Economics of Grazing Systems Versus Row Crop Enterprises

K.C. Moore and J.R. Gerrish1
With the eventual release of CRP lands, conservation compliance costs and environmental concerns, producers are looking for alternatives to cropping marginal agricultural land. Intensive rotational grazing systems offer the potential for greater utilization of forages in a livestock grazing operation, but the costs of developing such an enterprise can be substantial. Producers are skeptical that the returns from intensive grazing can be competitive with cropping options. Research in Missouri and Iowa has shown that livestock gains can be substantially improved under rotational grazing, and income will more than cover the costs of developing the necessary infrastructure. Net returns from these systems has also been shown to be greater than returns from cropping, especially erosive land with relatively poor crop yields.

Introduction: The relative profitability of grazing cattle as opposed to row cropping more marginal agricultural land is getting renewed attention for several reasons. The release of the first acres enrolled in the Conservation Reserve Program is drawing nearer. The costs of meeting Conservation Compliance on erosive cropland has many producers looking for alternative means of deriving income off such acreage. Government payments to farmers who grow program crops such as corn and wheat have been reduced, and in all likelihood will continue to do so. Environmental regulations loom on the horizon as another strong force driving the location of crop production.

Traditional continuous grazing systems are viewed as low-input, low-return extensive enterprises best adapted to rough land not suited to crop production. Management intensive grazing offers the potential for better utilization of grazed forage crops via rotational grazing of livestock through a series of pasture subdivisions. While the costs of fencing and watering systems can be substantial, they open up the potential for much greater returns to grazing enterprises. This paper examines the costs and potential returns of intensive/rotational grazing systems and compares them to the profits from row cropping similar land.

Materials and Methods: Enterprise budgets are used to compare the costs and returns from various production activities. Enterprise budgets are tools often used in farm management and farm planning. They represent the income and expenses of a farm, allocated to the various production activities. Both variable costs and fixed costs are included. Variable costs are expenses that vary with the level of production, i.e. seed, fertilizer, feed, veterinary expenses, etc. Fixed costs are incurred regardless of the amount of output, i.e. ownership costs for machinery, land, improvements, etc. Enterprise budgets show the contribution to profits of each production activity. They allow us to compare the profitability of various agricultural enterprises. We will construct budgets representing intensively grazed cattle and compare them to crop costs and returns.

Results and Discussion: To compare the economics of grazing versus cropping, we must first look at the costs to develop a grazing system. Pasture establishment is the first cost that comes to mind. This expense can vary widely, depending on species being seeded and method of establishment. For example, alfalfa-orchardgrass drilled into a prepared seedbed may cost as much as $150 per acre to establish, whereas switchgrass no-tilled into last years corn stalks may cost as little as $50 per acre.

Water and fence costs are the two that many producers see as the biggest hurdles. Water costs will vary tremendously depending with each application. If no ponds or wells are available, and if a water district is not accessible, costs can be quite high. But if possible, water provided to every paddock is the ideal situation. Fencing costs will also vary depending on existence and/or condition of existing fence, topography, and acreage to be fenced. Fence costs per acre can be very high if less than 40 acres are enclosed, but fall rapidly as the area increases (see Gerrish, et. al., 1992).

Take an 80 acre pasture divided into 24 paddocks as an example. If one inch high-density polyethylene (HDPE) pipe is buried and a tank placed in every cell, water system costs are $42.95 per acre. If over-the-surface one inch HDPE pipe with quick couplers is used along with one portable 100 gallon tank, water system costs are only $8.42 per acre. Using 12.5 gauge hi-tensile electric wire can keep perimeter costs down. To enclose our 80 acre pasture costs for materials and labor are $38.00 per acre. If we use permanent single strand hi-tensile for subdivision fence, with an lane in the middle to provide access to any paddock, subdivision fencing costs $38.47 per acre. We can cut these costs substantially by using 3 sets of portable fence; polytape on reels and step-in posts. This system will take more labor but costs only $7.00 an acre. Annual maintenance for this system for things like fertility and fence and water system repair are estimated at $18.32 per acre under the permanent fence system, and $14.32 under the portable fencing system.

