Profitability and risk evaluation of novel perennial pasture systems for livestock producers in the high rainfall zone

© 2011 Claire D. LewisIncreased awareness by farmers, scientists and farm advisors of the potential to expand the role of perennial pastures in livestock grazing systems has lead to the development and evaluation of new perennial pasture systems for livestock production in the high rainfall zone of south west Victoria. Increased stock carrying capacity per hectare compared to current common practice has been reported. In this study, the question investigated is: ‘Does investing in these new perennial pasture systems makes economic and financial sense considering risk for livestock graziers?’. A representative farm case study approach has been used to investigate the economic and financial merit, and the risk profile, of investing in either of two perennial pasture systems compared to current common practice. The representative farm was based on current common practice in the high rainfall zone in south west Victoria, running predominantly sheep producing wool and prime lambs, with a smaller beef enterprise. A partial discounted cash flow budget with a whole farm perspective was constructed to analyse investing in the new pasture systems on a 100 hectare portion of the farm. Investment in the perennial pasture systems was analysed over 12 years. The analysis investigated the effect of both seasonal and price variability on the performance of the new perennial pasture systems over time at a variety of stocking rates. The impact of establishment failure was also examined. The output of the model included the economic measures of net present value and internal rate of return, and the discounted net cash flow enabled financial evaluation. Size and timing of peak debt, time taken to return to positive net cash flows and loan servicing ability were analysed. The risk profile of the alternative future options was established using mean-variance efficiency analysis. Results from the analysis for the 100 hectare portion of the farm showed that, in general, both perennial pasture investment options promised returns on the capital invested of around 20%, which was greater than the opportunity cost of capital. The extra annual net cash flows generate was sufficient to service a 12 year loan under the conditions tested. The good performance of the new perennial pasture systems compared to the existing ‘Base Case’ was largely because supplementary feed requirements per head were reduced during the Summer/Autumn feed gap in most years and increased production per effective hectare that allowed higher stocking levels. Establishment failure substantially reduced the potential returns from the perennial pasture investment options, with the greatest effect seen at lower stocking rates. Whilst an advantage of the perennial pasture investment options was their ability to increase stocking rates per hectare and hence increase annual net cash flows, the analysis showed that the increase in intensification of the system also increased the variability of net cash flows over time. This is important information for producers considering such investments as the extra benefit of increased income per hectare comes with an associated increase in risk. It is up to the individual decision maker to evaluate this information from their own perspective on risk and returns. The results and conclusions drawn from this analysis are specific to the analysis conditions set. Small changes in the assumptions used often had large effects on the performance of the new perennial pasture systems over time. This analysis investigated the investment for a small portion of the total farm area, and larger areas being developed for pasture at any time would have greater implications for the farm balance sheet. Further work is required if more substantial proportions of the farm area is to be transformed to utilise these perennial pasture systems