In any business, there are those that fail, those that get by and those that excel. Industry ratios are always skewed towards the downside of the spectrum because that’s where most businesses are located, unfortunately. Ranchers’ industry average earnings before tax is 4.2% with the high side being 9%. Most of us know ranchers that beat the 9%. A few by a mile. You find common themes that come up in conversations with ranchers and readings about ranch profitability. Ranch profitability has as many variables as a Rubik’s cube! You also find out of the box thinking and risk-taking. High-profit operators are not afraid to take calculated risks. This article is a compilation of these practices, risks, and out of the box thinking that drives ranch profitability. More ideas can be found on our blog if you are trying to understand how to better protect your ranch from variability and maximize your ranch’s profitability.
The first step in ensuring your success in ranch profitability is buying the land the right way. If you want high financial ratios like ROI (Return on Investment) or ROE (Return on Equity), it helps if your land costs are low. Some ranchers that have been doing this for 50 years have a distinct advantage, but bottom line, you don’t want to overpay for your land. There are a number of factors to consider in that last statement. Grass range, water, AUM rating, fencing, and improvement possibilities all play into what a seasoned rancher would consider fair. You might pay more than the neighbor if there is a unique advantage that allows you to run more head or reduce inputs like less haying.
What Montana Ranch Buyers and Sellers Should Do
It is not unusual to see ranches sell for 20 times cash flow. It is important to remember that ranch cash flows can be extremely volatile and directly impact ranch profitability. So at the very least you should try and see 5 years of financials and cash flow statements to see the ups and downs. If you buy at the top cycle of the volatility it may mean years of sub-par returns. You would like to find a purchase at 10 times cash flow. This does happen and many times it can be a timing issue. Down commodity markets mean foreclosures. Sometimes, families run into legal issues that force a quick sale. And, then finally, sometimes you run into a noncattle person that bought, doesn’t know the business, and is looking for an exit.
If you are a buyer, you want to pay the multiple on the worst year you can find and pay strictly based on the cash flow of the operation and not have the recreational value enter into the equation. If you are a seller you want to sell at the top of the cycle. Showing your continual cash flow growth and never-ending returns the buyer will receive and the wonderful recreational value that the new owner will receive. Value is in the eye of the beholder. It also never hurts to take into account that part of your return can come in the form of land speculation. I would rarely pay for that speculation but some will and it is a consideration. Buying right is a key to ranch profitability.
It is hard for some people to say no when a banker wants to loan you money. Ranching is a capital-intensive business and some people just love new iron. Trucks, trailers, corrals, etc…that is Hollywood stuff, to have all freshly painted equipment. Stuff might be shiny but it’s going to hurt your bottom line and could end up being owned by the bank along with your families 150-year-old ranch. There is not a lonelier feeling than to lose several generations of work to a loan you can’t pay because the price of beef fell off the table. A business that can have their product price fall 40-50% in a short time should not be highly leveraged. There are very few leveraged businesses that can survive price drops like that and remain solvent.
One of my favorite quotes in researching for this paper was www.onpasture.com from Cody Sand when “he asked their banker when they had $20k in carryover debt what to do and his suggestion was to borrow more money.” When your showing a loss and your bankers answer is add more debt, RUN FROM HIM! He will end up owning your ranch before too long if the market isn’t in your favor. That only works if you’re the government and eventually even that doesn’t work.
If you are highly leveraged and you want to do like the Sands did and get out of debt, first, I would highly recommend reading the series in onpasture.com “How the Sand Ranch got its Groove Back” written by Kathy Voth. Cody Sand’s statement “We can’t go broke making a profit” is simple but profound. Someone taught him well!
Cut Costs and Evaluate Every Element of Your Ranch
In any turnaround situation, your first step is to cut costs to the bone. All excess labor, equipment and nonmandatory expenses have to go. Even at a loss. You have to get where you aren’t eating your own leg. Consider sharing equipment, buying used and trading of services. Maybe a cowboy needs to run a few head on some grass and you can trade out upkeep of pasture for him checking on your cows. Cash flow is king even if it involves painful cuts to get there. This means changing anything that keeps you from reducing costs. No sacred cows!