At first glance these costs may seem high. But if we compare them to the annual costs of putting in a corn crop they don’t look so bad. Putting establishment costs aside for the moment, the $119.42 per acre costs for permanent fence and water system development on 80 acres is less than the annual variable costs for a corn crop. Missouri Management Information Records for 1993 (see Moore, 1994) show that average variable costs (seed, fertilizer, operating interest, fuel, etc.) for corn were $150.11. Add to this a charge for machinery depreciation and an 8% return on investment ($27.63 per acre), real estate taxes and depreciation ($6.73 per acre), and a labor charge of $22.67 per acre and total costs for corn per acre were $207.14. For soybeans and wheat the figures for 1993 were $90.59 and $76.84 for variable costs, $19.25 and $17.65 for machinery ownership costs, $5.17 and $4.17 for real estate fixed costs (not including an opportunity cost for land), and labor charges of $18.67 and $13.42, respectively. Putting these figures next to grazing system development costs makes the investment in fence and water seem more reasonable, especially when you consider that the assets will likely be there for 20 years or more, while the costs for cropping occur every year.

Cropping is very expensive and requires substantial investment in machinery and equipment. For marginal land, costs for meeting conservation compliance may push these figures even higher. Just to cover the costs outlined above, breakeven yields for corn are 92 bushels per acre @ $2.25/bu., 23.35 bushel soybeans @ $5.75/bu., and 38 bushel wheat @ $2.95/bu. At this level of returns, only the costs above are covered, leaving no return to land. Much of the midwest’s marginal agricultural land does not average these kinds of yields.

If we put this land into a grazing system, what kind of returns might we expect? An enterprise budget for a steer backgrounding operation can give us one idea. Assume we purchase a 500 lb. steer in the spring for $425 ($.85/lb.). Variable costs including 8% operating interest and interest on our purchase cost is estimated at $55. Add $6.73 for real estate taxes and depreciation (before system development costs), $5.00 for machinery ownership costs, and $10.00 charge for operator labor. Total costs so far are $501.73.

System development costs will be depreciated over 10 years on a straight line basis, and an 8% return on investment will be added to this. These costs plus annual maintenance total $39.82 for the permanent fence system and $23.93 using the portable fence and watering system. Add $18.00 per acre for establishing a forage base ($100 total cost over a 10 year life plus an 8% opportunity cost) and total costs for the permanent system run $559.55 per acre and $543.66 per acre for the portable system. Assuming a stocking rate of just one steer per acre which would not be very intensive, at $.72 per pound selling price, breakeven average daily gains for the steer are 1.32 lb/day for the permanent system and 1.21 lb/day for the portable system. At this level of gain, no return to land is generated (as in the breakeven yields for the crops), but development costs are recovered in a 10 year period and an 8% return on investment is also generated. These gains require only 277 pounds of gain @ $.485 value/lb. of gain in the permanent system, and 255 pounds of gain @ $.465 value/lb. of gain in the portable system. This kind of performance is certainly reachable in most instances.

Table 1 presents animal performance and economic return data for a 3-yr average from intensive grazing research at the University of Missouri Forage Systems Research Center. Several items are important from this data. First, while the steers only grazed 88 days, gains during that time were in excess of 2 lb/day. The steers forward grazed ahead of the cow/calf pairs as an alternative to cutting hay for forage management. With nearly one-half a cow/calf pair per acre plus over one-half a steer for 88 days, total beef production per acre was greatest for the most intensively managed rotation. Pasture costs represent total development costs spread over 10 years, plus annual fertility costs. Animal costs are presented on a per acre basis, as are interest costs since they are adjusted to reflect stocking rates and days grazing the system. The bottom line income over costs favors the more intensive systems. The income remaining is what is left to cover overwintering and breeding costs, plus return to land. Remember that only calf gain is measured in the table, so that calf value prior to going to grass is additional revenue available to cover costs not shown in the table.

