It’s not forbidden fruit By Dave Pratt: Three ‘secrets’ to ranch profitability
For Tri-state Livestock News
Ask yourself: is your ranch a business, or is it a collection of high-value assets and high-stress, low-paying jobs?
• Do we take time to work on it, or do we just work in it?
• Can you identify your business’ customer and how you serve them?
• Do we work for it or does it work for us?
• If we sold the ranch, would we be selling a business or a collection of assets?
• Do we invest in professional development?
• Have I ever said, “We ought to run it like a business.”
Dave Pratt scribbled rapidly across the giant post-it board.
He switched colors with ideas, added seemingly cryptic equations to the margins, circled the immovable line and ended with what looked like one side of a NCAA tournament bracket. The championship game was won by a profitable ranch.
The ranch branched into a three-way runoff between overhead, gross margins and turnover, with land and labor locked into the overhead game. It looked… complicated.
Then he turned the portrait-oriented paper on its side.
“Now what does it look like?” he asked.
Thanks to some visual cues from the Ranch Management Consultant owner earlier in his workshop, a flash of recognition lit up a few participants’ eyes. A more natural analogy took root in the sideways diagram.
Suddenly, the ‘profitable ranch’ line morphed into a sturdy tree trunk, with its branches extending up toward the paths of reduced overhead, increased gross margin per unit and increased turnover, with scattered but strategic limbs reaching further to the top of the page.
“I don’t have the answers, and I’m not here to tell you what to do on your ranch,” Pratt said. “My job is to ask, ‘have you looked at it this way?’”
Do you believe this tree can actually bear fruit?
“The biggest obstacle we face is the paradigm that says ranching can’t be profitable,” Pratt said. “People who believe that think ‘Ranching for Profit’ is an oxymoron.”
He related the challenge to being a youngster, asking his mother for money. If he asked for $5, she suggested he find a job that paid $5. If he wanted more money, she suggested working more. The only way to make more money was to do more work.
It’s a limiting paradigm, Pratt said. There are only so many hours in the day, and agriculture is often seen as an industry limited by size and scope.
The tragedy of that mindset is found in the fact that only 30 percent of American ranchers who desire to pass their ranches on to the next generation intact are successful in that pursuit. It can feel like there’s not enough hours in the day to work hard enough to make it whole.
Ultimately, Pratt said, the 70 percent that fail to remain intact or transfer at all are the result of the business not being sustainably profitable, the operators or heirs being incompetent (“They may know how to raise livestock – they may even be really good at that – but that’s not the same as knowing how to run a business that raises livestock.”), and/or one or both of the generations involved don’t know how to talk about succession plans.
“A key part of sustainability is the ability of the ranch to be handed down to the next generation,” Chris Mehus said. Mehus is the Beef Marketing coordinator for Western Sustainability Exchange, who co-sponsored the workshop in Big Timber with the Crazy Mountain Stockgrowers Association.
“The more we can do now to support a really healthy business, the more likely it is for the next generation to take on the ranch and succeed,” Mehus said. “Without the economic piece, the ranch isn’t sustainable.”
Pratt said ranchers must first identify the difference between financial success – the ability to break even or cash flow the operation – and economic profitability.
He defined economic profitability with more questions: Can you pay cash rent for the land? The full cost of labor? Interest on all the assets used in production? Any other production costs? After those payments, can you still make a positive return on investment?
“Everyone says you have to inherit it or be born into it to ranch, but that’s just not true,” Pratt said. “You do have to sincerely believe that it can be economically profitable to ranch.”
What do you want to do with its fruit?
Success starts with the end in mind.
Ask yourself: how much profit do you want to make? Many ranchers let humility take over here, Pratt said: “Aw, shucks… just enough to break even and run another year, I guess.”
Pratt relayed a story of pressing this question in one of his Ranching For Profit school class. The cowboy finally relented – if they could truly profit $25,000 a year, they’d pay off their debt; $50,000 would help he and his wife set up a savings account for the first time in their life. With a $75,000 annual profit, they could make a significant donation to a ministry that had deeply touched their lives. $100,000 a year, and they might just take a real vacation.
“It’s not money that’s interesting, it’s what money represents that’s meaningful,” Pratt said. “I don’t know how you can build a plan without a target. And you can’t build a target without a purpose.”
Most ranches are satisfied to live on leftovers.
“But we start with the end in mind,” Pratt said. “In order to produce this result, what does the business need to do? In every other business, this is common sense. In ranching, it’s revolutionary.”
Are there dead wood branches that need pruned?
If a purposeful fruit tree can count on sun and soil and a little rain, the best help its master can provide is with a pair of pruning shears. Removing dead wood at the right time with the right plan can work wonders.