Numbers are your friend. Ratios give you a comparison to compare yourself to the industry. If you are performing above average you will have opportunities against the highly leveraged ranches when the market turns. Cow per worker, acres per cow, Gross Margin per unit, profitability, and debt. You can get these numbers from associations, from talking to people in your region, cattle brokers, and bankers. If you are on the high end of each scale or above, pat yourself on the back. You are going to be around and have options. If you aren’t on the high end of the scale, the interest you are paying may be a big key to your ranch profitability.
Operations Management is our most controversial subject. It is where egos and intelligence are questioned and almost everyone has a strong opinion. This section relies on talks over a number of years with ranchers that were highly profitable and reading experts like Bruce Teichert and newcomers like Cody Sand. We are all reporting on ideas that worked for people and are meant to get you thinking about improving your operation. These ideas will solicit strong opinions and I look forward to feedback if you agree or disagree. Funny thing about changing the status quo. You are a threat to those that have done it that way for years and the dumbest guy in the area. Until it works. Then you have a new bunch of friends. Maybe we can all gain some new friends!
Montana ranchers and all ranchers are dealing with more moving parts, manipulated markets and government regulation and taxes than they have ever before. If you aren’t willing to think outside the box and test new ideas and theories you may be giving up that chance to be one of those ranches that are 9% or above. One of the other websites and authors I used for this article was Burke Teichert in beefmagazine.com. My favorite quote of Burke’s was, “perfection is never achieved, but excellence can be.” I might add; on the way to excellence, good will still put money in your pocket!
Boy, there are a bunch of theories on grazing. Spread your cows out over several pastures so they don’t overgraze. Combine your cows down to one pasture for a short period of time. Don’t rotate too quickly, rotate quickly. Grazing is key to your ranch profitability. And the more efficient you are the fewer inputs and the lower the cost.
According to Burke Teichert in 7 Keys to Ranch Profitability, good grazing management reduces the need for feed, increases your land’s carrying capacity, improves animals productivity, and increases labor efficiency. You still may be forced into feeding in certain weather situations and supplementing minerals and protein but reducing inputs as much as you can, increases your profits. It also makes you a lean operation that can turn a crisis for some ranchers into an opportunity for you. A lean operation can be run by a skeleton crew because of its incredible efficiency. There are countless articles about creating a lean operation.
One thing that seems to be universal is that fencing is inexpensive and a good investment. I’m not necessarily talking about permanent fencing. Temporary electric fencing may suffice to manage your grazing better and it allows for resting a pasture. Fencing has become the number one tool in helping manage grazing pastures more effectively. It gives rest to pastures and contributes to more efficient grazing.
What Grazing does to Increase Ranch Profitability
All of our articles talked about watching your pastures to not overgraze and stocking the range below carrying capacity. This prepared you for the inevitable drought. The Sand Ranch seemed to be the most aggressive in grazing a pasture. Putting their herd in one area for shorter periods of time. It appeared the intense grazing on small parcels is working for them. They have greatly reduced their undesirable plants and have found pastures to be grazed more efficiently. This also has reduced the number of man-hours checking on the herd and has given more recovery time to pastures. They have had to deal with bringing water to each pasture and came up with some pretty good water ideas. Especially for calves.
Efficient grazing is so key to ranch profitability. The more you reduce the need to feed the animals, the greater your profitability. The more efficient your grazing, the more cows you can carry on one parcel. Everyone loves land but efficient grazing and fencing are cheaper than having to go buy more land. More can often mean less.
Most of my genetics discussions come from conversations with longtime ranchers but again both Burke Teichert and Cody Sand bring up some good points or reinforce my thoughts. I would encourage you to read through the articles listed at the end of the article. Good genetics is as much about reducing your inputs and reducing labor as it is about creating heavier animals. Remember, we are talking profitability not bragging rights on who has the heaviest animals. In onpasture.com’s series on the Sand Ranch, Cody Sand says, “Instead of asking how much your calves sell for, ask how cheap did you run your cows last year.”
Happy Cows = Happy Ranchers
Having cows that birth easy, are calm with the right build, enables you to keep your labor costs down. If you aren’t having to spend time pulling calves or chasing cows, it allows you to have fewer injuries and doctoring costs. In a Cow-Calf operation, you are carrying those cows year round. In many ways, they are your employees. The question is do you want to go to work every day with an ornery employee that doesn’t want to follow directions and makes you do more work? Or do you want to have pleasant employees that help you achieve your goals? Bottom line, you’re going to be spending a lot of time with these animals and make your living off of them. It is a much more enjoyable job if they are healthy, good producing, and an easy going group. The labor you save by minimal doctoring, not having to pull calves, and not chasing them all over the county, will directly influence your ranch profitability.
