For Release February 22, 2004

Managing Your Ranch, Like A Business

AGRI-VIEWS
by Chuck Otte, Geary County Extension Agent

I had the opportunity to attend a workshop on pasture management last week. The person giving it probably knows a little bit about the subject; he manages a well known ranch in Texas that is in excess of 800,000 acres. The interesting thing was that he spent very little time talking about grass. Instead, he spent a lot of time talking about basic business concepts that could have applied to any agricultural enterprise, any small main street business or even a big corporation like Microsoft. Certainly, all examples and data that he showed were from actual cow herd analyses that had been done over the years, but the concepts were basic business concepts.

One of the key points that he was trying to make is that an agricultural producer, to get a valid picture of how the operation is doing, has to separate the business from the way of life. Otherwise you end up doing drastic things like paying yourself less or cutting out health insurance, a family living expense, when you are trying to make the business more profitable. So the first step is to make sure that you have a good accounting system that will allow you to do this. Which brings up an important point. If you need things done in your business, and you don't know how to do it, outsource it. Hire someone else to do it for you.

One of the important factors that every business has to know is the unit cost of production or cost of goods sold. In other words, what is your break-even price. A simple thing to define, a difficult thing to calculate, especially when all those family living expenses are mingled in with the cost of production. Next you need to know and manage your capital against your unit of production. This can get confusing because you see research and production figures listed as so much per acre, or $ per hundredweight weaned or sold or so many dollars per cow. In the end though, what most ranches are selling isn't cows or acres, but calves or yearling. So figure your costs against your income source. For most ranches that's going to be hundredweight sold.

Matching the production system and marketing program to the environment is where we finally leave economics behind and start talking biology. This has been a real challenge in recent years given the drought conditions we've been battling. There are two basic numbers we use in regards to pastures. Carrying capacity is the number of grazing livestock that can exist on a unit of land, for a given amount of time, WITHOUT causing a decline in range condition. This changes across the season and from year to year. Many producers don't even think about this. What we hear more about is stocking rate. Stocking rate is how many livestock are being put on a given amount of land. Unfortunately, stocking rates don't change as often as carrying capacity does.

The bottom line is that an agricultural operation needs to have its roots in sound business management. Many farmers/ranchers are trying to create an IRS schedule F that minimizes or eliminates tax liability. But then they are also trying to create a farm balance sheet that maximizes how good the business looks to the bank. This same basic concept put Enron out of business folks.

Learn your basic principles, both economic and biological. Make sure you have an accounting system that makes you keep business expenses separate from family living expenses. And finally, know your boundaries. These may be personal physical boundaries. They may be biological boundaries, they may be business boundaries. When you've reached your boundary, don't be afraid to outsource. Spending a little money is sometimes the best way to make some money. But don't be afraid to think and act like a business, because you are one!

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