A snip on the wrong branch, however, will stunt the tree’s potential.
Pratt suggested identifying every enterprise on the ranch: cows, cull cows, replacement heifers, stockers, hay, grain, etc.
“Don’t look for where cash arrives or leaves your business. Look at where value arrives or leaves,” he said.
Then, ask the questions: is it productive, or is it profitable?
The most productive ranch is rarely the most profitable. In fact, Pratt said, the most productive may be among the least profitable. True profitability must include the true costs of doing business. It’s not profitable if it’s subsidized with free labor, inherited land, or appreciated values.
“Numbers don’t lie. They will tell you what to do.”
He shared market data on four sets of steers sold at varying weights and dates in Nebraska last year.
“Across the board, the profitability went down as they added more gain,” he said. The price per animal may have increased slightly, but not enough to balance the cost of carrying them. “The rate of gain isn’t important. The price per animals isn’t important. What’s important is the value of the gain.”
He shared a video interview with Steve Rainey, a rancher in British Columbia. In assessing their ranch’s enterprises, the biggest drain on profitability was feed costs.
“I attributed that to living on the 55th parallel,” Rainey said, but they took a closer look and asked a few more questions: what would it look like if we pruned this back?
The more questions they asked, the more they realized some major structural changes were in order for the ranch. They stopped putting up hay, started grazing cattle on those meadows and shifted their calving season to coincide with the changing nutritional availability.
After making these changes, Rainey said, their ranch is now running around a 4% return on investment. The average ranch in American runs a negative 1.5% return, according to Pratt. He was quick to note any examples he shared were not meant to be prescriptive.
“I’m not suggesting you change your calving season. I don’t know if you should even be in the cow business. I don’t know if you should own them or be custom grazing them,” Pratt said. “Only you can know these things.”
How can you care for the best fruit bearers?
What he does know is the namesake of the workshop: Three secrets to increasing profitability. Examining these three areas of each business enterprise will guide the pruning shears to the costliest dead wood.
1. Reduce overhead: These are the costs that don’t change significantly when livestock numbers change. Overhead includes land and: the costs of getting it and maintaining it, and the costs of the people and the things people use.
2. Improve gross margin per unit: This is about livestock efficiency. Calculate this measure by subtracting the direct cost of production from gross value of production.
3. Increase turnover: This is about your efficiency. Turnover refers to the scale of an enterprise and the enterprise mix. The key is to increase the scale of the enterprises with healthy gross margins without proportional increases in overhead costs.
More and bigger is often the first traditional solution, Pratt said. “We often ask, ‘can I add more cows?’ before we ask, ‘should I add more cows?’”
He shared a video of rancher John Marble in Oregon.
“I thought I was trying to solve a problem of scale,” Marble said. “But as it turned out, my problem was that my economic theory was too weak. The last thing I needed was to get more units.”
He questioned how to create a better gross margin with the grass and cattle he had. He looked at custom grazing and ways to increase pasture utilization.
“I thought I needed to get bigger. But I really needed to reduce overheard,” Marble said. “Then, I thought I needed to get bigger. But I really needed to increase the productivity of the unit.”
With the dead wood trimmed away, the most productive limbs can flourish. If employees aren’t working harder, but instead are working on the enterprises that make the most money, the value of labor just increased.
If a grassman could grow just one more ounce of forage per square yard, they would add 302.5 pounds of forage per acre to their land. An average cow eats 12,000 pounds per year, Pratt said, which means that miniscule-seeming increase in forage could add the equivalent of 40 acres per cow per year to your operation.
If the fruit is picked at its peak, it captures more value that it does rotted on the ground. Examining cow depreciation and looking for ways to add value to cull cows can certainly have an impact on turnover, too, he noted.
Enjoy the fruits of your labor
“Profit is to business as breathing is to life,” Pratt said. “If you don’t breathe, you die; but you better hope that you did more than just breathe.
“We have this idea that ranching is a lifestyle, and if we made it a business, it would get in the way of our lifestyle.”
On the contrary, he said, the purpose of these hard questions and equations are to enjoy the fruits of your labor.
“The old saying goes, ‘If you always do what you’ve always done, you’ll always get what you’ve always got.’ That’s not true,” Pratt said, noting that land prices have increased 14-fold since 1970. Gas prices have increased seven-fold in the same amount of time, while cow prices have only increased four-fold.
“If you always do what you’ve always done, you’ll lose your shirt.”
He took it a step further.
“If you always think how you’ve always thought, you’ll always get what you’ve always got… AND you’ll lose your shirt,” he said. “Ranching can be profitable. But it has to start by changing our way of thinking.”
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