Research published by Riley, et al. from data gathered in Iowa also shows that intensively grazed cattle can compete with cropping returns. They examined the net income per acre generated by eight different cropping alternatives and three different grazing systems on highly erodible land in southwestern Iowa. The three grazing systems were an 18 paddock and a 13 paddock intensive system, and a less intensive 4 paddock system. The cropping options were designed so that conservation compliance would be met. These alternative were compared to the net return to land under the CRP Program with payments of $70 per acre.

Riley, et al., collected data on the 13 and 4 paddock grazing systems for the years 1991-93, and for the 18 paddock system for 1992-93. Net income from the grazing systems was calculated as the value of the weight gain of the calves, with a small addition or subtraction for net hay production. The 13 paddock system gave the highest return to land, followed by the 4 paddock system and then the CRP option. The 18 paddock rotation was not stocked heavily enough to be competitive with the other two grazing systems. Only one cropping option generated positive returns to land, but well below that of the grazing options.

Literature Cited:

Gerrish, J.R., S. Marley, and R.L. Plain. 1992. Economic Interpretation of Grazing Studies. In Intensive Grazing Management, notebook provided at the Intensive Grazing Management Seminar, University of Missouri – Forage Systems Research Center.

Moore, K.C. 1994. 1993 Missouri M.I.R. Crop Costs – Projected 1995 Crop Budgets. Farm Management Newsletter FM 94-2, Department of Agricultural Economics, University of Missouri, Columbia.

Riley, B., C. Nelson, K. Kaetzel, D. Thomas, M. Duffy, and D. Strohbehn. 1993. An Economic Comparison of Rotational Grazing Systems to Eight Crop

Alternatives and the CRP Option for Highly Erodible Land in Southwest Iowa. 1993 Beef-Sheep Report, As-622, Iowa State University.

Table 1. Performance levels, costs and returns for alternative grazing systems at the MU Forage Systems Research Center, 1992-94

                              3 Paddock       12 Paddock       24 Paddock
                              ---------       ----------       ----------
  Cow-calf pairs/acre           0.31            0.38             0.48
  Grazing days - cows           225             212              215
  Grazing days - calf           181             181              181
  ADG - calf                    2.27            2.30             2.03
  Gain per acre - calf          126             156              176
  Conception rate               95.0%           97.2%            90.0%
  Steers per acre               0.35            0.44             0.54
  Grazing days-steers           88              88               88
  ADG - steers                  2.01            2.16             2.17
  Gain/acre - steers            62              83               102

  Returns per acre
  Calf gain @ $0.85            $101.75         $128.89          $134.64
  Steer gain @ $0.50             31.00           41.50            51.00
                               -------         -------          -------
  Total returns                $132.75         $170.39          $185.64
  Pasture costs/acre
  Fence (10yr @ 8.5%)          $  0.84         $  2.91          $  5.49
  Water (10yr @ 8.5%)             2.44            3.87             5.22
  Estab. (10yr @8.5%)            14.52           19.23            19.23
  Fert. (estimate)               10.44           10.44            10.44
  Clipping                        4.44            1.59             0.27
                               -------         -------          -------
  Pasture costs                $ 32.69         $ 38.04          $ 40.65
  Animal costs/acre
  Salt, minerals-cows          $  3.39         $  4.16          $  5.26
  Salt, miner.-steers             2.37            2.91             3.68
  Veterinary-cow/calf             3.26            4.00             5.05
  Veterinary-steers               2.28            2.80             3.54
                               -------         -------          -------
  Animal costs                 $ 11.30         $ 13.87          $ 17.53
  Interest costs
  $600 cow @ 8%                $  9.17         $ 10.59          $ 13.57
  $425 steer @ 8%                 2.87            3.61             4.43

  Total pasture,
  animal & int. costs          $ 56.03         $ 66.11          $ 76.18
                               -------         -------          -------
  Income above pasture,
  animal & int. costs          $ 76.72         $104.28          $109.46

1Associate Professor of Agricultural Economics, University of Missouri, Columbia, MO 65211 and Research Assistant Professor, University of Missouri – Forage Systems Reasearch Center.