Mr Pratt’s most recent blog discusses using debt properly. Now, okay, my mind goes immediately to the song, ‘Neither a borrower, nor a lender be. Do not forget, stay out of debt.’ Which then led me to wonder where that came from. I knew it was from Shakespeare’s ‘Hamlet’ (Polonius counsels his son, Laertes in Act-I, Scene-III of William Shakespeare’s play, Hamlet by saying, “Neither a borrower nor a lender be; / For loan oft loses both itself and friend.” But what about the tune?
Completely surprised when i discovered that it was created and made famous on the TV sitcom, Gilligan’s Island, which i watched religiously when i was young. SO FUNNY! It is sung to the tune of the Toreador Song in Bizet’s Carmen.
The Bible also has advice on debt and teaches us to guard against being in debt, likening it to slavery and bondage. However, debt does not seem to be a sin, but a tool to earn money wisely, but counting the cost before taking on the burden.
May 9, 2018
from the Ranching for Profit School
A lot of people tell me that they want to be “debt free.” They are tired of making big interest payments on land, livestock, machinery and their operating note. They have had too many sleepless nights worrying about making the next payment. They believe that if they didn’t have to borrow money they would be more profitable and financially secure.
But the proper use of debt makes us more profitable, not less. And being debt free doesn’t make us financially secure. In fact, for most of us, short of winning the lottery, the appropriate use of debt is our only realistic path to financial security.
The problem isn’t debt, it’s our misuse of debt. The two most common ways we misuse debt are:
We put finance first and economics a distant second
We use debt on the wrong things.
Using debt effectively begins with understanding the difference between economics and finance. It boils down to this: In economics we ask, “Is this profitable?” In finance we ask, “Can I afford to do it?” If we are going to be smart about our use of debt, economics must come first. If it isn’t profitable you don’t have to worry about how you’ll pay for it, because you shouldn’t do it in the first place.
When RFP grads evaluate the profitability of a livestock enterprise they include opportunity interest on the herd as a direct cost in the calculation. If the enterprise has a healthy gross margin it tells us that borrowing money to expand the herd will increase profit. If we haven’t included opportunity interest in our calculation we can’t be sure if expanding the herd is a good idea.
The other problem is that people use debt on the wrong things. There are two primary places where we put money in our businesses: fixed assets and working capital. Simply put, fixed assets are things we intend to keep (e.g. land, cows, infrastructure, vehicles, equipment). Working capital is the money tied up in things we intend to sell (e.g. calves). Most of us have most of our money invested in fixed assets. This is the biggest financial problem in agriculture. It’s a problem because when most of our money is tied up in things we intend to keep, we have relatively little to sell and generate very little income relative to the value of our assets. Making matters worse, a lot of the income that we do create gets spent maintaining the fixed assets. That’s why most ranchers are wealthy on their balance sheet and broke in their bank account.
Borrowing to buy fixed assets may be a smart long-term investment strategy, but it might cause you to go belly-up in the short term. We’d be better off to use debt to buy assets that directly produce income.
We shouldn’t be afraid to borrow money, provided the economics of our enterprise is rock-solid and we use the borrowed money to buy income producing assets.
The opportunity cost of owning land is next to nil since the government insists on stealing our savings by keeping interest rates near 0% and printing money (inflation), so the easiest way to determine the cost of the grass consumed is by using current pasture rental rates, which in north Missouri is about $60/acre.
Too many times I read (even from producers, sometimes!) that grass is free. Whoa, Nelly! It is not free and, in fact, the cost of grass has sharply increased due to so much of it being ploughed up to raise more corn and soybeans. Folks, that is not sweet corn nor edible soybeans. This is commodity, GMO crops raised to be fed to animals like cattle, chickens, pigs, fish, horses, buffalo, and even lambs and deer!
But I digress – how much grass do pastured hens eat and how does that relate to a dozen eggs? Hopefully, these questions can be answered at least for our management style.
By measuring the amount of forage in a small paddock before the chooks are moved in and then again after they are moved out in 3 days (during the growing season, it is imperative to move stock at least every 3 days to prevent removing too much forage, however, if you need to improve the diversity, overgrazing is a good tool to use for establishment, but it must be part of the plan). As with any research, there are variables that are hard to control. While we will measure the amount of feed we give them and report that, there is no way of knowing how many bugs they will eat. We plan three replications.
Day 1 – Fourteeen mature egg laying Barred Rock hens – .039 acres with mature fescue and about 40% red clover. Estimated forage available is 4 inches times 200 lbs of grazeable feed is 800 lbs per acre or 31.2 lbs (800 x .039). I’ll measure what is left when we move them in 3 days to obtain what they actually consume. Chooks will mash down a fair bit, but that is okay since that will feed the soil microbes and organisms. We are offering 1 lb of seed cleanout consisting of wheat screenings – unsprouted. Sprouted would be better, but for this trial, we want to know how much forage they are eating out of the pasture.
Results: Eggs laid: Day 1: 12 eggs, Day 2: 11 eggs Day 3: 7 eggs. Indications are that without more grain – production decreases markedly, this may not be a bad thing – pencil out the costs and needs.
Grazing equivalent: The 14 chooks grazed in 3 days what 1 cows would grazing in one day
Bear in mind, however, the trampling/mob effect would be entirely different since cows would likely trample more and certainly put more poop in large piles which will then cover up more grass. With so much rain, even more grass would be destroyed. There would also be a considerable difference in mob effect with 500 or 1000 chooks vs 14 as well. Chickens range only up to 250 feet (extreme outer limits) from their nesting boxes, so more trampling would occur due to concentration. I would think with that many – chooks would need moving everyday vs 3 days.
Chooks will eat far more bugs than cows.
There are several differences in the grazing impact, so just comparing the potential grazing is just for fun.
Neverthess, this experiment demonstrates that no matter the species – pastures MUST BE ALLOWED ADEQUATE REST PERIODS TO IMPROVE AND ALLOW FUTURE GRAZING! Animal movement must be controlled and their keepers must balance animal performance and pasture production effectively.