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Starting a Ranch – Is it Viable?

Here’s another great blog by Dallas Mount who owns Ranching Consultants (Ranching for Profit).  He outlines the start up costs of beginning a ranch.  It’s never been easy to ranch or farm – even when US government was giving away land.  Most of that land was harsh and unforgiving and many families were starved off trying to make a living.  However, there have a been a very few years in the last century which might have made purchasing land to farm a viable option.  At today’s land prices, that is not an option.  Prices are way out of whack in regards to its agricultural productivity.

bakingCan’t be done. At least that is what conventional wisdom says. I’d agree that it can’t be done, if you follow the rules of traditional ranching – running cows the way everyone else does and owning everything. If you are willing to break some rules and challenge conventional wisdom maybe you can join the amazing group of people that have done it.

Let’s look at the economics of conventional wisdom for starting a ranch from scratch. You’ll need land. Of course, if you want to be a real rancher (so the thinking goes) you’ll need to own it. If you are going to ranch full time, you’ll need enough cows to support a family so let’s plan to buy a ranch that will run 400 cows. In much of ranching country, the rule of thumb is 35 acres per cow. Let’s push that to 40 and ask those cows to graze year-round.

The value of the land will be driven by things other than its forage producing value. Generally aesthetic value and proximity to a metropolitan center will drive the land values. Let’s say we found a ranch that will sell for $600/acre. We will need 16,000 acres so our purchase will be about 9.6 million. Of course, we need to own the cow herd as well. 400 cows, 16 bulls and 80 heifers will cost us about $700,000 in today’s market and we will need an arsenal of machines so let’s add another $300,000 to make it a round $1 million for livestock and machines.

If we find a bank willing to finance all of this, we will likely need to come up with 20% down at least. So we will need about 2 million for the land and $200,000 for the livestock and machines. It just so happens our great aunt just died leaving us 2.2 million! Now all we have to do is service the remaining debt! Should be easy right? If the bank finances the land at 5% for 20 years and the cows and machines for 5 years at 7% that will leave us with a payment of about $600,000 per year on the land and about $200,000 on the cow/machine note.

If we divide our total payments of $800,000 by our 400 cows then each cow will need to generate $2,000 annually for debt service not to mention covering her bills for feed, vet, trucking, and all the other overheads. We better wean some big calves! Are you ready to buy yet? Maybe we should just sit in the coffee shop and complain about all of this? Oh … I know … it’s the banker’s fault for charging interest!

Hopefully this demonstrates that ranching the conventional way is not a realistic path to ranching from scratch. So what is? Firstly, I think it is important that we make a separation in our minds from operating a ranching business and owning land. After all, you can run 1,000 cows and not own a single acre of land, and you can own a million acres of land and not own one cow! Being in the land investment business and being in the livestock business are two separate businesses. The land investment can be a great place to park money and enjoy appreciation and wealth building over time. It can be a terrible place to park money when you need cash flow.

At the Ranching for Profit School, we teach an economic planning process that requires any livestock you run to pay fair-market rent for the grass they consume. Not including this in your planning essentially subsidizes your livestock enterprises with free grass from your land business. Conversely, asking cows to make your land payment might subsidize your land investment by overcharging your livestock business.  You must do the economics right to know where you are creating value. If you want to buy land, let’s establish a profit target that you will need to achieve to reach your goals and develop a business around that profit target.

Many of our alumni get into ranching from scratch by custom grazing cattle on leased land. This is often a model with a strong cash flow and can allow the operator to build reserves that can be used to invest in livestock or real estate. This certainly isn’t a utopia. There are the challenges of finding leases, managing landowners, developing good grazing infrastructure and many others. The skills necessary to be successful in this path include:

  • People Skills – managing landowners, marketing yourself as a lessee and custom grazer, putting a team together to do the day-to-day.
  • Grazing Skills – planning, implementing and monitoring land health and reporting back to landowners.
  • Economics and Finance – planning for profit, budgeting, and cash flow management.
  • Livestock Handling – leading your team or managing yourself to meet livestock performance objectives.

I’d love to hear from those of you who started from scratch. What advice would you have for someone else looking to do the same?

18 Responses to “Ranching from Scratch”

June 24, 2020 at 3:57 amjames coffelt said:

Excellent discussion

Ranching is a great life style.

Is it a great business? Peter Drucker, the great business writer, suggests every business, every idea, every activity, and every employee, should be on trial for its life, every day.

Can a ranching business succeed? Yes, and there are plenty doing it. However, that is not the right question.

We should ask: How are these assets, efforts, labor, and risk, performing relative to other alternatives?

