Free Money Can Be Very Expensive

An Executive Link™ member brought a map of his ranch to his EL board meeting to show his board the layout of the grazing cell he planned to build. He enthusiastically explained that the cell would help him keep graze periods short while ensuring pastures got the rest they needed. It would increase stock density and improve utilization. Under the current management there were areas his herd (400 cows) never grazed. He said that once the cell was built he’d immediately increase the stocking rate by 20% (80 more cows).

He projected that the cost of the fence and water development would be $30,000. He explained that he was going to put the project on hold for a year because there was a good chance that next year he could get money through the EQUIP program to cover at least half of the cost.

The economic summary he prepared for the meeting showed that the gross margin on his cow/calf enterprise was roughly $600/cow. That means that running 80 more cows would improve his total gross margin by $48,000. ($600/cow x 80 cows = $48,000). At the Ranching For Profit School™ we recommend that participants demand a 100% return from capital investment the year they make that investment. This project clearly passed muster. But the board questioned whether it made sense to delay building the cell a year in an attempt to get free money.

A little more math showed that, if his projections were right, rather than saving $15,000, waiting a year to get the “free money” would cost him $33,000. Here’s the math:

If he builds the project with his own money:
$48,000 (GM year 1) – $30,000 capital expense + $48,000 (GM year 2) = $66,000 (GM after 2 years)

If he waits a year to build the project:
$0 (GM year 1) + $48,000 (GM year 2) – $15,000 capital expense = $33,000 (GM after 2 years)

It gets even better (or worse if you wait). Within a few years he thought that he’d be able to run another 120 cows. That will increase the total gross margin by another $72,000. Delaying the project for a year would mean delaying this result as well. That makes the real cost of waiting for the free money $105,000.

One board member questioned whether the assumptions about increasing the stocking rate were too optimistic. But when we cut the increase in half, waiting for that “free money” was still a costly decision.

The EL member who’d planned to apply for funding through the EQUIP program reacted to these projections with a mix of shock, relief and excitement. He wasn’t entirely comfortable taking the EQUIP money in the first place. He wasn’t a fan of government programs, and it felt hypocritical to complain about government spending while holding his hand out for free money.

Personally I have mixed feelings about most government programs for ranchers. I can see a case for tax payers subsidizing fencing and water development to improve range health. The public receives value from the enhanced ecosystem services that can result from improved infrastructure, and an argument can be made for the public paying for the benefits they receive. However, I’ve seen some EQUIP funded projects for fencing and water development that opened up new areas of range that were then set stocked and overgrazed. Rather than improve ecosystem services, they resulted in accelerated run-off and erosion.

Then there are programs that incentivize ranchers to do exactly the wrong thing. The classic example is the emergency feed program, which incentivizes ranchers to overstock their ranches in drought. This free money comes with an exorbitant price tag that can include increased erosion, degraded water quality and significant long term decreases in carrying capacity.

This column is not about the wisdom of government programs. It is about the wisdom of letting free money from government programs dictate your management decisions. Free money is only free if it is available to do something you planned to do, the way you planned to do it, when you planned to do it. When it causes you to shift priorities, re-engineer a project to higher specs or delay its implementation, free money usually becomes very expensive.

16 Comments


  1. In today’s blog post you say, “I’ve seen some EQUIP funded projects for fencing and water development that opened up new areas of range that were then set stocked and overgrazed.”

    Where that’s happening (and I don’t doubt that it is) it’s a violation of the EQIP agreement and a lack of enforcement that are responsible, not the program itself. All EQIP fencing grants require that the recipient adopt rotational grazing, and a grazing plan showing how the animals will be managed must be in place before the first post is driven. Now, that can be pretty lax rotational grazing, moving animals just once or twice a week, but if people with EQIP funded fencing systems are set stocking, they are in violation of their contracts.

    Construction of perimeter fence is a 25-year contract.

    Also, note that the acronym is EQIP — Environmental Quality Incentive Program.

