Got Some Money Burning a Hole in Your Pocket?
By Dallas Mount, UW Extension Educator
The perfect storm has hit the livestock business for 2014. All the stars aligned, the rain fell, the grass grew, and the markets passed the records and just kept on going. Your ranch may very well have record income for the 2014 production year, and you may be looking for a way to pour some of that money back into the ranch so you don’t have to give it to the government.
Here is my top list of investments with a good return on investment (ROI) and also a short list of “don’t do’s.”
Improve your grazing system
Of just about any investment you can make on the ranch that produces a positive return on investment (ROI), improving your ability to manage grazing likely tops the list.
Most ranches have overgrazed and undergrazed portions of the ranch. Developing water, increasing cross fencing or the cheapest of all – combining herds, can greatly improve the total cow-days or animal unit months (AUMs) your ranch produces.
Many ranches I get the pleasure of taking the passenger seat tour of have pastures that are dominated by undesirable plants. Maybe it is cheatgrass, low-growing warm season grasses, brush or a host of other less desirable plants. Often times on the same soil type, in a site with the same moisture conditions, you will find a plant community dominated by desirable, productive plants.
What has caused one site to be very productive and the other site not? Maybe it is your ability to manage grazing in that pasture – either staying too long or coming back too soon. Likely, developing water and adding additional pastures will allow you to better control the grazing causing the desirable plants to thrive and outcompete the undesirable plants over time. It is not unheard of to double a ranch’s carrying capacity through improved grazing management, although an increase of 20 to 30 percent is more conservative bet. Don’t think four-wire barb wire fence, either – that is the 1900s model. One or two wire high-tensile fence built correctly can control cattle much better for a fraction of the cost.
The price of grass is showing no sign of going down given the interest in growing the nation’s cowherd so this investment is likely to continue to pay off into the foreseeable future.
Invest in your people
Professional development is often one of the last things ranchers think about, but it can reap excellent returns if spent wisely.
What if you were able to learn how to conduct an economic analysis of your business that helped you identify an enterprise on your ranch that is losing tens of thousands of dollars each year? Most ranches have at least one enterprise that isn’t working. What if you stopped doing this? You would be working less and making more money.
What if you learned how to build fences that cost one-quarter of traditional fences and went up in less than one-half the time with less maintenance? Might that time be well spent?
Find an educational opportunity that will challenge you, not confirm your current beliefs, and commit to attending it. The payoff may be enormous.
Harlan Hughes says, “Ranching by its nature must be a low-overhead business to be profitable.”
Overhead on the ranch generally is related to depreciation and repair costs of equipment and buildings. The less reliance your operation can have on these things, the greater the likelihood that your livestock business will be profitable in good times and bad. It may be tempting to add a machine that may decrease a burden in years like this when cash flow is good.
However, remember that the cows will need to continue to cover the depreciation and repair costs on this machine when times get tight once again. Resist the temptation to add to the overhead expenses of your ranch!
Bad business decisions to avoid taxes
So the ranch had such a good year that you may be faced with an income tax problem. What a great problem to have! Don’t fall victim to the too often occurrence of making a poor business decision to avoid paying taxes.
If it is not a good business decision, then it is likely not a good decision regardless of the tax implications. Maybe there is a strategy that you are planning on implementing that you can tweak the timing or implementation of to avoid some taxes – fine, but be ruthless in your scrutiny of these decisions.
I hope your ranch is able to make the most of this “perfect storm” that we are experiencing. We can learn lessons from the corn farmers when corn shot up to eight dollars per bushel in the recent past only to return to prices less than half of that today.
Enjoy this wonderful time we are experiencing, but make management decisions that will position your business to be successful in the long term as well as the short term.