Stocking rate economics

Bill Holmes
Formerly Queensland Government

The law of diminishing returns and the fallacy of numbers

More cattle usually means more production in total but some loss of production per head. Eventually, more cattle add no more to total production (or may even reduce it). This effect is magnified by price penalties for slower growth or poorer finish.

Denial of the law of diminishing returns leads to ‘the fallacy of numbers’, that more cattle are always better than less.

Should breeders be stocked the same as steers?

  • Overstocking with steers is quickly penalised by market discounts for age or finish.
  • Overstocking with breeders may be redeemed to a degree by supplementation but will be penalised by poorer branding rates, poorer weaners, and lower cull cow weights.
  • Optimum SR for breeders (adult equivalents per 100ha) is probably higher than for steers.

 Other considerations in stocking rate decisions

  • Seasonal risk, especially with breeders
  • Keeping options open
  • Maintaining resource productivity (for grazing)
  • Maintaining biodiversity (not the same as resource productivity though connected).

Resource costs of exploitive stocking rates

Grazing land condition class scores of A (best), B, C, D describe land condition and production capability (see Grazing land management material or attend a workshop).

Heavier stocking damages pasture plants and changes pasture composition so that over time total forage production diminishes. This deterioration continues if overstocking persists (declining condition class). If not too degraded, partial or full recovery may be achieved by wet season spelling and reduced stocking.

Differences in land condition may be valued using discounted cash flow analysis of future productivity (spreadsheet application available) of each condition class. To date these effects have not been factored directly into the analysis of stocking rate research, but their inclusion would favour more conservative stocking rates.

The cattle business and the asset business

Purchasers of land acquire the capacity of the land to produce, the satisfaction and social rewards from owning it, and the prospect of asset appreciation. Only the first produces a cash flow, but the last may be the most important.

Many observers see only the productive capacity of the land and judge the prices paid to be absurd. Purchasers and lenders may try to justify the price paid by overusing the productive capacity, in the process degrading and devaluing the more important underlying asset.

Over-using the short term productivity of the land to achieve cash flow objectives will have a resource (asset) cost, which should be acknowledged. Widespread buyer (and perhaps lender/valuer) ignorance of the economic value of land in better condition, or indeed of what indicates better condition, contributes to the over-valuation of degraded land, and contributes to the failure to consider the asset cost of exploitive grazing management.

Considerations for those comparing SR economics

Breedcow Dynama software is a useful tool for comparing stocking rate options.

Applying marginal analysis

  • Focus just on what changes, don’t try to analyse the universe.
  • For livestock, use gross margins (GM) rather than whole property net income, but be careful to note any changes in costs not included in GMs.
  • Determine a suitable resource base for comparing stocking rate (SR) – e.g. 100ha.
  • Think of SR determination as a sequence of decisions to increase SR/100ha beginning at zero.
  • Determine GM for first data point relative to zero SR – is it OK?
  • Determine GM for second data point relative to first – is the extra still OK?
  • Continue for all data points
  • Determine the last increase to provide a worthwhile improvement in GM.

Impact of the cost of livestock capital

Each SR increase requires more livestock capital, as cattle are very capital intensive.

Include (interest) cost of livestock capital in GM calculation – i.e. use GM after provision for livestock capital. Including the cost of livestock capital usually defines a (much) lower optimum SR than indicated by GM ignoring capital. Many past conclusions on the apparent profitability of higher SRs were possible only because the cost of livestock capital was ignored.

Do cattle prices make a difference?

Relative prices (or values if own cattle) are critical. Purchase price (stores) may differ from sale price (fats), and sale prices for various stocking rates will differ according to age and finish at turnoff weight.

Temporarily depressed prices may lead to heavier stocking rates as owners hold stock against the prospect of a recovery.

Some data from “Wambiana” grazing trial (1997/98 to 2003/2004)

Data from ‘light’ and ‘heavy’ stocking treatments is used to demonstrate analysis of stocking rate experiments using steers. Results of the initial analysis were:

Per 100 hectares Light SR* Heavy SR* Difference
 (10AE)  (20AE)
Adult equivalents per 100ha 10.18 20.11 9.93
Annual weight gain (kg) 1,453 2,276 823
Gain/AE 142 113 83
Value of gain ($0.20/kg discount for slow finish) $2,630 $2,203 -$427
Supplement costs $58 $180 $122
Gross margin $2,572 $2,023 -$549
GM/AE less interest on livestock capital @ 10% $1,924 $722 -$1,202
GM/AE $253 $101 -$55
GM less interest/AE $189 $36 -$121
GM less interest/ha $19.24 $7.22 -$12.02
If Discount for slow finish is only $0.10/kg:
Value of gain $2,630 $3,154 $524
Supplement costs $58 $180 $122
Gross margin $2,572 $2,974 $402
Gross margin less interest @ 10% $1,924 $1,673 -$251
GM/AE $253 $148 $40
GM less interest/AE $189 $83 -$25
GM less interest/ha $19.24 $16.73 -$2.51

*10 adult equivalents per 100 hectares equates to one in 10 hectares (1 in 25 acres), and 20AE to one in 5 hectares (1 in 12.5 acres).

The slower weight gain at the heavier stocking rate, if applied to a bullock production system, would result in a beast finishing approximately one year later (as a four and a half year old bullock instead of three and a half years).

Price assumptions are for a purchase price of $1.80/kg live, a sale price of $1.80/kg for the faster finishing animals (low SR) and $1.60/kg or $1.70/kg for the slower ones (high SR). The $0.20/kg or $0.10/kg discounts for slower finish are clearly fatal for the high SR treatment.

In the absence of a discount for older finish (not shown), gross margin less interest would be about $700/100 hectares ($7.00/ha) higher for the high stocking rate (an unlikely price scenario).