In my first article I outlined what I think are five essentials of profitable ranch management. Restated in abbreviated form they are:
- Approach to management – integrative and holistic.
- Continuous improvement of key resources.
- Good analysis and decision making tools.
- War on cost.
- Emphasis on marketing.
In my August column, I discussed why an approach to management should be both integrative and holistic. In subsequent articles, I will address one or more of the above essentials. This month, I would like to discuss why ranches fail.
In my 40+ years in the beef business, I’ve watched and wondered why some owners who love ranching and would like to continue are forced to give it up. Of course, voluntary termination for retirement or more desirable opportunities isn’t failure, but the most significant reasons I’ve seen for failed ranches relate to “war on cost” and include:
- Inadequate size to employ and provide sufficient income for even one family.
- Too much debt.
- The ranch and its resources to do something for which they are not well adapted.
- Too many overheads.
- Poor use of variable inputs.
- Poor or no succession planning.
Labor efficiency is important
In my career as a ranch manager, I started with a labor-efficiency goal of 500 cows (or cow equivalent)/man. Over time, that grew to 1,000 cows/man. We didn’t always achieve the latter ratio, but we came very close.
It’s very difficult for small ranches to compete with ranches that achieve a high cows-per-man ratio unless they have off-ranch income or other sources of on-ranch income. For example, some use excess time to day-work for neighbors. Others may do contract work with their underutilized equipment. Hunting and recreational opportunities can be sold in some cases.
Finally, it isn’t evil to be a part-time rancher and have a job in town. Many cattle in the U.S. are produced on ranches where the work is done around an off-farm job. I even know a few who started out small and grew to become fairly large ranches, and still have their day jobs.
You will learn that I do struggle with a ranch that has to be subsidized by the day job. It should be a profitable small business by itself – adding to rather than taking away from the family income.
Watch debt levels
High levels of debt don’t work when the typical return to total investment (land, facilities and cattle) in ranching is usually between zero and 4% of market value. Even the best of production managers can be beaten by too much debt. I’ve seen, and briefly been involved with, ranches that were very well managed and would have made a very acceptable profit if their debt-to-equity ratio had been reasonable.
Land values have been driven up by non-ranching investors with other interests such as recreational pursuits or a safe place to park wealth. Ranchers need to be very careful when they expand to avoid having too much debt service in relation to total income. Remember that prices won’t stay high forever, and, if they do, costs will continue to rise.
Running cows and calves in locations where they must be fed for four or five months of the year, raising registered livestock in locations where attention to records and breeding is difficult, or running stockers where gain will usually be low are all bad choices. The class of cattle and type of operation needs to fit the resource. Perhaps some ranches should be sheep and goat ranches or at least have some sheep and/or goats to be most profitable.
Some people try to ranch on good farmland. Perhaps crops should be grown and sold. If the land is to be used for cattle, consider Management Intensive Grazing to take advantage of the potential productivity of the land.
Too many overheads (people, facilities and equipment) relative to the number of cattle or the gross revenue is a very common problem in our industry. As I helped my company buy several ranches, some of the realtors were very anxious to show me the facilities. I did eventually want to see them, but I first wanted to know that the ranch was a good ranch.
If you will consider the cost of a new pickup, tractor or piece of farm equipment, along with its projected fuel need and maintenance cost, you will see that the cost per cow on your ranch can be pretty frightening.
For example, let’s assume that we want to buy a $100,000 tractor. If we depreciate it over 20 years, the annual depreciation will be $5,000. I think you can easily assume that interest, fuel, repairs and maintenance will be another $5,000, for a total of $10,000/year. If you have 200 cows, that is $50/cow. You only have one tractor and haven’t paid the wage of the operator or the price of the equipment that it will pull.
People should also be considered in the overhead category. An employee or owner’s take-home pay is usually less than 50% of the person’s cost to the business. When you put benefits, insurance, horses, houses, pickups or four-wheelers, unemployment compensation, etc., into the calculations, you can see that an employee must produce or earn at least twice his/her take-home pay just to break even.
My conclusion is that ranching must be kept very simple with few overheads – not too much stuff to fix, paint, operate or maintain.
Because of inadequate understanding of the science, inadequate records or poor observation skills, we have a great tendency to overuse or underuse variable inputs. Nearly 30 years ago, a colleague did an economic comparison of five alfalfa producers. The producer with the highest cost per acre also had the lowest cost per ton. He was certainly using inputs to better advantage than the others. However, contrary to this example, high input use is not always the best approach. There will be much discussion about this in future articles.
Don’t forget succession
Intergenerational transition planning too often is not done in our industry. And, when it is done, often only the financial and tax remedies are put in place. The parent often holds the management reins tightly until death or complete retirement assuming the heir will automatically take hold. Sometimes this works – most often not.
I know from my own experience that the development of managerial capability takes time, effort and mentoring. Ranches are complex and require production, finance, marketing and people skills. A new manager (son, daughter or employee) needs to develop or know where to access these skills. A new manager’s job should grow slowly – not arrive all at once.
I hope these brief reasons for ranches failing will cause you to turn them around and consider ways to make your ranch a profitable and fun enterprise. Future articles will bring more in-depth discussion.
Burke Teichert, consultant and speaker on strategic planning for ranches, is retired as vice president and general manager of Ag Reserves Inc. (more commonly known as Deseret), where he was manager of seven ranches in seven different areas. He lives in Orem, UT, and can be reached at [email protected].