An S + P 500 index fund has averaged a 12% return for years.

So, is the equity invested in the ranching business, cattle and land, performing better than 12% ? Note, I used the word equity, not assets for the comparison. That is, net assets.

I would suggest the following:

The only management model to consider is a low input management model. Work toward eliminating or reducing, shots, worming, tagging, calf checking, weaning, machine work, hay. Let the cows rehab the land, and produce cattle genetically fit to thrive in the all-natural survival of the fittest, model.

Work from set stocking, to rotational grazing, to mob grazing, as able. Each step is better for the land, and permits an increase in stocking rate. Stocking rate influences profitability more than any other trait, more than performance, milk, growth, marbling, etc..

Find a way to sell into premium markets. A quality animal sold by the piece is 3-4 k retail, $800 at the sale barn. That spread requires sales and marketing effort.

The land is a separate business which can include revenue from gas and oil, hunting, fishing, timber, tourism, etc..

The choice to ranch for love of lifestyle is admirable. However, it is a business which requires economic performance.

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June 24, 2020 at 4:09 am, JOSH LUCAS said:

Learn how to be an effective communicator! (Like they teach at the rfp school) Managing the landowner relationship when leasing can be challenging if you don’t communicate your goals for the property well enough.
Oh and definitely don’t buy equipment!

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June 24, 2020 at 6:07 amShelly Oswald said:

Good points but where is the marketing component where you know the intrinsic value of your products, communicate that to your customers and obtain the premium you need to be profitable without cutting corners?

The other point missed is that your approach conserves capital investment in the land and treats it like the profit center it should be. In order to conserve our farmland and keep it in the hands of our citizens, we need to be paying fair rent to ourselves or our neighbors and not asking them to subsidize the food we produce.

I love the principles you teach!

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June 24, 2020 at 6:15 am, Rebecca Patton said:

My husband and I came back to his family ranch in the hopes of developing a succession plan and being able to take over and run a successful ranching business, however, we were stuck in the paradigm that there is such a huge barrier to entry in ranching that our only opportunity to make money with cattle was to be successors to a debt free ranch. Apparently the older generation had different priorities than ranch transition, so we are now looking to break away with the new perspective that we can do what we want through custom grazing and leasing, and we have never been more excited! Thanks for sharing Profit Tips with us!

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June 24, 2020 at 6:20 am, Clint Hoelting said:

If you are going to take care of other people’s cattle on other people’s land, you might as well get a job on a ranch. Same thing, except with Custom/Lease you will have to pay for overheads a ranch hand wouldn’t.

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June 24, 2020 at 7:42 am, Justin Tollman said:

I was stuck in the “How To Own It” traffic jam for a while, and then was introduced to Ranching For Profit. In 2014, my wife and I had no ranch, and no idea how to step into a ranch, but I knew I wanted to. We went to a RFP School, and that really sparked an idea for me to set up a business plan that I could get people to buy into: Leasing a ranch!
Prior to that shift in paradigm, we were stuck. You see, I grew up on the ranch that we now lease. But, so did my sisters. It’s been in the family for over 120 years, but my parents were stuck in the asset transition trap: How do you be fair to everyone? My wife was extremely scared of going into a huge amount of debt, and quite frankly was scared of what happens if it doesn’t work.
The lease model has opened many doors! It got us unstuck. Has it been perfect? Of course not! I don’t know a ranching family that has everything go perfectly. When the all of the cattle issues go right, people issues may flare, when the people are happy, water issues might pop up, this business has a way of humbling anyone who knows everything. And then, there are always customers to deal with, and luckily almost every “contentious moment” with my customers has been built up worse in my mind than in reality. But, I’ve heard it said that people get paid by the size of the problems they can solve, so if you want paid more, choose bigger problems.
I’ve heard so much “I don’t think you can do that!” Well, my favorite saying now is “You never know what you can do until you have to.”

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June 24, 2020 at 7:44 am, john marble said:

I think the biggest roadblock to starting or maintaining a successful ranching business is the commonly-held belief that ranching is somehow different than other businesses or industries. Loving to work outside, handle livestock, smell the new-mown hay…all of that is fine, but it doesn’t have much to do with running a successful business. People who want to enter the ranching industry need to do the same things that new entrants to the gas station or motel or bowling alley business have to do: market goods and services at a profit. Not very romantic, but clearly true. Successful business people study marketing and logistics. They develop relationships with other progressive, smart operators. They avoid enterprises that lose money.

Sorry to break the new: ranching is just not that special.

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June 24, 2020 at 11:02 am, Marc Cesario said:

John – love it!

