AoR 86: Intro to Ranch Financial Resiliency--Jack Southworth, James Rogers, & Clay Worden

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>> Welcome to the Art of Range, a podcast focused on rangelands and the people who manage them. I'm your host, Tip Hudson, range and livestock specialist with Washington State University Extension. The goal of this podcast is education and conservation through conversation. Find us online at artofrange.com. Welcome back to the Art of Range podcast. Today's episode will be the first in a new grant-funded effort to promote ranch financial resiliency and to do some outreach on livestock insurance as one component of a financial safety system. The partners in this project include Cathy Bartels with Farm Credit Services, Northwest; Matt Griffith with WSR Insurance out of California; Jack Field with CKP Insurance out of Washington State; and my co-host for today's episode and a few more to come, James Rogers and Clay Worden. James will be familiar to regular listeners but has left the Winecup Gamble and is in a new role now. Jack Southworth, also a familiar voice from the very beginning of the podcast, will be our guest today to begin our foray into ranch financial health. Clay Worden will be new to most listeners and he'll introduce himself at the beginning of this first episode. We had some previously unencountered technical difficulties in our recording today, so please excuse any seeming jumps in the audio or the conversation. Something in the space-time continuum broke down today and we'll get back after we fixed it. Let's do some quick self-introductions to provide some context for listeners before we jump into a topic. James, you're doing some different things now than you were last time we talked. Describe a bit what you're chasing down these days.

>> Well, thanks for having me, Tip. Yeah, it's exciting times. There's a lot going on in the ag industry. And as I kind of retire from my role at the Winecup Gamble Ranch there at Northeast Nevada, I still saw a need to engage with family ranches and just help them to, you know, adapt some systems and some accountability and just provide tools so that they can operate at a more professional level. And so, we began the Northway Ranch Service Company and just we're excited to engage and we really see things as the triple bottom line, you know, social, economic and ecological health for ranches. And so, we kind of work in all of those arenas. And so, it's exciting to be a part of this discussion today. Thank you.

>> Great. Clay?

>> Well, I'm also excited to join you all today. I've enjoyed listening to some of your previous podcasts. I think you disseminate some excellent information. My background for those that don't know me, I was born and raised on a ranch in Wyoming. When it came time to go to college, I found myself playing basketball down in Florida. I joined an accounting firm after that that had a pretty robust ag practice. And from a Wyoming boy going to Florida, I didn't realize there were so much agriculture outside of the West. And then, for the last 30 years, I've been helping from family organizations to large corporate organizations in the whole supply chain from farm gate to consumer plate. And it's really given me some insight into, you know, which organizations are profitable, which are not and I've really got a passion for trying to help ag producers produce not only quality products but a profit.

>> Great. Welcome. Jack, I'll let you go ahead and do some introduction as well. We've visited before but we likely have a number of new listeners since the very beginning of the podcast and glad to have you back. Who are you and what do you do?

>> Good morning, Tip. It's a pleasure to be here. My wife, Therese [assumed spelling], and I operate a cow/calf yearling operation in Eastern Oregon and we're a high mountain valley outfit with a long winter. And the last year, the combination of drought and high feed prices has prompted us to take a hard look at what business or businesses or maybe, I should say, enterprises we should direct our efforts off towards on this ranch. And so, for you to have a podcast today about financial resilience, that's what I think ourselves and a lot of ranches in the West are thinking about these days.

>> Yeah. I'm glad to have you. I did use the term ranch financial resiliency and I fear a little bit that resiliency has become one of those buzzwords that starts to lose its meaning, sort of like sustainability. And so, it's important for us to define what we mean by resiliency. I guess financial health would be a good word as well, but I actually like the term resiliency because I think sometimes the term financial health seems to imply that you reached a level that we would call healthy and then it's static and nothing changes and you stay healthy. But I actually think healthy requires resiliency and resiliency implies or assumes that things will go up and down and won't remain static but you have some ability to respond to those financial disturbances, if you will. I guess I'm an ecologist at -- by training and at heart, and so the term disturbance works well for me. But, you know, when things happen that are unexpected or that could be negative, resiliency means that you have both the ability to resist being damaged irreparably from, say, a financial set back as well as the ability to bounce back from. So, there's both resistance and resilience that are concepts inside the idea of resiliency. And I would add here that I'm not an economist, not even an armchair economist and so I'm hoping to ask the dumb questions that people often feel like they're afraid to ask because they think that other people think that they should already know the answer to the question. So, I'm relying on the expertise in the virtual room here and I'm hoping to ask some dumb questions. Now, maybe to get us started, I feel like you often hear in certain ag circles that, you know, we don't do this for the money. But for agriculture to work for people and society, it's got to make money at least in a way that allows it to remain, you know, fiscally floating. People have to be about -- people have to be able to make a living at it. And I would also say that my experience and observation has been that when ranches go under, it's usually money that caused it. So, money still matters and it tends to be the thing that causes social conflicts which also contributes significantly to the demise of ranches that have been around for a long time and to the instability of, you know, keeping land intact, et cetera. There's pretty significant secondary and tertiary effects when particularly family ranches go under. And so, I want to -- my interest in having you on, Jack, was to just start with an open-ended question. You've been doing this for a while and have seen through your roles with Country Natural Beef a lot of how other ranches operate. What would you say are some general principles for sound ranch financial management? And we can go from there to what some common weaknesses are that you see. But I'm reluctant to try to prescribe the conversation too tightly and I want to just have an open conversation. What do you feel like you see out there over the number of years of doing this?

