Pioneer Technical Insight

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A Forage Production Unit (FPU) is a block of land that is used to produce forages (maize and a winter crop) for contract sale or for a farmer's own use. FPUs provide an excellent level of return and are an excellent option for:

• Farmers who wish to exit dairying but retain their land.
• Dairy farmers who want to secure cost-effective feed that can be harvested and carted to the milking platform.

This technical bulletin will discuss FPUs, the likely financial returns, management input and sustainability.

As well as delivering an attractive income, an FPU provides lifestyle benefits when compared to milking cows. Almost all of the work is done by a local agricultural contractor leaving you more time to pursue off farm interests.

Farmers can choose to stay on the land rather than moving into town when they wish to retire from milking. Not all farmers enjoy finding and managing staff. In most cases an FPU can be run without the need for additional labour.

By retaining the land, you continue to reap the benefits of capital gain and it can be sold down the track when you are ready to move into town or kept in the family long-term.

For most farmers the change to an FPU starts with the sale of stock, shares and sometimes plant and machinery. Around 80% of the farm is planted in crops and the remaining 20% is kept in permanent pasture providing an area for heifer grazing and also the ability to develop a cropping rotation.

Maize silage is the crop of choice for Forage Production Units. This is because it has the highest yield potential of any commercially grown crop in New Zealand. A deep rooting structure and excellent drought and disease resistance means that yields are relatively stable year after year. Quality is consistently good and there is a stable ongoing market for maize silage for sale into the New Zealand dairy industry.

The FPU generates three streams of income:

• Capital investment income from the investment of the money generated through the sale of stock and Fonterra shares.
• Cropping income from the sale of maize silage and a winter crop (e.g. Italian ryegrass) which is grown over the winter months between maize silage crops.
• Heifer grazing income generated from the area of the farm that is not under crop.

In this example an average 70 ha Waikato dairy farm milking 200 cows and producing 63,000 kgMS is converted to a Forage Production Unit.

Livestock values are 1:

• Cows $1400 per head
• Heifers $1200 per head
• Rising 1 year olds (i.e. last year's calves) $750 per head.

The Fonterra Fair Value Share Price is $4.52¹ and the money that is generated through the sale of stock and shares is invested at 3.6% per annum.

A total of 80% of the land is cropped in maize silage followed by Italian ryegrass. The maize silage yields 20 tDM/ha/year and the Italian ryegrass yields 4 tDM/ha/year. Both maize silage and Italian ryegrass are sold for 18 c/kgDM standing.

It is assumed that it costs $2,432 to grow a hectare of maize silage² and $250 to grow a hectare of Italian ryegrass.

Heifers are grazed at 4 per hectare and the return is $7 per head per week.

Capital investment income
The capital investment income is as follows:

Cropping income
The cropping income is as follows:

Heifer grazing income
The heifer grazing income is as follows:

Total income
The total income for this operation is:

¹ Dec 2009
² Pioneer^® Brand Maize Silage 2010-2011 catalogue

The benefit of this FPU system is that there are three streams of income. The income generated from forage (maize plus standing grass) sales is the largest and represents around 70% of the total return. The impact of changes in maize silage yield and selling price on the total return from the FPU is shown in the table below.

As you can see, overall farm income is good over a range of maize silage yields and selling prices. There are a number of expenses that must be deducted from this gross margin analysis. They include:

• Capital and interest repayments on the land
• Depreciation
• Power, rates and insurances
• Wages and/or personal drawings.

One of the big advantages an FPU is that it requires a relatively low level of time input and expertise to manage. All of the cropping operations from spraying and cultivating through to harvesting can be done by a local contractor. Cropping management input is limited to coordination of the contracting activities and crop walks especially during the early part of the season.

The heifer grazing may require some time input for moving stock although that will depend upon the individual grazing contract.

The 20% of the farm that is kept in permanent pasture provides a rotation for the cropping land helping to increase long term sustainability. For some farms the cropping land can be used as a nutrient sink for local dairy farm effluent reducing the fertiliser requirements and holding or increasing soil organic matter levels.

There are a number of other options for farmers wishing to investigate maize cropping. These include:

• Leasing land to a local contractor who will grow and sell crops and manage the entire operation.
• Growing maize for grain for sale to a local drier. Currently the demand for maize grain is high and it is an excellent option particularly for farmers who do not have a dairy market for wet forages in close proximity to them.

Pioneer^® brand products has developed a comprehensive spreadsheet that will help you to analyse the potential returns from an FPU on your farm.