Category: Goals Strategy Tactics

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.

Profit strategies: Increasing the cow herd

Pete Talbott  |  Updated: 10/09/2014

Back in February, I discussed the options for utilizing available forage and whether it should be used by expanding the cow herd or a different class of cattle, be it your own or custom graze.  For the purpose of this article let’s assume you have decided to increase your cow herd.  So first, the assumption is made that you did the economic, resource and personal analysis that increasing the brood cow herd is your best option.

There are a number of ways to increase the cow herd, some of which include saving heifers from your calf crop, buying young open heifers, buying bred heifers, buying young bred cows, buying pairs and, lastly, buying open cows.  My thoughts on the last option are very simple: Don’t do it.  Open cows are open for a reason: poor fertility, disease-related problems that you don’t want to introduce into your herd, nutritionally challenged that could be from the resources she was on or her body is not suited to the resources she was on during the last breeding cycle.  The one positive to purchasing open cows is that the initial price will probably be the lower investment at the time of purchase, but that could be the last lowest cost for her.  Like any scenario, there are exceptions, and a specific situation might warrant the risk in obtaining open cows but be very cautious in doing so.

The market levels today don’t make any of the options an easy decision.  Individual goals, ranch resources and operating procedures are a few of the factors that must be considered for each operation.  In addition to the above:

  1. Depending on the ranch, the older the new cow the longer it takes her to acclimate to the new environment and society of the existing herd.  I have found it takes two to three years for a cow in new country to learn the country and reach her production potential for that set of resources.  Now the easier the ranch, the faster the transition will be (i.e., desert vs. irrigated pasture).
  2. Keeping your own heifers delays a product to sell but retains your genetic base and goals (if that is important) and also gives you cattle already adapted to your environmental resource and methods of working the cattle.
  3. Do you spend a lot of time watching heifers at calving?  This could be a burden on human resources.  Calving 3-year olds could all but eliminate having to watch heifers, and I have observed that heifers calving at 30 to 36 months stay in the herd several years longer.  However, this must pass the economic analysis.
  4. Another consideration in calving heifers is when you calve in relation to the grazing season.  Heifers that calve in the dead of winter will always require more inputs than those that calve in more moderate weather and on green grass.
  5. What does it cost to develop a replacement female from a weaner to a producing cow?  Some individuals’ development costs are not much more than the costs of running a mature cow, while others will have costs twice or more than that to run a cow.
  6. Purchasing young bred or young pairs gives you a saleable product sooner.  Can you find what you want in genetics and frame size, adapted to your type of environment?
  7. What are your cash flow needs if you retain? Do you have the assets in hand to purchase, or will you have to borrow?

This is why using a cookbook approach, or industry averages, to come to a decision on your ranch is not appropriate.  You must do the hard work it takes to analyze economic impacts, resource and environmental considerations, human resource requirements and so on.  Use your financial and resource data in coming to the best decision for your business.

See the full article and more in the digital edition of the September issue of Drovers/CattleNetwork.

Goals, Strategy and Tactics for Change

The Goal: Who are you trying to change? What observable actions will let you know you’ve succeeded?

The Strategy: What are the emotions you can amplify, the connections you can make that will cause someone to do something they’ve hesitated to do in the past (change)? The strategy isn’t the point, it’s the lever that helps you cause the change you seek.

The Tactics: What are the actions you take that cause the strategy to work? What are the events and interactions that, when taken together, comprise your strategy?

An example: Our goal is to change good donors to our cause into really generous donors. Our strategy is to establish a standard for big gifts, to make it something that our good donors aspire to because it feels normal for someone like them. And today’s tactic is hosting an industry dinner that will pair some of our best donors with those that might be open to moving up.

If you merely ask someone to help you with a tactic in isolation, it’s likely you won’t get the support you need. But if you can find out if you share a goal with someone, then can explain how your strategy can make it likely that you’ll achieve that goal, working together on a tactic that supports that strategy is an obvious thing to do.

And it certainly opens the door to a useful conversation about whether your goal is useful, your strategy is appropriate and your tactic is coherent and likely to cause the change you seek.

A tactic might feel fun, or the next thing to do, or a lot like what your competition is doing. But a tactic by itself is nothing much worth doing. If it supports a strategy, a longer-term plan that builds on itself and generates leverage, that’s far more powerful. But a strategy without a goal is wasted.