Dave Pratt shares ranching for profit strategies in Nebraska
February 3, 2012
“If our farms are not fun, not profitable, or are too much work, our children won’t want them … Romancing the next generation is the ultimate test of sustainability.”
– Joe Salatin
Dave Pratt, owner of Ranch Management Consultants in Fairfield, CA, presented this quote by Joe Salatin as food for thought for more than 50 ranchers who attended the West Central Cattlemen’s Day in North Platte, NE. Pratt has taught Ranching for Profit schools across the U.S. since 1992, and was in North Platte to show producers how to be more sustainable and profitable in the ranching business.
“When most people think about sustainability, what are they talking about?” he asked the crowd. “They are talking about soils and environment – ecology. If the land is sick, how much fun will it be to farm?” Pratt went on to explain that it takes more than just healthy soils for a business to grow and prosper for future generations. Having the right people in the business, developing a management plan, and determining a profit goal are also important.
“Which is more effective?” Pratt asked the group. “Telling a family member ‘Someday this will all be yours.’ or ‘In five years you’ll be vice president of marketing?’ In order to produce the results we want, what training will you need?”
As a ranch management consultant, Pratt said rather than writing a job description, he likes to write effectiveness areas. “An effectiveness area describes the results you expect the employee to achieve,” he explained. “A job description describes what people do. Instead, focus on what result they accomplish. Examples of an effectiveness area is cattle production, pasture production and gross margin.”
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He continued, “Communication starts by clearly defining the roles in a business.” Employers need to identify what results they expect an employee to achieve, what effective areas lead to performance targets, and clearly define the content of each position. “Don’t be afraid to show an employee how to grow in the position they are in, and the training they will receive to get them there.”
Pratt encouraged the group to look at the skills of each employee and make a list. “List the skills of each employee, list what they currently do, look at what needs to be done, look at what they like and enjoy doing, and assign each of them effectiveness areas,” he said. If all effectiveness areas aren’t assigned, the employer will have to decide whether to train or hire someone for the position.
“Ninety-five percent of all new businesses fail within the first 10 years,” Pratt stated. Most farms and ranches stay in business because they are subsidized through off-farm income, they work for free, have appreciating land values, or have inherited wealth, he added. “If you are starting a livestock business from scratch, you have three choices,” he continued. “You can subsidize the business, go broke, or make a profit.”
Pratt said 60-80 percent of the costs in the ranch business are overhead, or fixed costs. “You need to make sure an investment will work economically, before you can figure out if it works financially,” he said. Profit is based on return on investment and net worth. Income and expenses in the ranching business are also more than cash money. Income can be retained replacement heifers, and expenses can also include depreciation and death loss.
“Can you pay cash rent on land, full labor costs, interest on all assets used in production, and all other production costs, and still make a good return on investment?” Pratt asked. “If so, you are showing a profit.”
Pratt said producers should be concerned with their gross margin, which is the gross product minus direct costs. Producers can increase their gross margin by either increasing the number of cows they have or making more money per cow.
Overhead costs, like land or labor, tend not to change as production numbers change. On the other hand, direct costs will change as production numbers change. The key, Pratt said, is managing gross product, which is what you produce, either in cash or retained production. To increase profitability, Pratt said, consider increasing the gross margin per unit, running more cattle on the ranch, and reducing overhead costs.
Pratt also encouraged producers to evaluate each segment of their business. “An asset that isn’t producing income is a liability,” he said. “Evaluate what you really need to own.”
Editor’s note: To learn more about Pratt and Ranching for Profit, visit ranchingforprofit.com.