Category: Goals Strategy Tactics

UNL Cow-Q-Lator

An Excel worksheet with Examples comparing the cost of TDN and Crude Protein in different feeds considering transportation and handling costs with losses. It also calculates the feed needed and total cost given herd size and days fed.

This is the Goto software that will give you the Best idea on using your available resources to combine them – Making sure your Livestock are getting the right balance in their DIET – while keeping your costs Low.

Click Here for Link to Cow-Q-Latro

Damaged relationships: the price of a failed succession plan

I have read many articles about how lack of succession planning puts the financial future of farms at risk.

They are attention grabbers and while I agree that the lack of or an ineffectively implemented succession plan can have financial implications, mostly farms survive.

These same articles rarely talk about the hidden price of a failed succession, which is the harm to relationships. Family relationships are on the frontline of the succession process. We have all heard the stories about broken families following botched

If asked, the parents in those families would have said their key goals were “to keep the farm in the family and for the kids not to fight.” And yet fight they did. We all hate it when our kids fight, at whatever age.

In succession planning, there are hard and soft issues. Hard issues are those that can be measured in numbers such as net worth and profitability that can be dealt with in a technical manner.

Soft issues are the human side of the equation where we must understand the dynamics of the people involved. A poorly planned and executed plan may not only suffer negative financial and taxation consequences but can ruin family relationships.

Soft issues?

Soft issues can include unresolved conflict within the family, lack of trust among family members, unrealistic expectations and how to be fair to everyone when only one child wants be a farmer. Other issues are fear of losing control and fear of putting the family wealth and a lifetime’s work at risk.

Farm owners face many difficult questions: how do I deal with unreasonable expectations or feelings of entitlement that children may have? How do I treat those that don’t want to farm? Can I still play a role in the farm business?

Soft issues deserve the same degree of attention as the other issues for an effective plan—and they are often the most challenging.

Communication is key

One of the first steps I take when assisting clients with succession planning is to interview all family members, those actively farming and those who are not.

I want to identify divergent interests but also those areas of common interest and expectations that can be built on to move the plan forward. I also want to identify potential obstacles, often soft issues that are difficult to quantify but can erode trust. There is no one-size-fits-all approach.

Often when we get down to the detailed planning, it’s mom and dad and the successor at the table but every family member’s view must be represented. Parents instinctively see their children as equals; they love them equally after all.

However, when it comes to the farm, and keeping it in the family, equal distribution of wealth is often impossible. That leads to the “fair versus equal” discussion and communication is the only way reach consensus and harmony.

It’s important to discuss uncomfortable issues and you must make sure that whatever comes out of that process is effectively communicated to all in the family.

You can plan all you like, but unless you communicate effectively around the issue of some children getting more than others, your succession plan could fail on one of its key objectives — family harmony. You may keep the farm in the family, but it will be a divided family.

Why start early?

Although reasons vary as to why people don’t plan for succession or delay it, it typically comes down to what David Maister, in his book Strategy and the Fat Smoker, describes: We put things off because “the reward (and pleasure) is in the future but the disruption, discomfort and discipline needed to get there are immediate.”

For many, the soft issues are especially uncomfortable and parents worry about upsetting the family dynamic.

Time is your friend – use it

In most situations, our clients have identified the successor or successors early on and planning could have begun far sooner, giving the family more options and time to plan and implement.

An early start gives family members the understanding of what to expect when the parents retire. It is important to think of succession planning not as an event but as a process that takes years. The sooner you start the more time you will have to work through the layers, evaluate multiple possibilities and have those important conversations.

Time is an enormous ally in managing the succession process while ensuring family relationships stay intact. Remember, families better their chances of success one conversation at a time.

Jonathan Small is a partner in MNP’s Farm Management Consulting practice in Red Deer, Alta. He can be reached at 1.403.356.1281 or jonathan.small@mnp.ca

Consider the Future

Consider the Future

Have you noticed that the most successful and happy people throughout history have been those who made decisions that were based on the future?   It’s true!   Successful people know that nothing stays the same.   The present is different from the past – and the future will be different from the present.   Those who make decisions that are based on the future will always have a HUGE competitive advantage over those who continue to make decisions based on the past and/or the present.