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June 24, 2020 at 8:01 am, Davene Finkbeiner said:

I started from scratch at 50 years old. Now I am 62. I followed ranching for profit Allan Nation Joel Salatin Bud Williams.Turing the ranch over to my children. It has been one hell of a ride.

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June 24, 2020 at 8:48 am, Marc Cesario said:

It’s amazing how often you can hear advice, even believe the advice that’s been given, then somehow rationalize why your situation is different. It’s so easy to fall into the trap of machinery, equipment and barns but it’s a dead end more often than not. Grass, appropriate fence and a good water system is really all what most start from scratchers should focus on.
It’s good and necessary to believe in ourselves, but too often we think we can do more than we actually can. At best, I feel we can only do two things well, and more likely it’s probably just one thing. Often multiple enterprises just drain resources from the each other. Stay focused.

The word priority was only ever used in the singular until the 1900’s. There can only be one priority.

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June 24, 2020 at 8:52 am, Marc Cesario said:

Josh- yes, Managing expectations is extremely important. underpromise and over deliver.

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June 24, 2020 at 9:54 am, Ross Macdonald said:

Don’t get caught up in a recipe, what you know today will change/evolve over the next several years.
Let your definition of profit drive your decisions and recognize that it is never perfect but with effort, desire and experience it gets much better.
Soils, grazing, stockmanship, marketing, relationships are get better if you work to make them better but it is a journey not a destination, so your definition of profit had better include happiness.

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June 24, 2020 at 11:49 am, john marble said:

Gosh, Clint, I haven’t found that to be true at all. I’ve rented quite a number of places over the years, and the amount I pay in rent has absolutely nothing to do with land overheads. On occasion, I’ve had land owners express their desire for the rent to cover property taxes or some other irrelevant item. I try to be fair with owners, but in the end I will only pay a rental rate that allows me the opportunity to make a good profit, and that is often based on running “other people’s cattle” on that rental land. Sorry, but negotiating land rentals, signing contracts on custom cattle and designing business plans that result in profit are not “hired hand” jobs. Those are business owner jobs.

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June 25, 2020 at 9:45 am, Justin M Tollman said:

I think John and Clint may be looking at two sides of the same coin. To paraphrase Clint “you’re working for someone else if you custom graze on leased land.” I will say that the thought has crossed my mind over the last 3 years that I would be better off financially if I just worked for someone else. That’s on a cash taken home basis. But, when you look at net worth vs. cash flow, that isn’t the case. To John’s point, working on the business is different than working in the business. If I didn’t want to set direction, plan my own time, work on the big picture stuff, and play the virtual 3-D chess game that is forecasting, contingency planning,etc., then yeah, working as a hired hand on an outfit might be better. But, always know, you are always working for a customer. Whether that customer is someone who writes you a paycheck for labor, or a customer who writes you a paycheck for cattle that you sell, or a customer that writes a paycheck for custom care. But, ranching from scratch, to me it’s about setting the direction, the mission and vision, the building for a brighter and easier tomorrow, and taking ownership of that process. I’m not as excited about the ownership of land or things, but the ownership of happy business partners.

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June 26, 2020 at 6:14 pm, Amber said:

I totally agree. My husband and I and our two kids lead a great life on leased land, with custom grazed cows and building our own cowherd on the side. We work for ourselves, while functioning in a great network of relationships. It is all about how you treat people.

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June 27, 2020 at 12:36 am, Graeme Bear said:

A great topic Dallas. Often the most thought provoking topics are those that challenge traditional thinking and paradigms. Love the collection of views and contributions by everyone on this one. The fundamentals of successful business are the same whether it be a cattle ranch or transport or manufacturing business, exactly the same principle apply.

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June 28, 2020 at 5:12 am, Doug Dillon said:

It can be done! I have done it twice. I purchased my first ranch in 2009 after graduating college. Purchased another ranch in 2014. Sold the first ranch in 2015. I attended two RMC schools and was in the Executive Link from 2010 until 2015. The two biggest things I think any one starting from scratch needs to keep in mind is you have to be passionate about what you are doing, it’s going to be tough. Keep you pencil sharp and make the hard decisions that make you money.

The 2nd is don’t get married to a ranch. In 2015 Mike Hall spoke at the RMC summer meeting in Laramie WY. He talked about “not being married to a ranch.” I realize not all ranches are equal, and its hard to walk away from something you have built. He talked about making your land business profitable by selling land. Its a difficult thing for most people or families to do, but if you are starting from scratch you are going to have to do some of these difficult things to generate cash to get out of debt.

