100.00)
($1,120.00) 2
($522.61)
($530.20)
($545.44)
($560.77)
($576.19)
($591.70) 3
($353.53)
($360.35)
($374.11)
($388.03)
($402.11)
($416.35) 4
($269.03)
($275.49)
($288.59)
($301.92)
($315.47)
($329.23) 5
($218.35)
($224.63)
($237.40)
($250.46)
($263.80)
($277.41) 6
($184.60)
($190.76)
($203.36)
($216.32)
($229.61)
($243.23) 7
($160.51)
($166.61)
($179.14)
($192.07)
($205.41)
($219.12) 8
($142.46)
($148.53)
($161.04)
($174.01)
($187.44)
($201.30) 9
($128.43)
($134.49)
($147.02)
($160.08)
($173.64)
($187.68) 10
($117.23)
($123.29)
($135.87)
($149.03)
($162.75)
($176.98) 15
($83.77)
($89.94)
($102.96)
($116.83)
($131.47)
($146.82) 20
($67.22)
($73.58)
($87.18)
($101.85)
($117.46)
($133.88) 25
($57.43)
($64.01)
($78.23)
($93.68)
($110.17)
($127.50) 30
($51.02)
($57.83)
($72.65)
($88.83)
($106.08)
($124.14) 35
($46.54)
($53.58)
($68.97)
($85.80)
($103.69)
($122.32) 40
($43.26)
($50.52)
($66.46)
($83.86)
($102.26)
($121.30)

16. NUMBER OF YEARS TO PAYBACK
Annual Payments for $1,000 at Various Interest Rates and Payback Periods
INTEREST RATE
3.00%
4.00%
6.00%
8.00%
10.00%
12.00%
NUMBER OF YEARS TO PAYBACK 1
($1,030.00)
($1,040.00)
($1,060.00)
($1,080.00)
($1,100.00)
($1,120.00) 2
($522.61)
($530.20)
($545.44)
($560.77)
($576.19)
($591.70) 3
($353.53)
($360.35)
($374.11)
($388.03)
($402.11)
($416.35) 4
($269.03)
($275.49)
($288.59)
($301.92)
($315.47)
($329.23) 5
($218.35)
($224.63)
($237.40)
($250.46)
($263.80)
($277.41) 6
($184.60)
($190.76)
($203.36)
($216.32)
($229.61)
($243.23) 7
($160.51)
($166.61)
($179.14)
($192.07)
($205.41)
($219.12) 8
($142.46)
($148.53)
($161.04)
($174.01)
($187.44)
($201.30) 9
($128.43)
($134.49)
($147.02)
($160.08)
($173.64)
($187.68) 10
($117.23)
($123.29)
($135.87)
($149.03)
($162.75)
($176.98) 15
($83.77)
($89.94)
($102.96)
($116.83)
($131.47)
($146.82) 20
($67.22)
($73.58)
($87.18)
($101.85)
($117.46)
($133.88) 25
($57.43)
($64.01)
($78.23)
($93.68)
($110.17)
($127.50) 30
($51.02)
($57.83)
($72.65)
($88.83)
($106.08)
($124.14) 35
($46.54)
($53.58)
($68.97)
($85.80)
($103.69)
($122.32) 40
($43.26)
($50.52)
($66.46)
($83.86)
($102.26)
($121.30)
Annual Payment = 35 X = $

17. Example Partial Budget

18. Replace 100 Acres of Commercial N with Clover
Current Situation
120# N/acre
N cost $0.70/lbs.
2 acres/cow
90% calf crop with 500#
Clover
3#/acre of $5.25/# - good for 3 years
Additional 10# P/acre $.60/#
Additional 10# K/acre $0.55/#
2.13 acres per cow
Weaning weights increased 20#

19. 100 Acres in Clover Additional Costs Additional Revenue
3#/acre of Durana or good for 3 years = $525/year
Additional 10# phosphorous/acre per = $600
Additional 10# potash/acre per = $550
Total additional costs = $1,675
Additional 20 pounds on calves from 43 90% calf crop sold for $125/cwt. = $968
Reduced Revenue
Reduced Costs
Savings on 2 applications of 60#/acre of commercial $0.70/pound = $8,400
7 fewer $400/cow = $2,800
Stocking rate reduced by 15%  7 90% calf crop, 500 pound $125/Cwt. = $3,938
Total additional costs +reduced revenue =$5,613
Total additional revenue +reduced costs = $12,168
Total Profit = $6,555

20. Impacts of Fertilizer Cost & Usage on Profitability

21. What if Pounds Weaned do Not Increase?

22. Two questions What happens if we “grow” into more cows?
How do I handle shared assets and liabilities?

23. Growing into more cows Same process as with partial budget.
Develop an “average” cash flow projection sheet for years after you reach herd objective
Develop projected annual cash flows for 5-7 years with and without additional cows leading up to the year where you are fully online.
Sum the annual cash flows for the two scenarios.
Make you decision based on potential net income and your risk tolerance.

24. Shared Assets/Liabilities
Common question when considering co-grazing.
Also comes up when land is used for more than one enterprise or purpose.
Tractor used for crops, cattle and hay
Combination equipment shed/livestock facility
Same principle applied to allocating overhead expenses.

25. Allocating assets/liabilities-the contribution approach
Determine the total cost
Fixed
Variable
Can you identify specific costs that can be allocated to specific enterprises?
Extra expenses for goat or sheep
If not, allocate expenses by percentage of income.
If co-grazing cows and sheep and cows generate 60% of income then charge cows 60% of expenses.
Apply enterprise contribution percentage to appropriate variable and fixed costs.
*** If one enterprise will not cover its variable costs, it can’t reduce fixed or total costs

26. Important Considerations
Include only changes
Make sure expected production increases are relevant to your scenario
Take into account the start up period
Don’t base calf prices on today’s prices
Think it through!!

27. Economics of Improved Grazing Systems
Dr. Curt Lacy
Extension Economist-Livestock
University of Georgia
Economics of Improved Grazing Systems