>> Tip, I feel like we're in increased volatility or times with increased volatility whether it be drought, volatility in prices for cattle, volatility in the costs of our inputs: hay, fuel, fertilizer. We're in times where we're having to move forward where we can't see very far ahead and you'd mentioned resilience. I'd like to add another adjective there. I think it's about adaptive resilience. I think it's our ability to take a stress like last year's drought, rebuilt from that stress and maybe be a slightly different operation as result after examining our financial, social, ecological and production situation. And so, if we have that adaptive resilience, that mindset that we're going to take these stresses and learn from them, then I think that's the first component of long-term success. You spoke of financial health. Well, it's fine to be financial health -- healthy but we need to be thinking forward and so that we're not mining the principle we've secured in the past to operate in the future. We ought to pay our own way forward in the future with the financial productivity of these ranches. And so, how do we get to be financially productive? Well, we start off with the people on a ranch whether it be a husband and wife, a manager and employees, an owner with an employer too. We need to work together as a team and I think that is the first step in having a really healthy operation and a team that has a common purpose in knowing what they're working for just primes an operation for success. The second thing is ecological health. We need those dead stems of healthy perennial grasses in order to have these profitable livestock enterprises. Before we think about breeds of cattle or the krill handling systems, we need to think about what we want our landscape to look like to provide for the production we want. And then, lastly is with all those things in mind, let's chart a financial path forward. We have a tremendous amount of tools now, don't we, provided by universities, provided by outfits like Ranch Management Consultants, we have tools available to us that we didn't have 40 years ago when interest rates were high and there was a large liquidation of livestock operations to the West. Now, I think we have the tools to help us move forward.

>> Yeah, and if I could jump in there and go back to what you were saying about ecological health. I think this is somewhat unique to pasture and range-based livestock production because look at other sectors of agriculture, especially animal agriculture such as, you know, modern dairying or poultry or swine. And in most of those situations, those operations do not rely on ecological health and I've said like a million times before, this is part of what I think is in -- it is an important story to tell about pasture and range-based livestock agriculture. There is an intrinsic tie between ecological health and financial health that really can't be removed if you don't protect future productivity by taking care of the land today. It jeopardizes your ability to make money tomorrow and that is unique, I think.

>> You bet it's unique but in the long term, we all are connected to ecological health, aren't we? Even chicken and hog operations are tied to a monoculture or dual culture of corn and soybeans.

>> Right.

>> And they got to think about their long-term health in a different way perhaps.

>> There are a couple of degrees removed from it, but in the big picture it still holds. If the corn farmer is losing soil and, therefore --

>> Yes.

>> -- increasing the cost he's got to spend on inputs in order to make the same volume of corn from the same acreage of land, that eventually is going to impact the chicken farmer too.

>> You know, Jack, this is Clay and you were -- you're spot on on the team side, the three really stool legs that you're talking about. Those organizations that I see that have a well-functioning team tend to be more profitable than those that have a dysfunction in their team. The next thing you talked about was the ecological. Those ranches that I see that put more attention into growing grass than they are growing cows tend to be more successful. And then, the last piece, that financial piece, I think it is important to understand that, you know, people don't plan to fail. They just fail to plan and you've got to have a financial plan in place especially in this time of these high inputs. It takes a different thinking and different measurement in times like this.

>> So, Clay, what is that financial plan right now? Because bankers call for an income statement and a balance sheet and a cash flow budget. Well, guess what. You can't do any planning with that, can you?

>> I certainly don't think so. I -- you know, those are some pretty basic tools and if you think about most family operations, you know, they're keeping records to complete a tax return. And yes, we all need to show to Uncle Sam what we've made and what we owe him. But that really doesn't provide the insight that -- to make decisions on. And so, I'm with you. I -- the banks, that's what they like to look at. But from an operational standpoint, I really think the rancher needs to correlate the financial data with the unit data that happens, you know, on the ranch. So, whether it's on a per acre basis or a per head basis or a per ton basis. You know, what's it cost to --

>> So, let me stop you there. I think this -- the audience today is for the intermountain West. And so, per acre doesn't work because our acres are so variable. And so, per unit, are you talking about cattle or different enterprises? What is the unit that you think we should evaluate?

