In one of my first columns for BEEF, I presented my five essentials for successful ranch management. These include:
- Our approach to management needs to be both integrative and holistic.
- Strive for continuous improvement of the key resources – land, livestock and people.
- Assemble and use good analysis and decision-making tools.
- Wage a war on cost.
- Emphasize marketing.
Item three suggests that we should assemble and use tools for analysis and decision making. Good production and cost records are vital for decision making. We often have these records, but fail to use them appropriately; rather, we make decisions based on our intuition or recollection of the past.
It’s critical to spend time away from the physical work part of our jobs and engage in analysis and decision making. A few hours each week spent on analysis and thought-driven planning can pay huge dividends. This is best accomplished at a desk or kitchen table; or if several people are involved, in a conference or board room setting. While you might do some of the analysis yourself, be sure to involve others in seeking input to the analysis and evaluating the ideas.
Items four and five suggest a lot of our planning time should be devoted to cost reduction and marketing. By cost reduction, I’m referring to cutting overhead as much as possible. This includes land costs, facilities, buildings, equipment and people.
Then you want to improve or increase gross margin where gross margin is total revenue minus direct costs. I just did an analysis where 37% of a ranch’s sales came from cows and bred heifers. Each of the units of production and sale had a different cost and value.
So, we need a method to analyze different ways of organizing our production systems. I use a spreadsheet that I started to use as a graduate student many years ago. Back then, I had to do it all with a pencil and handheld calculator. When computers became smaller and more powerful, I moved the spreadsheet to a computer. With ideas and help from others, I have been making it better ever since.
I like to look at all the livestock enterprises as if they were one enterprise. By doing this, I don’t forget to think of inter-enterprise activities and relationships that need to be considered.
I start with an inventory-based stock flow, which starts with the beginning inventory, then projects births, deaths and ending inventory. Sales become the number that you can sell and still have the desired ending inventory for each class of livestock.
The stock-flow form I use (shown below) has been used for many years by a number of people with slight modifications. In this example, I’ve made next year’s beginning inventory the same as the current beginning inventory to allow a comparison to other scenarios on a fully stocked, static basis.
I might evaluate changing to purchased yearlings only; or I might keep the steer calves over to yearlings. I might look at slowing the herd turnover and selling more heifer calves. I might analyze purchasing replacement cows, terminal crossing to get bigger calves, and sell all the heifer and steer calves at weaning or after a preconditioning period. You can analyze almost anything you can imagine.
Following the inventory projection, the spreadsheet includes a sales chart that shows number sold, weight, price and total receipts for each class of animal. That’s followed by a purchase chart that does the same thing for purchases by class.
Then I have a budget sheet for each feedstuff that I may purchase. It takes the beginning inventory and purchases of livestock, and shows the amount fed daily, the number of days fed, the price of the feedstuff, and the total projected expenditure for each class of animal. In another chart, we show other incidentals, like brand inspection, trucking, vet and medicine, etc., that vary with the number of animals.
From all this we can calculate total livestock sales minus livestock purchases, plus or minus the value of inventory change from the beginning to the end of the year, minus all direct costs. This calculation gives us a total or combined livestock gross margin. Remember that we still need to subtract overhead to get to profit.
I will usually do this for the current situation, and then do additional stocking scenarios as mentioned above. The great advantage of this approach is that it keeps you consistent in pricing of sales and purchases, in sale weights and animal performance.
To assure that you’re comparing on an equal basis, you need to calculate the number of animal units you’re carrying by class of animal. For example, a cow with a calf at side for half of the year might be 1.2 animal units (AU); a yearling might be .7 AU, and a bull 1.3 AU. Then you must adjust inventories of the new scenario to have the same, or very nearly the same, number of AUs as in the current scenario.
This usually takes a few iterations, but the computer does the arithmetic very fast. In this manner, you can look at any number of stocking and marketing alternatives very quickly. If anyone on your team thinks they have a better idea, just model it and see.
At first, I like to model widely diverse scenarios to get a general idea of the major changes that might be needed. Then, after making major decisions, the model can be used to fine tune. For example, I might ask “what if I converted my hay land to pasture and purchased winter hay needs?” I’d also want to shorten my hay feeding season as much as possible. The cowherd can now increase because of outside purchases of hay. My overhead (all the costs associated with making hay are overhead to the cattle enterprises) will shrink. Remember the overhead is not part of gross margin, but greatly affects profit.
Once you set it up, this and many other alternatives can be accurately compared. Make sure prices projected for various classes and weights of animals have an appropriate relationship to each other. It doesn’t matter so much if all prices are a little high or a little low, but if you show a 450-lb. calf will sell for the same price as an 850-lb. yearling, or that a yearling steer will sell for the same price as a bred cow, your analysis won’t be worth much. I like to call this “internal pricing consistency,” which is making sure you have the proper price relationship between classes and weights of cattle.
Most of the financially strapped ranches that I encounter are doing what they do quite well. The problem is that what they’re doing and what worked well 20 or 30 years ago doesn’t work today.
These ranches must change what they’re doing rather than improve what they’re doing. This is a tough concept to buy into, and it closely relates to the “paradigm lockdown” discussed in last month’s article. We will take this another step next month.
Burke Teichert, consultant on strategic planning for ranches, is retired as vice president and general manager of Deseret. He can be reached at [email protected]
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