The Sandhills of Nebraska (USA) are stabilized by grasses, but the range and density of woody species have greatly expanded in recent decades. A shift from grassland to woodland may have substantial economic and ecological consequences. To identify thresholds in this state conversion, we measured herbaceous plant and tree canopy attributes at eleven sites ranging in tree density from zero trees ha^-1 (open tallgrass prairie) to 1218 trees ha^-1 (seventy year-old, even-aged stand of Pinus ponderosa). We measured above-ground herbaceous production by functional group (C₃ grasses, C₄ grasses, shrubs, forbs, and sedges) at each site in 2005 and 2006 using a quadrat method. We used the modified step-point method to estimate relative species composition at each site. We estimated tree canopy leaf area index (LAI) in each clipped area at every site by using GLA software to analyze hemispherical photos. To model herbaceous production we used regression analysis for log-normally distributed values. At the most densely wooded site (with LAI 2.0), we saw a 95% reduction in herbaceous production, compared to open grassland. Forty percent of this reduction had occurred in plots with LAI < 0.3. Plots with LAI > 0.3 showed continued linear reduction in understory production, but at a much shallower slope (-650 kg ha^-1 LAI^-1). The overall reduction is partly a result of conversion from relatively productive C₄ grasses to less-productive C₃ species, but we did not see significant changes in relative species composition until LAI > 0.6. These drastic reductions in grassland herbaceous biomass occurred on sites with less than 100 trees ha^-1, a remarkably low occupation threshold. Such significant reduction of forage, conversion of habitat and shift in productivity in such areas indicates a need for early woody species removal to prevent economic and ecological damage in this system.