Animals that are problem children need to be culled. For any reason. Temperament, tough to breed, dry cows or problem pregnancies all require more time and more labor. That is money out of your pocket and time you could be spending on something else. Improve your herd by choosing what cows and replacements you keep.
Inputs that Impact Ranch Profitability
The management of inputs can help turn a loss to a profit and from the lower end of the industry average in profit to the higher end. A great example is our friend by this time Cody Sand in the onpasture.com series How the Sand Ranch Got Its Groove Back. He and his wife delayed breeding by a month. By doing that they reduced a number of inputs that they had to deal with in early spring birthing versus them being born late spring. This means their calves are sold lighter but their calves have a higher survival rate in late spring with fewer inputs. No more windbreaks, calf shelters, warming boxes, colostrum in bags, electrolytes and time and labor required for all of these inputs.
There are so many supplements, vitamins, minerals it reminds me of all the health supplements that companies push on us humans. Do we need them if we just live healthy lives? I’m not saying some medications or supplements are not helpful but we can all over do. You should calculate what your return is on every input. If you are not getting at least your money back plus some, consider forgoing them. Inputs, like anything, should be able to show a return.
In my previous business of printing, it was always said that printers are in love with iron. Shiny new presses are like pretty new barns, latest corral systems, and brand new trailers. If they aren’t making you a solid profit for purchasing it, I would avoid it. Great for the ego but not very good for the bottom line. I would recommend buying used, trading services or sharing equipment. If it is a piece of equipment you don’t use every day, that is mobile, and you have someone you trust, you just dropped your capital outlay by 50%. If your in-laws are coming over you can just get your partner to bring all the shared equipment over so you can show them all the impressive equipment you own! Sorry, sick sense of humor!
Ranchers are known for their ability to create something out of nothing. Situations come along every once in a while that can be transformational to your profits. A perfect example is our well-known hero Cody Sand! Cody swung a deal with a farmer to turn out his cows on the farmer’s fields. Corn stalks, winter wheat, and sunflower stalks provide winter forage for the cows and his cows fertilize the farmers fields. It provides the farmer with some grazing income and keeps the Sands from having to put hay up for the winter. These kinds of unique situations are win/win and can put you in the upper range of the profit scale in a hurry. This was just an example of one idea but if you are constantly looking for ways to improve your bottom line you will be surprised how often you come up with something that increases your profits.
I hope you enjoyed this article. The biggest thing I would like you to take away from this article is the cattle industry has a wide array of levels of profit. Part of it depends on the property but the rest is open to being managed. Lastly, if you are doing what everyone else in the neighborhood is doing, you are not taking chances. Tweak your operation by taking small chances to increase profitability. Observe your operation from 5,000 ft. up and get out of the box!
Once again, I would encourage you to read www.beefmagazine.com Burke Teichert series on 7 Keys to Ranch Profitability and the series by Kathy Voth starting with How the Sand Ranch Got Its Groove Back. I used both of those articles as references and I also used Good Habits of Profitable Ranchers by Stan Bevers.
If you enjoyed this article, you may also enjoy our Montana bull auction report were we visited several Montana bull auctions to gain insight into the current beef market. Or take a look at our article about cattle ranches for sale in Montana where we evaluate the process of buying or selling a ranch from the buyer and seller’s perspectives.
If you are struggling with your own ranch profitability or would like to share a success story, I would love to sit down and talk with you about some potential options and gain valuable insight from you. I am here to help and not one of those cutthroat real estate agents. I truly care about helping you with anything you are struggling with. Or, if you are just starting the buying or selling process for a farm or ranch and have questions or concerns, give me a shout. I can be contacted here.
About the Author
Partner at Venture West Ranches
Buzz Tatom, a partner at Venture West Ranches, is a ranch owner and has built, run and sold numerous businesses in his career. This gives him a unique background in helping Montana farmers and ranchers navigate the life decisions that we all have to face. Whether it is passing a ranch on to the next generation or planning for eventual sale, his talents and contacts help save clients money and navigate complicated transactions.