Unfortunately, nearly all people from all walks of life are afraid to make decisions that are based on anything but the past or the present.   It has always been this way, and it will probably always be this way.   Even though they can see things transforming before their very eyes, they are reluctant to make any changes in what they are doing.   It’s as though they would rather fail doing what they have always done than succeed if success requires change.   That is a shame – but it gives you the opportunity to move your family and your family’s business to a very sought-after position.

Based on what you think about the future, what kind of management decisions should you be making in your cow-calf operation?   I’m not going to tell you what I think.   I want you to do your own thinking.   You may come up with something different and/or better than what I have.   The decisions you come up with, however, need to be based on what you think the future holds.   Be bold in your actions.   Those who are slow to take the appropriate actions may lose all they have – forcing their kids and grandkids to get jobs in town.

People Hate Change –

Cowboy Logic: “Some people hate change so much, they put the quarter back into the coke machine.”

By Kit Pharo

We had an inordinate number of unsubscribers last week.   This happens every now and then – and I never know why for sure.   In this case, I suspect it had to do with our “Consider the Future” article.   Most people do not want to plan for the future, especially if it will involve change.

People hate change.   It’s as though they would rather fail doing what they have always done than succeed if success requires change.   Nowhere is this more prevalent than in agriculture.   It takes years, sometimes decades, for people in agriculture to make simple changes – even though they know the change will be for their own good.

I am led to believe the primary reason change is so slow in agriculture is the fact that many farms and ranches are multi-generational.   It’s not uncommon for there to be two or three generations dependent on the farm or ranch for their livelihood.   Grandpa may have moved to town, but he still derives his income from the farm or ranch.   The young buck who is doing most of the work is living and working in his dad’s or, worse yet, his granddad’s paradigm.

There is an old adage that says, “We advance one funeral at a time.”   Once again, nowhere is this more true than in agriculture.   IT DOESN’T HAVE TO BE THIS WAY!   If you want to, you can break away from the status quo herd and take control of your family’s future.   The sooner the better!

Quote Worth Re-Quoting –

“It is not necessary to change.   Survival is not mandatory.”   W. Edwards Deming

Three Keys to Financial Success –

By Kit Pharo

Status quo cow-calf producers are getting by – but most would not consider themselves to be financially successful.   Truth be known, in a ten-year period, status quo producers are doing very good just to break even.   Well over half of them won’t break even.   In a nutshell, there are three keys to attaining real financial success in the cow-calf business.

  1. Reduce and eliminate expenses
  2. Increase pounds per acre
  3. Sell calves for a premium

Reducing and eliminating expenses is easier than most cow-calf producers think – but it will require a slight paradigm shift.   Most expenses are fossil fuel-based.   Real success in this business will take place when we transition from fossil fuel energy to free solar energy.   Winter feeding is usually the biggest expense.   With the right kind of cows and with proper grazing management, most winter feeding can be eliminated.   Working with nature will also reduce and eliminate expenses.

Increasing pounds per acre will never take place until you STOP focusing on increasing pounds per animal.   Status quo producers have been focused on the wrong thing for the past 50 years.   Stocking rate affects profitability, or lack thereof, more than anything else.   With the right size and type of cow, most cow-calf producers can increase stocking rate by at least 30 percent.   With proper grazing management, it is possible to increase stocking rate by another 50 to 200 percent.

Status quo cow-calf producers will never sell their calves for a premium.   They will always take what the market is willing to pay them on that particular day.   PCC customers, on the other hand, will soon be able to sell their calves for a $15/cwt premium.   That amounts to a premium of $75 per head on 500-pound calves – and a premium of $120 per head on 800-pound yearlings.   Nowhere else can you receive premiums like this.

Key Performance Indicators for Cow-Calf Operations.

