Does My Ranch Make a Profit? Should It?Written by Dallas Mount
I recently had an interesting email discussion with a few ranchers over the subject of profit. A well-known rancher in his newsletter commented, “If you can’t make a decent profit at today’s prices, you need to get out of the cow/calf business.” I wrote back explaining that most of the ranchers I work with are not making an economic profit today.
I have the privilege of working with some of the best, most profit-minded ranchers in the region, and I expect if they are challenged, then others are in an even tougher spot. I think the real issue is that we are likely working with two definitions of profit. Many ranches are satisfied if they can pay off the operating line at the end of the year or have enough money left over to pay for groceries. Having positive cash flow is different from making an economic profit.
For a livestock business to show an economic profit, we have to kick out the economic crutches we like to prop up a livestock business with. For example, if you sold your cowherd, what could you lease the grass to someone else for? Charge your cows for this as an opportunity cost for grazed feed. What about that hay you could have sold? Charge them market price for that, as well. This continues with labor. If our cows make an economic profit, then they don’t need to be propped up with free labor from ownership. Charge the cows what it would cost to replace you and other owners for your contribution to the business.
In today’s market, once we consider these often ‘non-cash’ expenses then most ranches are not making an economic profit.
Using this definition does your livestock business make an economic profit? If the answer is no, then the next question is – should it? I put a lot of emphasis in my work on profitable ranching. Maybe I put too much emphasis on this. If you are comfortable and content with where you are and the outcomes your ranch is producing, then maybe there is no reason to be overly concerned with producing a profit.
I think the reason I put so much emphasis on profit is that those with whom I’m working want their ranch to do more. Perhaps they want to create room for another generation. Maybe they want to expand the business. Maybe they want to create a nest egg outside of the ranch for retirement or maybe they like the challenge and excitement of creating and leading a profitable business. For me personally, it would not be motivating to work for a business whose ambition was “don’t go broke.” It would be much more enjoyable to be a part of something focused on winning.
The email I received from the rancher responding to my comment started this way, “This model makes it impossible to make a cow/calf operation pencil out.” A classic quote from Henry Ford comes to mind, “Whether you think you can or you can’t, either way you are right.” It is easy to just dismiss this and blame it on the markets or the weather as the chief factors that determine your profitability.
However, it is much more meaningful be proactive. This could be learning how to do an economic analysis of your business and discovering the enterprises that are working and those that are not or going the next step and comparing the economic performance of your business to key benchmarks and developing strategies to leverage your advantages and address your weaknesses.
After all, if someone is doing it, it might be possible. Have a great summer, and I look forward to hearing from you.
Simple balance statements can inform producers about their total net worthWritten by Natasha Wheeler
“If we’re going to be a farmer or rancher, we have to have a lot of different things that we’re good at. We have to be a little bit of a mechanic, a little bit of an electrician, a little bit of a plumber and a little bit of a vet, but we need to have a little bit of a business mind as well,” remarks Justin Mills of Platte Valley Bank.
Having a business mind includes keeping track of the numbers, not only for conversations with the banker but also for the producer’s own benefit.
“If I never look at the numbers, how do I know if I am making or losing money?” questions Mills.
Mills acknowledges that producers work hard, getting their hands dirty, pulling calves, setting fences, irrigating and more, but penciling out the finances can often get pushed to the side.
“The bank looks at numbers a certain way, but the producer, on the other side, may look at them with a different perspective,” he comments.
As a producer, it can feel like the bank needs endless paperwork and financial data, but Mills suggests taking a different perspective.
“We need to know how this stuff works. If I go and sit down with the banker and I’ve put all my numbers and projections together, I know if things are going to work,” he explains.
One of the tools producers can use is a simple balance statement, which includes information such as cash equivalents, inventories and debt possessed by the producer.
“The balance statement is going to give us a snapshot of where we are from a financial standpoint,” Mills says.
The balance statement accounts for everything the producer owns and all of the money they have in accounts or investments, as well as all of the money that they owe for payments, loans or other accounts. The final product that is calculated is then considered the net worth.
“It’s not about who has the highest net worth. It’s about how things are changing. Are the finances growing? If they are not growing, are there legitimate reasons? We want to look at the changes,” Mills states.
In agriculture, there are many valid reasons for drastic changes, and it’s possible to have a net worth that goes up one year and down the next. Using the balance statement can help producers – and their bankers – see how those numbers play out.
In addition to a balance statement and keeping records of operation finances, Mills suggests putting projections down on paper.