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June 28, 2020 at 7:15 am, Davene Finkbeiner said:

I started from scratch 10 years ago with leased land and share cattle. I agree about selling land. Bought pasture based on its resale value and now have it listed for double the price I paid for it. When cattle prices were at there peak I did not buy more cattle I took share cattle instead and put cash into rental houses.Now they are producing a income of 1200 per month.Biggest problem in our area is I am surrounded by inheritance ranching operations who spend a lot of time trying to derail the start from scratch operations. They are especially hard on young people just getting started.I am looking for a good support group for my 2 Kids just coming into the cattle business.

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Surprise Marketing Strategy

The self ascribed ‘Lunatic Farmer’, Joel Salatin, is a gifted speaker, writer, and farmer.  He and his family operate Polyface Farms in Virginia.  His blog is a fascinating and helpful insight into the difficulties farmers and ranchers of small holdings face.  During this time of renewed interest of purchasing locally from local abattoir, I’m going to reblog those of his which address why local butcher shops and farmers do what they do and charge what they charge.  I hope the series will be helpful.  However, we are realists and know that, by and large, once the huge foreign owned packers are back up and running, consumers will be back at Wal-mart buying cheap imported meat processed, in some cases, by illegal aliens.

The comments are worth reading as well, but you’ll need to click through to his blog site.

BEST MARKETING PLAN EVER

             Like local-oriented direct-market farms around the country, we’re dealing with a tsunami of  interest.  Suddenly everyone wants our meat, poultry, and eggs.  Where were they last year and the year before?

             For roughly 3 years we’ve been brainstorming and trying to hold onto sales.  The biggest hit we’ve ever taken was when Wal-Mart became the world’s largest vendor of organic.  Of course, this is industrial organics; produce from hydroponics and meat from factory farms.  But organic nonetheless.

             Ever since that happened half a dozen years ago local outfits like us have been scrambling to hang onto customers.  We haven’t panicked, but the new reality shocked us into realizing we could lose everything if we didn’t stimulate sales.  And then along came door-to-door delivery.  Another hit.

             Many people think here at Polyface all we do is move cows around and the world is our oyster.  Nothing could be further from the truth.  When we started this 50 years ago, we were the only game in town.  We enjoyed that distinctiveness for about 30 years but gradually things changed.

             Other farmers began duplicating our systems–not that we tried to keep them secret.  Good grief; I wrote every trick into books and made them available to wanna-bes.  Even many apprentices stayed in the area and began competing with us.  Between more farmers, industrial organics at Wal-Mart, and on-line home-delivery, we realized we were fast becoming obsolete.

             Now we’re laughing.  How could we have known that the best marketing strategy in the world was a pandemic?  If only we had known.  Just hang in there until the pandemic and all will be well.

             Now, for the first time in a decade, we’re rationing.  Yes, rationing.  The temptations to compromise are profound.  If you’ve watched the news, you know what’s happened in the pork industry.  A farmer called us yesterday offering us slaughter-weight pigs at $110 apiece.  Folks, it costs us $500 to raise a hog.   Do you see the temptation to buy them and turn a fancy profit in a day?  But they weren’t raised on GMO-free feed; they weren’t raised on pasture; they weren’t the 1950s-style genetics that put taste and fat on a hog.  We said no, of course.

             Instead of pulling our hair out on marketing strategies, we’re wrestling with who gets what.  If you let a retail store have eggs and don’t put them on line people think you’re playing favorites.  Goodness, Teresa went out this morning to grab a package of link sausage to fix for breakfast and had to make grits instead–we don’t have enough sausage for our own breakfast.

             Why should all these people suddenly flocking to us get product over the folks who have been with us for 20 years?  If we shut down a sector of our patron base, will they ever come back to us?  How fickle is this?  After the hype and panic, will all these Johnny-come-latelies stick around, or will they go back to Costco?

             We can’t expand beef unless we have more grass.  We can’t get more grass without more land.  We can’t get more land without farms to rent.  We can’t rent more land without land lords who want to partner with us.  No complaints here; just explaining that you can’t turn a biological system, a whole ecology, on a dime.

             And so as we ration and meter out pieces of availability to our broad customer base, we’re dealing with frantic calls, accusations of favoritism, and the angst of people fearful of running out of food.  And you can’t buy a home freezer until August–they’ve all been snarfed up by the folks who stocked up early.  If anyone wants to buy farm property to secure their food supply, we’re open for partners.  We’ve had some wonderful response to this in the past; who knows what the future holds.

             Do you think this sudden interest in local integrity food will outlast the crisis?

MEAT SCARCITY AND OVERTIME

            By now all of us are well aware about the glitches in the meat and poultry processing food chain in the U.S.  It’s severe enough in pork and poultry that animals are being euthanized rather than going to processing.  Beef will probably not get to that point simply because beef grows slower and therefore has more forgiveness.  A month of holding pattern for a chicken is a long time; for a beef it’s not that long.