Ranch KPI

The national beef herd is currently expanding from historically low levels. This expansion and the possibility of lower prices provide an excellent opportunity for you to review financial performance measurements that are critical to your operation. These measurements are known as Key Performance Indicators (KPIs) and are based on production and financial data. You can use these KPIs to evaluate different factors that are crucial to the success of your cow-calf operation.  They can help any rancher evaluate whether the operation is fulfilling his or her goals.  In a sense, they are a report card that can be used to identify weaknesses in a given operation.  Below are twelve KPIs that every rancher should consider as they bring their ranch to full capacity.

It is important that you calculate KPIs correctly and base them on good data.  Be honest with yourself.  In some instances, ranchers find that their financial recordkeeping isn’t as good as it should be.  The most accurate KPIs are calculated from financial accrual-adjusted records.  Remember that no single KPI assures success.  As with a ranch’s resources, the ranch manager must balance the use of these indicators.  To focus on one KPI, at the expense of another, will not improve the overall performance of the ranch.  As an example, increasing the pounds weaned per exposed female does no good if the nutritional base expense indicator is too high.  KPIs have to be in balance for overall performance to be excellent.  Finally, most ranches are involved in multiple enterprises.  The KPI’s discussed below are strictly for the cow-calf segment of a ranch.

Target levels for the various KPIs have been identified through analysis of herd data from several sources including hundreds of herds in the Beef Cow-calf SPA and the author’s research and experience working with individual ranch owners and managers.

  1. Pounds Weaned per Exposed Female – Greater than 460 pounds per Exposed Female

The primary objective for owning breeding beef females is to wean calves.  While every rancher has this goal, how they accomplish it over time varies.  However, the number of calves weaned and how heavy those calves are serve as an indicator of ranch productivity.  From a production standpoint, the pounds of weaned calf per exposed female remains the most important production KPI.  To calculate this KPI, divide the total pounds of weaned calves by the total number of exposed breeding females that were intended to be bred.  This KPI is a function of weaning percentage and weaning weights.  A high weaning percentage begins with a high pregnancy rate followed by a high calving percentage.  While weaning weights are certainly a function of genetics and management, weather and days of age are the most important determinants.  To solve low pounds weaned per exposed female, a rancher should look first at reproduction rates, not at increasing weaning weights.

  1. Revenue per Breeding Female – Greater than $950 per Breeding Female

For a ranch to record net income, it must sell products and generate revenue.  In its simplest form, this KPI is a product of pounds weaned being sold for a competitive price.  However, revenue per breeding female also includes other items.  First, this KPI would include the gains or losses associated with the sales of culled breeding stock.  Second, it should include the annual value change (accrual adjustment) of the weaned calves that are kept in the herd as replacement heifers or replacement bulls.  Ideally, this value would be the accumulated expenses of the calves; however, many ranchers may choose to use market value.  The target figure of $950 per breeding female is based on accumulated expenses, not market value.  If you use the market value approach, the KPI should be higher than $950.

  1. Nutrition Base Expense as a Percent of Total Expenses – Between 30.0 and 45.0 Percent

Because reproduction is the the most important factor in ranch productivity, proper herd nutrition is imperative.  Yet, no two ranches have exactly the same resources to grow, purchase, and maintain the nutritional base required by the breeding herd.  Thus, we need to identify three types of nutritional expense:  1) expenditures for purchasing forage, protein supplement, salt, and minerals; 2) expenses for producing raised feed, such as hay production; 3) costs to maintain and improve grazing for the herd.  Those familiar with the Beef Cow-calf SPA analysis will recognize these as the Raised/Purchased Feed Expense and the Grazing Expense.  To calculate this KPI, start with the total expense of the ranch including owner labor and depreciation.  Then, identify the nutritional costs.  Most successful ranchers keep nutritional expenses at 30 to 45 percent of total expenses.

  1. Labor and Management Expense as a Percent of Total Revenue – Less than 15 Percent

Labor and management expense can be the most variable cost across beef herds.  To calculate this KPI, determine what the total labor and management expense is.  If the ranch uses only hired labor and management, this figure is relatively easy to determine.  If an owner operates the ranch, he must establish a figure for his labor for this KPI to be comparable.  In either case, items such as payroll taxes and employee benefits need to be included.  Labor and management costs are higher than most people realize due to the benefits that hired managers receive.  To interpret this KPI, the ranch owner should target spending less than $0.15 for labor and management per one dollar of revenue generated.

