You Might Be Ranching For Profit

You might be ranching for profit if your spouse doesn’t have to work in town so you can have health insurance.
If you are making a profit you ought to be able to pay yourself whatever it would cost to replace yourself and the business ought to be able to provide a benefits package, including health insurance. The sad truth is that most ranches are subsidized with off farm income. When you are Ranching For Profit there is no such thing as free labor.

You might be ranching for profit if you don’t put up hay.
Most ranchers shouldn’t be putting up hay. They don’t have the scale to justify owning equipment. If they grow hay, they ought to hire someone else to put it up. Can’t find anyone reliable in your area to put it up? Sounds like an opportunity to start a profitable custom hay enterprise. Of course, you should hire someone else to drive the tractor.

You might be ranching for profit if you don’t feed hay.
There are some profitable ranchers who feed a little hay, but they don’t feed much (generally less than ¼ ton per cow per year). To minimize or eliminate hay we need to match our production schedule to the forage cycle. With cows, this usually means calving a month after the grass starts growing and/or creating seasonal enterprises. If you have deep snow for 4 months, maybe it is time to admit that you don’t live in cow country … at least not year-round cow country.

You might be ranching for profit if your enterprise mix matches the drought risk of your ranch.
If you don’t have the grass, you better not have the mouths. You can’t feed your way out of a drought. You’ve got to destock. Destocking becomes less painful when your enterprise mix matches the drought risk of the ranch. This means having a “keeper herd” and a “disposable herd” (a group that you can easily liquidate). If the drought is too severe you may need to destock some animals in the keeper herd. You’d be smart to make a destocking plan before the drought hits to take some of the emotion out of the destocking decisions.

You might be ranching for profit if you had to rent your ranch from a neighbor.
Some folks own their land outright and don’t make land payments or pay rent. If that’s you, congratulations. It’s a whole lot easier for your operation to cash flow without having to write that big land check every year…but if you are ranching for profit, you would be able to pay it if you had to. The operating business should be thought of as separate from the land business, and that operating business ought to be paying market rate rent for the land it uses. If your place is really profitable, you ought to be able to make it even more profitable by renting the neighbor’s and expanding.

You might be ranching for profit if you know the 3 Secrets for Increasing Profit™.
There are only three things you can do to increase profit in any business, including your ranch: keep overheads low, improve the gross margin per unit, and increase turnover. The real trick is to know which of the three secrets applies to you right now and what to do about it. If you are ranching for profit you’d know your numbers and you’d know what they mean.

If you aren’t ranching for profit, I hope we’ll see you at an RFP school soon so you can get started.

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  1. Wouldn’t keeping overhead low be one in the same with improving gross margin?


    1. Good question, but no. Overhead Costs are land and labor costs. Gross Margin is is calculated by calculating the total value of production (called Gross Product) and subtracting Direct Costs. Direct costs are costs that increase or decrease directly as units of production increase and decrease. They include things like supplement & substitute feed, vaccine and stuff like that. Of course if you pay rent on a per head basis that also acts like a Direct Cost, but the over riding rule is that all land and labor costs are Overheads.

      What we really want to look at when we look at Gross Margin is Gross Margin per Unit. Gross Margin per Unit measures the economic efficiency of the unit (the efficiency of a cow, or a steer, or a sheep, etc.) efficiency of an enterprise.

      When we look at overheads we are looking at the efficiency of labor and/or land.

      Think of it this way, let’s say we have 100 cows and a pick up truck and that we allocate the cost of operating a pick up truck (about $10/year) to the cows. That would be $100 of truck cost per cow ($10,000/100 cows = $100/cow) . Now let’s get 25 more cows. That’s not likely to increase my pick up costs so now the cost would be $80/cow (10,000/125 = $80/cow). That’s the way you’d figure things if you were calculating Unit Cost of Production (UCOP), which is what most universities would suggest you calculate and which, in my opinion, is an absolutely useless statistic. But adding the 25 cows did not increase the efficiency of the cows. It increased the efficiency of the pick up.

      If the crunching the numbers is going to be more than an academic exercise, if it is going to have real diagnostic value and provide actionable information from which you can make important decisions with confidence, we’ve got to treat overheads separately and keep them out of the gross margin calculation.

      Sorry about my long winded answer. I actually get pretty frustrated with the useless UCOP dogma that has made it harder for people to learn THE right way of looking at the numbers. What makes learning something new so hard, is not the new thing, it is letting go of the old thing.


  2. With pasture rental rates as high as they are, it may be more cost effective to buy in hay rather than rent pasture to stockpile for winter feed.


    1. It’s crazy, but you are right. In some places at some times the world turns upside down and it is cheaper to feed hay…at least if you only consider the cost of the feed…put add to that the cost of the feedING and it may change the result…maybe not.


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