             As a result of these industry problems, the crush on smaller community-based abattoirs like the one Teresa and I co-own here in Harrisonburg (T&E Meats) is unprecedented.  With our facilities and crew we can only handle a certain number of animals per week and when the slots are filled, they’re filled.  We’ve had a sudden surge of perhaps 30-40 percent in slot requests.  Even Polyface can’t get in with all the animals we need processed; then we’re short and customers complain.  Sheesh.

             We’ve never run Saturday work or a second shift, but we’re examining all those alternatives now to squeeze some more use out of our concrete, stainless steel, and building.

             Hang with me here, because this will no doubt infuriate you like it does me.  Our small plant of about 20 employees is located on a roughly 1.5 acre lot surrounded by other small businesses.  It’s been on that lot for some 70 years.  We’re federal inspected which means an inspector pokes and sniffs at livers and looks over paperwork each day.

             The inspector has an office in the building to keep records but he’s only there less than an hour a day.  He goes to other plants during the day.  Of course, he has the right to pop in any time he wants to and see anything he wants to.  He also has the right to immediately shut us down if he sees egregious violations of his interpretation of the voluminous subjective codes.

             The way the system works is this:  if a plant owner passes all the compliance and licensing requirements, the federal government issues an establishment number which authorizes the facility to engage in business.  The stamp is called the “Blue Buzz” and it’s the little round blue circle on all federal inspected product that carries the FSIS (Food Safety Inspection Service) acronym and establishment number.  That license also requires the federal government to supply, at no charge, an inspector for up to 8 hours per day.

             If you need one for more than 8 hours per day, then the business and not the government picks up the tab at a time and half rate for every hour more than 8.  What you have to appreciate is that in the case of a small plant like ours, the inspector is actually only on site an hour a day and sometimes less.  He or she is not there on location for 8 hours; not anywhere close.

             But here’s the catch.  As we begin discussing running on Saturday or operating for an extra couple of hours to try to accommodate more of these local farmers who desperately need animals processed, the government requires us to pay a time and half inspector rate for every hour we OPERATE more than 8 hours, regardless of whether an inspector is there or not.

             The inspector shows up each day, checks things, and then leaves.  Why can’t that check be good for 10 hours instead of 8?  Or for 12 hours instead of 8?  He’s not there anyway, so if the system trusts us not  to cut corners in the 6th hour of an 8 hour shift,  why would it be suddenly risky for us to operate another 15 minutes past 8 hours?  It makes no sense whatsoever, but it definitely changes our economic picture dramatically the moment we have to pay $75 an hour for someone who isn’t even there.

             This is the kind of foolishness foisted upon local abattoirs by a scale-prejudicial system that refuses to accommodate or budge in order to alleviate the desperate need of people for food and farmers to get it to them.  This is accounting by the government.

             Is it time to build an underground railroad for processing?

Thank your Kate Simon for the photo!

Farm Finance

Every business or family finances have some unique components that you must determine to help your business or home run smoothly.  However, there are some very basic tools that apply to all.

  1. Bookkeeping-every family and small business should employ bookkeeping principles.  These will include records by account, labor costs, profit and loss (income statement), working capital, balance sheet, debt-to-asset ratios.
  2. Use a double-entry system to keep track of where your money is spent.
  3. Set up basic accounts, these may need sub accounts depending on your company, but here are 10 basic ones:  sales, expenses, payroll, and retained earnings for your income statement and cash, accounts payable, accounts receivable, notes payable, inventory, and owner’s equity for your balance sheet.

 

Most of us have taken basic bookkeeping in high school and so already have the foundation for setting up appicable accounts for our own families and businesses.  The stumbling block is actually doing it!  If you wonder where all your money is at the end of the month or year or complain about the lack of funds, then it’s time to make a resolution and commitment to keeping track of where your money goes. This especially includes all those little cash purchases; coffee, candy bar, water bottle, etc.  Remember, too, you don’t have to buy software to do this.  For millenia, record keeping has been done with pen and paper.  However,  if computer software will encourage you to move forward, I think there are some very reasonably priced packages out there.  Many you may be able to try out for free for a short time.

Here’s a budget helper that seems to be free, but i don’t know anything about is.  It is Dave Ramsey’s EveryDollar free budgeting tool.  Plus Dave Ramsey has a bunch of free tools available.

Whether you choose computer software or a pencil and notebook, start this year taking control of your finances.

Cheers!

tauna

Faith, Family, Farm

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