  1. Operating Expense as a Percentage of Total Revenue – Less than 75 Percent

Controlling expenses can be one of the most important exercises for ranch owners and managers.  Managers should target operating expenses at less than 75 percent of total revenue.  Operating expenses include all expenses except interest and depreciation.  If operating expenses are less than 75 percent the ranch’s total revenue, the ranch can use the remaining 25 percent to 1) pay interest, 2) hold in escrow to cover depreciation expense, or 3) retain as net income.  Clearly, a ranch will suffer a net loss if operating expenses plus interest expense and depreciation is greater than total revenue.

  1. Net Income Ratio – Greater than 5 Percent

This ratio corresponds with the fifth KPI.  Net Income is calculated as total revenue minus total expenses.  This KPI represents that portion of total revenue that is retained as net income.  Put another way, a ranch can do four things with total revenue, 1) pay operating expenses, 2) pay interest expenses, 3) place in escrow to account for depreciation expenses, or 4) retain as net income.  This KPI records each of the four as a percent of total revenue.  This target is to retain greater than 5 percent of the total ranch revenue as net income, while the remaining 95 percent can be used to pay for operating, interest, or depreciation costs.

  1. Cost per Cwt. of Weaned Calf – Less than $170.00 per Cwt.

For a ranch manager, the best number to know is what it takes to produce a pound of weaned calf, or in this case, 100 pounds of weaned calves.  This KPI incorporates the productivity of the ranch and the total expenses it took to create that productivity.  Every ranch has a different set of resources that it uses to create calves.  This KPI illustrates how efficiently that manager is using those resources.  When calculated correctly, you can compare this figure to other ranchers across the country regardless of the resources that the manager is using.

Industry-wide, this bottom line KPI is where ranchers compete with one another.  Further, it is known that the cattle industry is cyclical and calf prices move between high (resulting in financial profits) and low (generating financial losses).  This cyclical movement of prices relative to each ranch’s cost of production is what encourages specific ranchers, and the cow-calf industry in general, to expand or contract.  Given current fundamentals, a cost of less than $170 per cwt. is a target ranchers should shoot for.

  1. Total Investment (Market Basis) per Breeding Female – Between $7,500 and $12,500

On most ranches, owned land is the major asset on the balance sheet.  Currently, external factors have driven land prices higher.  In today’s real estate market, ranchers are finding it hard for breeding cows to pay for any land purchase.  Furthermore, potential ranch heirs look at the large investment, labor required, and low rate of return, and have to wonder whether it would be better to invest elsewhere. The ranch manager’s job is to generate the greatest return on the lowest investment possible.  This KPI target range, $7,500 to $12,500, takes into account that some land has already been purchased (or inherited) or that some portion of land the ranch uses is leased.  To calculate this KPI, divide the total asset investment from the balance sheet by the beginning fiscal year inventory of breeding females.

  1. Debt per Breeding Female – Less than $500 per Breeding Female

Given the low rate of return on assets, most ranches cannot pay for much debt.  To illustrate, a target Rate of Return on Assets KPI (Target KPI #13) is greater than 1.5 percent.  With interest rates greater than 4.0 percent, it is impractical to purchase assets that will only return 1.5 percent when that interest is costing the ranch 4.0 percent.  This example does not take into account cases where the asset improves the ranch efficiency enough to overcome the interest cost.  This KPI can vary with some herds able to handle more debt than others.  To calculate this KPI, divide the total debt of the ranch from the balance sheet by the beginning fiscal year inventory of breeding females.  In general, successful ranch managers keep the debt per breeding female under $500 each.

  1. Equity to Asset Ratio (Market Basis) – Greater than 50 Percent

The equity to asset ratio is the percentage of a ranch the owner owns.  To calculate this KPI, divide the net equity by the total assets.  Both figures come from a ranch’s balance sheet.  The opposite image of this KPI is the debt to asset ratio that shows the percentage of the ranch owned by others, such as a lender.  Few lenders will want to finance a ranch if they already own more than 50 percent of it.  This being the case, you should strive to own more than half of the assets.  The type of ranch assets you own will influence whether you can get financing.  For example, if your share is made up of land you own, a lender may find it easier to lend money against an equity to asset ratio of less than half.

