Extension Education: What is the Profit Driver on your Ranch?
What is the Profit Driver on your Ranch?
When I say profit driver, I am referring to the enterprise on your ranch that provides greatest net return per unit. Is it your cow-calf business, your hay business, your stocker operation, that backgrounding lot or your land business? The truth is if you are like most ranchers you probably don’t know. You may have a guess, but likely your guess is just as likely to be right as it is wrong.
Why is this an important issue? My experience has shown me that one of the most effective ways to improve ranch profitability is to stop doing the enterprise that is losing money most years. This seems like a no-brainer right? But how can we stop doing these things if we don’t know what these things are? This is where identifying what business are your profit drivers comes in.
One thing that surprises me is how hard it is for most ranchers to quit doing losing enterprises on the ranch. Maybe it is because tradition and reluctance to change kicks in. Maybe we keep doing that enterprise to justify a job for someone on the ranch. Maybe we are worried that if we quit doing that we won’t know what to do with our newfound free time. It should be an easy decision. If an enterprise has negative net returns over the last five years and we don’t see that trend changing, stop doing it! You will improve the profit of your ranch and be working less.
Information from the economic analysis of ranches I have conducted during this past year shows in most cases the land business has been the profit driver in recent times. We are only considering the income from the ag value of the land business and not the other enterprises such as gravel pits, hunting etc. The forage value has gone up and people are paying more for leases, so we attribute that increase in value to the land business.
Due to high feed cost and high replacement costs as a result of cow depreciation, cow-calf businesses have suffered in the past year especially. In fact, I have a very difficult time building a profitable cow-calf business on paper even with using favorable prices.
Hay businesses did very well this past year when using market value for the hay, but many didn’t have water supplies to produce a good crop. This was a change from the previous 10 years where most hay business for ranches typically break even or have negative returns.
If the land business is the profit driver then there are some important considerations that this should highlight. If we know a business has a positive return, then finding ways to increase the production of that business without reducing net return per unit is time well spent.
Most people tend to focus their management attention on the aspect of the ranch that they most enjoy. Perhaps it is genetics, or the horses, or even farming for some. I believe most of these ranches could implement grazing management practices that would increase the production of the land business and may over time even double the net income of the ranch.
Management attention spent on already profitable businesses generally has positive results. It is like the 4-H motto – “make the best better.” Burke Teichert recently wrote an article on this Beef Magazine that does an excellent job laying out some strategies for improving the grazing side of the land business. You can read it at beefmagazine.com/blog/ranch-profitability-secret-more-powerful-genetics.
If you would like to learn how to conduct an economic analysis of your ranch to determine what business is your profit driver, consider attending the High Plains Ranch Practicum or another school that teaches this tool. If you are not willing to learn how to do this yourself, or if you are not disciplined enough to find the time to get it done, then hire someone to do it for you. This is not tax accounting or cash flow accounting that your banker does, it is managerial accounting and gives you the information to make management decisions.
We have also developed an online resource set on this subject that can be found under the Unit Cost of Production link on the Ranch Practicum website at hpranchpracticum.com.
I hope moisture found your ground this spring.