    I know things are different out west, but here in the Northeast the fencing practice has made converts out of many dedicated set-stockers. They sign up to get the “free fence,” grit their teeth about the requirement to move their animals twice a week, but within a year or two they are moving animals daily or twice a day. And their neighbors are noticing that they are carrying half again as many animals on the same ground. It has been a powerful tool for soil health and water quality here. It has allowed many farmers to build well-designed fencing systems who would not have otherwise been willing or able to make the investment.

    I realize that’s not the point of your post, but I thought I would share a different perspective on the program, and point out that your criticism of its use in set stocking, is a function of malfeasance and under-staffing, not inherent in the program.

    Of all the farm subsidy programs out there, I think EQIP is one of the few where the public benefit is clearly worth the public expenditure. Don’t get me going on crop insurance or the LRP-lamb.

    Reply

    1. Thanks for your comment. It is interesting (and encouraging) that you have seen the program actually cause people to change management practices. I’m glad to hear that. My experience with folks getting money is that they money they got was for doing things that they were intending to do anyway..but then I tend to hang out with the progressive end of the ranching spectrum.

      Thanks again for your comment,

      Reply

  2. Dave,
    One correction, the program is EQIP (Environmental Quality Incentive Program) , you are not the first to add the U.
    You bring up an excellent example of producers missing the point and a conservation agency that has turned from a technical assist. provider into an ATM machine.
    I used to coordinate a watershed project with the goal of restoring some water quality issues. Often success was measured not on how many producers were educated on the benefits of installing Best Management Practices (BMPs), but on how much money you could shove at the problem. I guess the idea was that the free money would help them learn the errors of their way. Sometimes that worked, but often they just grumbled about having to monitor or keep record of what they had done.
    I’ve worked with dozens of BMPs for grassland, cropland or livestock management and it is truly rare to find one that doesn’t pay for itself on its own without free money. I guess that’s why they are called “Best”. Yes, many can also provide an “environmental” benefit in terms of stopping a degrading practice that may or may not be costing the general taxpaying public, but the economic benefit happens to the land manager, his land and his bottom line.
    Spend more time evaluating the longlasting benefits instead of the EQ(“Incentive”)P.

    Reply

    1. Thanks for the correction. I actually knew better…but sometimes when I know what something is supposed to say, I don’t see what it actually DOES say… John Lubbock wrote,”What you see depends mainly on what you look for.” That sure applies to me.

      It is interesting that incentives exist to encourage people to do what is already in their best interest. As I mentioned in the column, at the Ranching For Profit School and in Executive Link, we encourage people to hold new capital investments to this standard: Demand at least a 100% return on capital investment the year you make the investment. (If I invest $20K I want to get >$20K back that year.)

      If an investment won’t produce that return we suggest looking at alternative ways of making the investment or alternative investments that will pass the test.

      Some people think that the “100% return” test is an impossibly high standard. They assume they need to look at a 5, 7 or even 10 year pay-back on their capital improvements. That’s not good enough. When we start to look we can almost always find at least one or two investments on a ranch that pass the “100% return” test. And, if I can find something that will give me a 100% pay-back in one year, why should I need any further incentive to act?

      Reply

  3. Gross margin seems to be taken as equal to net profit in this narrative. Would the improvements still pencil out if overhead costs were considered or would overhead costs remain the same under this new venture?

    Reply

    1. Good question. Most of the improvements we make add very little, if anything, to our overhead costs. (Remember, the cost of the improvement is a capital expense. It is only the interest on the capital borrowed, depreciation, maintenance and repair costs that are overheads.) Since Gross Margin – Overheads = Profit, if overheads don’t change, then every additional $1 of gross margin is an additional $1 of profit.

      When a project results in higher overheads we need to deduct those additional overheads from the additional gross margin to calculate the profit we can attribute to the project.

      Reply

  4. I’ve used the EQUIP program successfully. When I did it however, I was not allowed to set stock my range land. I had to have a comprehensive grazing plan utilizing a rotation program. Since I was already cell grazing it was a no brainer.