“Some of the same numbers we use to fill out our balance statements can also go on our projections sheet,” he explains.
He continues, “Projections are sometimes a little more intriguing because now we can start to dream. But how many of us do that in the cab of our tractors and how many of us actually put it down on paper?”
Writing down projection numbers helps to zero in on what has to get done to achieve certain goals.
“If we aim at nothing, we are bound to hit it,” notes Mills.
Filling out a projections sheet includes considering likely incomes, such as crop and livestock income, as well as likely expenses, such as taxes, utilities, veterinary bills, etc.
“I always project out about 10 years for what I am going to do,” he remarks.
Taking advantage of tools
Mills also suggests learning how to use a program like Microsoft Excel to keep track of variables and financial complexities.
“We can do projections without Excel, but if we want to utilize the technology we have in front of us, we can do a lot more with the ‘what-ifs,’” he says.
He also explains that projection numbers are not set in stone. Producers can put in their best estimates and change those as different variables affect the finances.
“Don’t feel like we have to be locked into exactly what the sheet says, but, if we put some of the numbers down, it helps us to know where we are,” he remarks.
In the same way that school children receive grades to get a bearing on how well they understand the material, producers should have some kind of benchmark to track their progress.
“We need to know what our net worth is,” states Mills.
Justin Mills spoke at the Future Cattle Producers seminar in Casper in April.
Feed Costs Computer software helps ranchers analyze feed and gain costsWritten by Natasha Wheeler
Riverton – “A lot of beef ration software is available,” commented Scott Cotton, University of Wyoming Extension educator.
Using a variety of computer programs, producers can input data from their operation to analyze the economics of feed efficiencies.
“Most university software is basically designed to benefit people, so even though there is sometimes a fee, the programs are usually unbiased, based on research and don’t target any specific feed, mix or feed brand,” he noted.
Commercial software is often a variation based on the university designed programs and may encourage the use of a specific company’s products.
“Some of our research projects are funded by a company, but when a producer comes into an Extension office, we don’t care what brand they are using. We are going to work with whatever they choose to use,” he added.
There a number of programs producers can use, depending on the data accuracy they want and the time investment they are willing to commit. Some of these programs include Nutrition Balancer (Nut-Bal), Standardized Performance Analysis (SPA), Beef Ration and Nutrition Decision System (BRaNDS) and Feed Cost Calculator.
“Nut-Bal, created by Texas A&M, is a really good comprehensive program,” Cotton said.
USDA Natural Resources Conservation Service (NRCS) currently advocates the use of Nut-Bal, although it is expensive and time-intensive.
“To do it right, we have to go out, crawl around, get a less than one hour-old fecal sample and get it analyzed at $40 per sample,” he explained.
The test results are based on residue in the fecal matter, determining what the cow has actually been ingesting.
“It is probably the most accurate test,” he continued, “but it is also the one that most producers get involved with and, after about six months, say they just don’t have time to go out, follow the cows and take manure samples every week.”
SPA is an elaborate program that was developed by a group of economists to analyze cow production.
“It can tell us what our average cow profitability is on a five- and ten-year basis,” he stated.
Calculations from the program, after a few years of input, make predictions such as how many live calves a single cow will produce over her lifetime.
“The problem is, it almost takes an economist to run the software. It is very detailed, and it requires a lot of input,” he commented.
Cotton predicted that it could take a producer 20 hours of data entry to submit all of the specifics for their operation into the program.
“I like BRaNDS. It is one of the two programs I use,” Cotton stated.
It was developed through Iowa State University and the University of Nebraska and analyzes data about specific animals, location and feeds.
“Producers can also put in what their weather conditions are, downloaded from the National Weather Service,” he added.
Once all of the data is entered, producers can adjust input levels to determine the ideal combination of feeds and supplements.
Cotton continued, “Feed Cost Calculator software is an Excel program. If we have Microsoft, we already have Excel.”
It is available as a free download from the website, which also offers other free programs that calculate data such as cow/calf shares and corn field carrying capacity.
“We can compare up to 10 different feeds or 10 different sellers,” he added.
Data can also be entered for the transportation costs, to help a producer determine how mileage effects the cost efficiency of particular feeds.
“It also tells the producer feed costs per pound of crude protein or per pound of Total Digestible Nutrients (TDN),” he said.
Using these software programs, producers can look at their beef rations and nutrition decisions to design the optimum feed schedule for their operation.
“It really should be based on an individual’s livestock, feed and conditions, and we know that feed and conditions change,” he commented.
