Duly noted: Proper management includes appropriate use of financing
January 18, 2018
I set out to write a story about how a ranching operation can exist without needing loans. I know it's possible. The ranch we're on operates under that premise, but after speaking with John Hewlett, a farm and ranch management specialist of Agricultural and Applied Economics at the University of Wyoming, we considered that perhaps it's not necessary for a ranch to operate without loans. Allan Crockett, a business coach and instructor in the Ranching for Profit school, is not steadfast against financing, but instead encourages it to be used as a tool. Something, he said, that usually isn't.
Hewlett said most ranchers don't care to pay interest on loans and some don't even want to pay taxes, but taxes indicate the ranch is profitable.
Even if the loan isn't required by the ranch, if perhaps it is stable and profitable enough to be self-funded, financing may still be a wise choice, Hewlett said, in order to get ahead. Paying the ranch interest for a self-funded loan is necessary for borrowing, and an interest loan offered by a bank may be less than the self-funded loan's interest rate.
"The way to look at interest, from my perspective, is that you get ahead if you have revenue in excess of the expense. The ag economist would say you're further ahead. Also true of nearly everything that you obtain to do agriculture, whether it's a tractor, a small, medium or big tractor. The big tractor gives more service, uses more fuel, but probably requires a bigger loan. That doesn't make that bigger tractor evil. If you have a bigger place to work, more acreage for crops, if you have hay that you're trying to work that ground up for, the bigger tractor may allow for just you to do that versus paying someone else to do it. The bigger tractor might be a good investment," Hewlett said.
There may also be instances where it makes more sense to lease a tractor instead of purchasing if it would be implemented for a short time. Penciling the options, Hewlett said, is worth doing to allow for the option yielding the most profit.
Ranching without an operating note is an option if the finances are available. Crockett and Ranching for Profit stress that changing how you manage your livestock and land can drastically, over time, change the financial status of the ranch. Many times, those financial changes that drastically increase profit happen very quickly, even in a year or less. Often this is done by eliminating an enterprise(s) that isn't making any money, and focusing on the enterprise(s) that is making money. By making the ranch more profitable by implementing shifts in the "way it has always been done," Crockett said, can allow for a ranch to make more money, allowing for options like choosing to forgo the operating note.
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The three secrets Crockett listed, and that are taught in the Ranching for Profit School, to become more profitable are: reduce overhead, increase gross margin per unit, and/or increase turnover. By enacting all three, there stands to be an increase in positive results.
"What we found is that most ranches' overheads eat them alive. We've got to get a good handle on costs, and let nature do most of the work," Crockett said. He listed the example that antelope, deer, and elk calve in late-spring, and by following their example, we can allow the available forage at that time of year to go to work when the cow needs it the most.
"I ask people when they're calving, and they say, 'Spring.' I say, 'What month is that?' They say January," Crockett said. "That's the dead of winter. If we get out of the way and mimic nature, we let our ranch do what nature does and does very well by herself."
He challenges ranchers to consider shifting to calving in April, May, and June, allowing the rancher to cut way back on hay and cake, and with that, labor decreases, but not just with the people involved, but everything that supports labor: the tractor to feed round bales, a bale-bed and cake pickup and the costs that go with each of those.
The trepidations most have with pushing calving back up three to five months is minimizing calf size and productivity, but Crockett argues that profits probably don’t offset the overhead costs associated with bigger calves.
Many of the calves that are born in late-spring months are selling for the same as their late winter counterparts, he said. "In the production side of things, we have bigger calves, what we really need to do is cut our costs. We're all selling things to increase production, yet we're becoming less and less profitable. Productivity is not the answer, the answer is getting a handle on our costs and really be frugal about where we spend money."
Increasing turnover of the cows and calves, steers, heifers, whatever the producer's intent, is made possible by cell grazing, which involves building more fences and installing additional water sources, sending livestock through pastures quicker and eating a larger variety of available forage, therefore allowing the grass to increase in productivity and the soil to improve.
There are, of course, costs associated with operating a ranch, even one that has smaller overhead and larger profit margins, so what is to be done about these expenses? They don't all require a loan, whether that is a loan within the business or from an outside source.
"The whole process is that we have healthy soil in which we've grown grass; we turned the sunlight energy into green grass, and we've harvested that with our animals. To me if I take some of those profits, and increase the number of animals by funding it myself, that's ok," Crockett said.
This transition may take years for some, Crockett said, and a loan is acceptable in the instance of growing the business into a profitable venture. He gave the example of a ranch that has established cell-grazing, allowing for more productivity coming from grasses that have been in the family for a century. All of a sudden the land can support 100 more head in addition to the 500 there, he said, but there isn't enough cash flow to make the purchase.
"You can get a loan if you can do it right. If you have the right cows at the right price and it increases productivity of the ranch, then there's nothing wrong with sound business debt," Crockett said. "Too many don't have sound business debt and work for free, or they sell off a corner of land or a couple pastures to the neighbor to pay off debt. To me, if this is truly a business—and if not, we need to admit it’s not, then profit is not an issue—if it’s a business, we need to make a profit."
While Crockett resides in Arizona, he assists ranchers throughout the United States, Canada, and Mexico, viewing the various businesses and land during all months of the year. He asks the northern ranches why they need that big tractor? And the reality is, he said, that there are snow storms, and people and cows get snowed in.
"Atlas blizzards happens, droughts happen, but if you begin to manage as though those kinds of things happen every year and forget they are exceptions to the rule, then you being to want to manage for those exceptions instead of the norm," he said.
A lot of ranchers in the north and Canada think they have to feed all winter, that cows can't graze through snow, but it's not a hard thing unless they get into an ice situation, Crockett said.
"Most people are already feeding, and they do that based on the calendar. They may feed the 15th of November or around Christmas and it has nothing to do with weather conditions or body condition score of the animal. That's absurd, why would you do that?" he said. "With the people that I coach, I ask, 'Why are we doing this?' Sometimes I have to ask that question seven times to get to the real reason we do this. We can cut our costs tremendously, we can get to the point, we don't have to have an operating loan, we can be self-funded, and it's great place to be."