  1. Asset Turnover Ratio (Cost Basis) – Greater than 15 Percent

Because ranching is such a highly capitalized business, it is vital that the manager generate the greatest possible net income from those assets.  The asset turnover ratio illustrates how much those assets are generating (turning).  To achieve a KPI target of 15 percent, every dollar of asset making up a particular ranch must generate $0.15.  This figure may seem quite low, but it demonstrates the nature of the ranching business.  To calculate this KPI, divide the net income by the value of assets from the balance sheet.

  1. Rate of Return on Assets (Market Basis) – Greater than 1.5 Percent

Managers depend on the rate of return on assets to evaluate their performance.  The manager’s charge is to use the ranch’s assets to generate positive net income.  In this way, ranch managers are like fund managers on Wall Street.  The difference, however, is the expected ROA.  While the long term return from Wall Street may be greater than 6.0 percent, the long term return from breeding beef cows is closer to 0.5 percent.  When calculated correctly, the ROA can be compared to any other asset management business including your savings account at the local bank.  To calculate this KPI, start with the net income and add to it the interest expenses for the year.  Then, divide this figure by the average value of the assets from the balance sheet.  In this case, we use the market value basis as opposed to the cost basis of the assets.  Successful ranches have an ROA greater than 1.5% over time.

The twelve KPI’s presented here are not the only measures that a ranch should consider.  However, these KPI’s provide an excellent starting point for evaluating the financial targets a ranching operation should strive for.  Remember, each ranch is unique and possibly involved in multiple enterprises that contribute to the financial well-being of the operation. These variations may alter how certain KPIs are viewed.

 

So you want to be a seedstock producer?

Gilda V. Bryant for Progressive Cattleman

Commercial cattle producers may jump into the seedstock business because the notion of selling a bull or heifer for big bucks is appealing.

However, this approach often leads to problems. In fact, new seedstock producers have a high rate of failure; the average operation folds in five years or less. Common mistakes include not having or following a business plan, not grasping the complex issue of genetics or simply the inability to prioritize chores.

Matt Spangler, Ph.D., University of Nebraska – Lincoln, says new seedstock producers may not understand their unit cost of production will likely increase.

Additional labor requirements, such as the additional routine handling of animals to measure and record traits such as birth, weaning and yearling weights, yearly ultrasound scan data and DNA sampling and testing are a few of the tasks that add expenses to an operation. There are also breed organization membership expenses and animal registration.

“Detailed record-keeping and interfacing with the breed organizations in reporting data represent a change in management and a change in labor requirements that accompany moving from commercial production to seedstock production,” Spangler explains.

New seedstock producers can utilize several strategies to be successful. One is a change in philosophy. The revenue stream for commercial cattle producers is beef production based on phenotype, while seedstock producers should focus on the accumulation of genetic merit. Plus, seedstock producers make rapid genetic changes, with faster generation turnover, using younger sires and dams.

“A lot of people who enter this business make the broad assumption that every bull calf born will be merchandised as a bull,” Spangler reports.

“The reality is: The good seedstock producers who understand how to make genetic progress realize they’re only going to market half of the bull calves, but they still have to collect all the data on each one, including the ones they don’t merchandise as a bull. [It’s] another source of added expense. Culled bull calves usually enter feedyards after accumulating expenses that are more than the average weaned calf or yearling steer.”

Bringing in new seedstock

New seedstock producers may buy animals from another successful seedstock operation, hoping the breeder’s success will transfer with newly purchased animals. This rarely works. For long-term success, producers must have a plan that includes developing a breeding goal which matches an identified set of commercial bull buyers. Producers need to work the plan and stick with it.

Spangler says people who try short-term trends and fads, constantly changing their breeding goals, often strike out.