Cotton believes that producers should know their livestock but acknowledges that many guess on some of the important data about their animals.
“Producers will know what their calves are because they weigh them across and sell them, but they don’t always know what their cows actually are in terms of frame size, body condition or weight. We really need to get to the point where we know what we’re working with,” he explained.
This goes for the nutrition of feeds, as well, such as the quality of alfalfa or range grass that cows are consuming.
“An average test costs $17. If we tested our range grass, our hay and our supplement, we might be in for $50 of testing per year,” he noted.
Extension offices have price sheets and information available to producers who are interested in obtaining nutritional values on their feeds.
“It’s really worth the money just to do those tests every year. It helps us know our cost at the mouth of the animal,” he stated.
Cotton believes that producers should know what should be expected from a typical ration and how to vary from it. They should know how quickly their animals are gaining weight throughout the season, not just when they are put on scales at the end of the growing season.
“We always hope for the 1.5 or two pounds of gain, but we don’t want to guess that much,” he added.
The cost of gain per pound, he noted, is an important economic consideration, no matter what the conditions of the livestock and environment are.
“We want to look at the cost of nutrition, or more specifically, cost per pound of gain, and that is what I am talking about when I talk about these nutrition decision software systems,” he said.
UW online tool assists producers in determining the present-day value of a cowWritten by Natasha Wheeler
Casper – “Determining the value of a cow can help producers make better decisions because there might be situations where we are over or under value what an animal is worth,” noted Research Scientist Brian Lee, with the Agricultural Economics Department at the University of Wyoming (UW).
Lee spoke at the Progressive Rancher Forum during the Wyoming Stock Growers Association Winter Roundup on Nov. 30 in Casper, sharing an online tool developed at UW to help producers determine the value of a cow.
The tool uses a number of different factors to calculate the net present value of an animal, including the number of calves produced, the sale price of those calves, the cull price of the cow at the end of her useful life and the costs associated with feeding and maintaining the cow and her calves before they are sold.
Net present value
“The value of the animal depends on all future returns of that animal,” Lee explained.
To use the tool, the producer enters data, such as estimated costs and market prices, into a table to determine the net present value of a cow.
“Future dollars have different value than current dollars,” he said. “Net present value accounts for the time value of money, as well as the size of the stream of cash flow over the life of the investment, and in this case, that’s a cow.”
Net present value can also be used to determine the value of other investments, such as equipment or buildings. A positive net present value indicates that the investment is worthwhile.
Another factor the tool considers is the discount rate of the investment.
“The discount rate can be described as many things. It is the opportunity cost of capitol or the minimum rate of return required to justify the investment,” Lee commented.
The discount rate can be determined by comparing returns from a similar investment of equal risk. For example, if a producer is buying replacement heifers, the discount rate could be set equal to an alternative investment, such as a bank account that builds interest.
“If there is an investment that we can put money into and make an equal gain, that is what our discount rate should be,” he stated.
The higher the discount rate, the lower the net present value. The discount rate can also be described as a measure of risk for the investment.
Producers can adjust the discount rate when they use the online tool, along with the other predicted costs and market prices. Results are then calculated by year, providing a table of values based on productive years from the cow. A cow that produces three calves has a different net present value than a cow that produces seven calves.
“It goes year by year, so if we hold out a cow for more years, she is worth a little bit more in dollars because of the additional calves raised. The idea is, we are able to see in current-day dollars what the animal is worth,” Lee explained.
By using the tool, Lee hopes producers will be able to make better-informed decisions about buying replacement heifers or other management.
The tool can be found at uwyoextension.org/ranchtools/cow-valuation-tool. Other economic tools can also be found on the UW ranch tools website.
CattleFax predicts profitability at banker’s conferenceWritten by Saige Albert
Casper – With the cattle industry in a buzz over expansion prospects, CattleFax Markets Analyst Troy Applehans said the cow/calf sector is expected to be extremely profitable moving into the next couple of years.
“Talk of expansion is a double-edged sword,” Applehans said. “If we expand too fast, prices will go down. If we don’t expand fast enough, we run the risk of not being able to fill orders for customers, so they go to alternate proteins.”
Applehans further predicted that, even if the herd expands to 30 or 31 million cows, cow/calf producers will still stay profitable.
“If we increase demand one to two percent per year, we can increase the number of head and stay extremely profitable,” he explained. “We want more dollars, and $200 to $250 per head is an extremely respectable margin.”
