Does My Ranch Make a Profit? Should It?
I recently had an interesting email discussion with a few ranchers over the subject of profit. A well-known rancher in his newsletter commented, “If you can’t make a decent profit at today’s prices, you need to get out of the cow/calf business.” I wrote back explaining that most of the ranchers I work with are not making an economic profit today.
I have the privilege of working with some of the best, most profit-minded ranchers in the region, and I expect if they are challenged, then others are in an even tougher spot. I think the real issue is that we are likely working with two definitions of profit. Many ranches are satisfied if they can pay off the operating line at the end of the year or have enough money left over to pay for groceries. Having positive cash flow is different from making an economic profit.
For a livestock business to show an economic profit, we have to kick out the economic crutches we like to prop up a livestock business with. For example, if you sold your cowherd, what could you lease the grass to someone else for? Charge your cows for this as an opportunity cost for grazed feed. What about that hay you could have sold? Charge them market price for that, as well. This continues with labor. If our cows make an economic profit, then they don’t need to be propped up with free labor from ownership. Charge the cows what it would cost to replace you and other owners for your contribution to the business.
In today’s market, once we consider these often ‘non-cash’ expenses then most ranches are not making an economic profit.
Using this definition does your livestock business make an economic profit? If the answer is no, then the next question is – should it? I put a lot of emphasis in my work on profitable ranching. Maybe I put too much emphasis on this. If you are comfortable and content with where you are and the outcomes your ranch is producing, then maybe there is no reason to be overly concerned with producing a profit.
I think the reason I put so much emphasis on profit is that those with whom I’m working want their ranch to do more. Perhaps they want to create room for another generation. Maybe they want to expand the business. Maybe they want to create a nest egg outside of the ranch for retirement or maybe they like the challenge and excitement of creating and leading a profitable business. For me personally, it would not be motivating to work for a business whose ambition was “don’t go broke.” It would be much more enjoyable to be a part of something focused on winning.
The email I received from the rancher responding to my comment started this way, “This model makes it impossible to make a cow/calf operation pencil out.” A classic quote from Henry Ford comes to mind, “Whether you think you can or you can’t, either way you are right.” It is easy to just dismiss this and blame it on the markets or the weather as the chief factors that determine your profitability.
However, it is much more meaningful be proactive. This could be learning how to do an economic analysis of your business and discovering the enterprises that are working and those that are not or going the next step and comparing the economic performance of your business to key benchmarks and developing strategies to leverage your advantages and address your weaknesses.
After all, if someone is doing it, it might be possible. Have a great summer, and I look forward to hearing from you.