“Seedstock producers have to be willing to fail, and they have to quickly adapt to changes,” Spangler advises. “Not everyone is good at every task. Clearly identify what you’re good at. Put a team together that can work together to accomplish tasks. Being aware of what you’re good at and what you’re not is very important.”

Robert Weaber, Ph.D., Kansas State University, says taking a tactical, pragmatic approach to building a seedstock business promotes success. Instead of using an expensive heifer as a donor, which rarely works, new producers may purchase a package of 3-, 4- or 5-year-old cows that are similar to the desired pedigree and genetic potential they want to develop.

To attract modest-sized producers who buy two to four bulls at a time, providing a choice of more than a dozen animals is necessary.

“A financial plan is key,” Weaber explains. “[A new entrant] may have a relatively good commercial beef production and management background. If you hire a herdsman to run a couple 100 cows for you, [get the right person]. Employees in charge of the day-to-day will drive your success or failure in the coming months.”

Compiling genetic data

Weaber recommends developing a strategy for performance data collection and performance testing. Folks often underestimate the complexity of the data side of the business. It also takes time to report gathered information to respective breed associations and to incorporate this data into decision-making.

Year-round customer service separates successful seedstock producers from the competition. They visit with a commercial bull buyer to determine his or her needs and match each bull to the consumer’s production environment and breeding objectives. They quickly respond to a customer’s questions that may deal with herd health issues, feeding or marketing calves.

“[Customers] want problem-free bulls,” Spangler advises. “If they buy a bull, they don’t want to worry about temperament issues. They bought him based on some criteria, and they want to make sure when calves hit the ground, that bull met those criteria. If they have problems with the bull, they want to be compensated without any questions asked. They want a problem-free buying experience.”

Weaber reports online sales and private treaty open house events are becoming more common. These win-win events allow commercial customers to receive quality customer service, while seedstock producers attract and retain new customers. Often the seedstock business is more about the people and relationships than it is about the genetics customers buy.

“I don’t want to discourage people who want to get into the seedstock business,” Weaber advises. “I want them to be successful in the business, [understanding] that planning goes a long way. There are plenty of pitfalls in seedstock production. Make sure you’re prepared to withstand the storm.”

New seedstock entrants may learn more about the business from breed association field services staff. A first-time breeder can develop, explore and build relationships through breeder association contacts. Breed associations also provide tours and educational programs.

Consider visiting other seedstock producers in the area. Subscribe to several breed journals to learn about association services, data collection and new marketing ideas. Hire a consultant for advice about breeding, nutrition or building a bull development ration.

Join the seedstock community

Weaber believes it is vital to be engaged in the community, attending local county cattlemen’s meetings, extension programs or even drinking coffee in the local coffee shop on Friday mornings. Community activities keep producers involved and connected to potential customers. After all, 90 percent of all bulls sold are to buyers who live within a 100-mile radius of the seedstock producer’s operation.

Seedstock producer Gordon Jamison raises Hereford cattle on the Jamison Ranch in western Kansas. This family operation breeds L1 Herefords for efficiency, soundness and muscling with emphasis on maternal traits for commercial producers. In business for 40 years, Jamison’s customers rely on outstanding genetics and customer service.

“Customer service goes a long way toward providing long-term generational customers,” Jamison explains. “Our goal is to have buyers that come back year after year. There are a lot of seedstock suppliers. … [Buying bulls] is almost as easy as going to Walmart. Customer service is tremendously important.”

Jamison offers his customers free delivery for all bulls purchased, including those sold by video or over the phone. He also provides a first-breeding-season guarantee and a soundness guarantee that covers bulls up to three years. Jamison assists buyers as they market cattle, especially heifers. And he helps them gain access to branded beef programs.

“Examine that desire [to be a seedstock producer] carefully because being a seedstock supplier isn’t for everyone,” Jamison advises. “If you don’t enjoy working with the public, if you’re not willing to deal with issues that are going to arise, you don’t belong in the seedstock business. It’s as much about customer service as it is providing quality. You have to have a passion for it.”  end mark

ILLUSTRATION: Illustration by Corey Lewis.

Gilda V. Bryant is a freelancer based in Amarillo, Texas. Email Gilda V. Bryant.