An inventory model is used to determine least-cost fodder reserves for sheep in the Hamilton area of Victoria. Unlike earlier studies a grazing model is used to generate feeding requirements and thus allows for the gradual onset of drought and the associated rise in feed prices. Compared with studies based on probabilities of effective rainfall, the approach used measures more accurately the way in which drought incidence is affected by the seasonal pattern of pasture production in relation to animal requirements. The grazing model facilitates a study of the relative severity of drought at a range of stocking rates and a number of probability distributions are identified. The refinements achieved by using a grazing model also allow a more realistic treatment of penalty costs than the usual prescription of a constant drought price for fodder. Furthermore it allows for the determination of least-cost fodder reserves for a range of stocking rates, and thus a comparison between stocking rates is possible because allowances can be made for the effect of different timing and level of feeding on feed costs. The sensitivity of the least cost reserve to changes in acquisition cost and rate or interest is examined for various stocking rates.