On Jan. 1 of this year, Applehans noted that the all fresh retail price for beef sat at $5.36. Coupled with a six to seven percent increase in demand, he said the prediction is unprecedented.
“Demand strength has influenced the market to stay strong on fed cattle prices, feeder cattle prices and calf prices,” he explained. “It is a very rare occurrence that all three of these segments are profitable.”
More typically, the cow/calf producers, said Applehans, are in the driver’s seat, leveraging the rest of the industry.
“Stocker operators have the chance to be profitable, but their margins could be thinner because of the price of calves,” he continued. “The feedyard sector is going to be as thin a margin business as it has been.”
“There is only so much margin per animal,” Applehans said. “There are five segments – the cow/calf, stocker, feedyard, packer and retailer – all trying to get as much of the margin per animals as they can.”
When looking at which segment has the most leverage in the industry, he explained that cow/calf producers, which produce the base product, calves, are best poised in the industry.
As supply continues to dwindle, cow/calf producers are best poised for continued profit.
Jan. 1 U.S. feeder cattle and calf supply was down 700,000 head, and April 1 numbers show a deficit of 975,000 head.
“This means we are utilizing a smaller supply at a quicker rate,” Applehans said. “We can’t do that forever. We are pulling the smaller supply into feed yards.”
A continuing reduction in cost of gain has resulted in more desire by feedyards to purchase calves, which leads to the question of whether feedyard supply will last into the summer and fall.
“Feedyards will bid all the profits out of cattle, so they can’t bridge a breakeven,” he commented. “That is good for cow/calf and stocker operators, and it shows the leverage they have in the market.”
Seasonality of markets
Though continued high prices are likely, Applehans said that risk management is still a necessary part of cattle operations.
“Risk is a scary word for cow/calf producers, but we are managing risk in an era of record-high prices and volatility,” he explained. “Some of our risk management is just in knowing the seasonality of markets.”
When looking at market fluctuation through the year, Applehans noted that the trend is consistent from year to year.
“If we know about the seasonality of our markets, we can get out of a lot of jams because they work 80 percent of the time,” he said.
“When we look at the October to November timeframe, that is when most calves are sold,” he said. “We would expect prices to be lowest at that time. Does it make any sense to sell them? We don’t have to sell calves just because they are moving off summer pasture.”
Rather, Applehans urged producers to consider selling cattle during summer video sales for October delivery to garner additional value.
“Eight of 10 years, cattle sold during the summer months for October delivery were higher priced than in the spot market in October,” he commented.
Applehans marked a 13 percent difference between market highs and lows through the year.
With current prices, he said, “We could have low $130s. We don’t feel like we will have to get that low, and we have very good support of the $135 to $136 area.”
“I believe that feeder cattle futures are going to go to $200,” Applehans predicted.
With bearish sentiment toward corn prices, coupled with competition in the marketplace, he noted that 750-pound steers will likely bring the high prices.
“Unless something happens drastically, I’m pretty sure the 750-pound steers will bring two bucks,” he commented.
CattleFax Markets Analyst Troy Applehans also emphasized the importance of knowing the breakeven price.
“A breakeven can be a difficult number for cow/calf producers to come up with,” he said. “It isn’t something we can spend 10 minutes on to generate a number. It takes a process, and we have to have records.”
Without breakeven data, it is harder to decide what prices are acceptable to sell.
“When we look at cow/calf returns from 1980 to 2000, we notice that basically, this is a breakeven business,” Applehans explained. “Since 2000, it has been much more prolific for profitability. We look at low-return producers, though, and they very rarely made money during that entire span. The high-return producer very rarely lost anything.”
The difference between the two, Applehans continued, is that high-return producers don’t cheat when it comes to nutrition, animal health or genetics.
U.S. beef cow slaughter is down by 105,000 head, or 9.6 percent, year to date, and CattleFax Markets Analyst Troy Applehans said, “We expected beef cows to be down 250,000 to 300,000 head. Heifer slaughter is indicative of people keeping back more replacements and trying to expand or stabilize the herd.”
Heifer retention is projected to cause a drop of 600,000 head for 2014 and an additional 100,000 head above that in 2015.
The result is the available 65 to 67 pounds of beef per capita dropping to only 54 pounds of beef available per person.
“This is a huge number in terms of the reduction that we’ve seen, Applehans noted. “There has been question of if we are going to price ourselves out of the market.”
However, the broiler and pork industries have facilitated continued market access with their similar increasing prices.
“Our export market is also going to remain strong and important,” he continued. “We have less supply, so we need to increase the price in ratio to the smaller supply.”