    Reply

    1. That’s good to hear, but it seems to me that the rules are enforced with different degrees of vigor from one place to the next.

      Since the grazing is something you were already doing, or planning on doing, getting “free money” might be a no brainer … provided accepting that money didn’t jack up the cost by increasing the specifications to which it had to be built or significantly delay the project … and provided you think it is appropriate for government to provide these kinds of subsidies. (I don’t have much patience for people who take government money [my money!] and then complain about government programs.)

      My issue isn’t with the EQIP program…I’m mostly okay with that. As with anything there are some abuses but it is well-intentioned and it inceitvizes responsible management. My concern is when the pursuit of “free money” distracts us from other priorities.

      Reply

  5. Always enjoy your articles, this is the first time that I’ve commented on one. I work w/the Natural Resources Conservation Service here in Missouri and am proud of our state/and agency and the work that we do. I got on your mailing list several years back (when you were here and talked at our Spring Forage Conference (now in it’s 32nd year). We work with livestock producers here in the “heart” of cow/calf country (SW MO) and using the Environmental Quality Incentive Program (EQIP) we assist numerous producers each year w/improved pasture management “systems”. I share in both of your concerns (in using “taxpayer” money to assist w/things like this as it helps improve the resource “if” management is properly utilized but this is not “guaranteed” as it is very easy to resort back to “old” management). Anyway…keep up the good work!!!

    Reply

    1. Thanks for your comment. I hope we hear from you more often.

      BTW…we were considering doing this year’s summer RFP school in Missouri this year. We ended up scheduling it in California because we got invited to do several one day workshops here that are likely to generate interest in the full school. If a couple of RCDs or other groups wanted to host a few RFP workshops sometime between now and June 2017, it’d make bringing the school back to Missouri for summer 2017 a no-brainer for us. Just sayin…

      Reply

  6. FYI, Environmental Quality Incentives Program, EQIP. No u.

    Reply

    1. Thanks for the correction. Funny thing is I actually knew better and in spite of knowing better I often get it wrong … that rule about U following Q… As I responded to another person who pointed out my error, sometimes when I know what something is supposed to say, I don’t see what it actually DOES say. Thanks for the correction.

      Reply

  7. Totally agree, it is much better to do your own calculations for projects, along with cash flow, than to allow outside people to dictate when and how as these decisions affect you land base health and future productivity

    Reply

  8. In South Dakota there are many, many Ranchers who have used Government cost share from Equip and other programs to better their ecological sites and riparian areas.
    There is proof from these programs that it works if a person is willing to work at it . In this state , many tours and schooling for grassland sustainability and also soil health are availability.

    Reply

    1. Awesome! As far as programs go, EQIP is a winner…and from what I hear, South Dakota is better at following the spirit and letter of the law regarding this program than some other places.

      That said, are programs like this necessary to incentivize ranchers to do what is already in their best interest? I’m pretty sure that most of the people I know who have used EQIP money to develop new fencing and water would have done it on their own if the money weren’t available.

      In some cases the projects would have been built to different specifications and may have been scaled back a little (e.g. a water tank every two miles along a pipeline instead of every mile).

      My issue with government programs, including EQIP, is when people let free money mis-direct their priorities. How an putting in fences and water development be misdirecting priorities? Simple. The classic case is someone who has low, or even negative, gross margins on an enterprise. By building the fences and water developments that were funded by EQIP money, they are likely to increase their carrying capacity. When they increase their stocking rate to use the additional forage it increases the speed at which they go broke faster. Seems nuts, but I’ve seen this happen more than a couple of times.

      Free money or not, before someone starts installing water or building fences, they need to know their numbers. If their gross margin/unit is bad, they need to figure out how to improve it before they increase animal numbers.

      Reply

      1. Just curious how that producers return is with lower calf prices? I think EQIP has been defended enough, but what I would say if a person doesn’t manage then nothing they do will help.

        Reply

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