>> Sure. I think AUMs is the, you know, a unit that could be looked at. You know, when I see some operations that keep their cost on a per head, you know, what's it cost to run a cow? I see other folks that keep cost, what's it cost to get a calf weaned and sold at the market? So, I think it could be different for different folks but I think out West, I agree with you that it would be an animal unit.

>> And I think you're spot on because it's a universal measurement of what a cow eats in a month. As whether it's 1000 pounds of grass or a half ton of hay, we can convert that forest land grazing to a meadow to range land. It works universally.

>> But maybe, James, I could, you know, ask you a question, you know, in terms of some of your experience. I mean, I think one of the pieces that I've understood is the real value of volume and understanding that the volume of activity on a ranch, whether that be the number of units, pregnancy rates, your calving rates, what is your experience been?

>> Yeah, Clay, I think -- I mean, you're spot on that we kind of see, you know, animal units as the big driver out here. I mean, we're all limited to a finite space or a ranch that we can work from. And so, if we can increase the number of units that we run on that finite space, we tend to overcome some of the overhead that we have that's really that space is subject to. I know, you know, for me, you know, we rarely see our overhead change a lot. It's usually pretty constant. And the more units that we can run on that with that overhead, obviously, we reduce that and it makes a big difference in our profitability.

>> And I think one of the things that hopefully people understand, there's a difference between maximizing and optimizing those animal units. And what I've experienced is those that try and just maximize the units may not, year after year, maximize their profits. But those that find they optimized animal units for their space, they tend to have a little bit more consistency in their profitability.

>> Jack, do you like using the animal unit as the unit basis for evaluating these things? You suggested that per acre is not a good one. What do you think about the suggestion that the per animal is a good way of evaluating that?

>> Per animal is good, Tip, as long as we tie it back to a standard animal unit. A cow and calf eat 1.4 animal units AUMs per month. They eat 1400 pounds of forage a month. Your 800-pound yearling steer eats closer to 800 pounds of forage per month. So, it's not head to head. It's 1.4 to 8. And as long as we keep that in mind and our comparisons, then we'll be all right. We have to remember that we have a limited amount of forage on each of these ranches. And so, we have to tie it back to how much is being consumed by these different enterprises.

>> Jack, I think you're spot on with that analysis and I think that that's where it gets back to that comment of correlating the economic information with the non-economic units. And I think that's where I see most ag producers are not keeping track of those correlations. They're keeping track of their income, they keep track of the balance sheet, they've got a cash flow statement, all that's terrific but really to -- I believe, how can you manage something that you don't measure? So, if you're going to manage it, you've got to measure it and you've got to measure it on these units. So, hay production in your country. I mean, what is it costing you per ton of hay, you know, how many tons of hay are you feeding. You know, so oftentimes, the hay just gets put in the stack and there are some costs that are associated with it and it gets fed. And I think those producers that are really managing that capital outlay of putting that hay in the stack and making sure it goes through their animals appropriately tend to be more profitable. And so, I think you're spot on when you say, finding a unit measure that works for your location.

>> Yeah, and I would add to that. I don't know what percentage of livestock producers and I'm not even sure where we would, you know, define commercial versus non-commercial but I don't know how many people are tracking the per animal cost. I'm recalling a cost -- an enterprise analysis conducted by Doug Warnock who was my predecessor at Extension in Ellensburg and he concluded back in 1996 that the average cow/calf producer, and he was including larger operations in this as well, were losing on an annual basis about $75 per mother cow. And if that's the case, that explains why some don't make it and also why most people are relying on off-farm income to support their agricultural hobby. How would you say that squares with other folks that are out there today that's been a while ago?

>> Yeah. I think that those square. I know that Farm Credit System has some benchmarking data. I've seen some benchmarking data at some of the universities, you know, where it is trying to figure out what a cow is. I know Jack has got a terrific model on a cost system, you know. But it's interesting that most farmers tell you what they think it's going to cost per cow or mother cow but they really don't know, and it's -- another way to look at this is when the protein or supplement salesman comes out and says, "Hey, you know, if you feed this supplement, your calves are going to be better." But there's real no way to validate that if you're not keeping track of the data. And so, I'm a trust-but-verify. So, if you had some data that you could see how those calves did before you use the supplement, how they do after a supplement, it makes you a little more well-informed on making a decision on whether you ought to outlay that capital for that input. So, I think benchmarking data is very powerful and helps people understand in their region, you know, what other producers cost. The hard part is it's apples and oranges, you know, not everybody keeps their costs the same, not everybody, like Jack mentioned, their animal units aren't calculated the same. So, you have to have some insight behind those numbers to make them work for your operation.

>> What would be one example of a benchmark measure?

>> Just cost per weaned calf or you could have a cost per pound of gain if you were, you know, using yearling operation.

>> And what are all the costs that you would include in that benchmark measure?

>> Well, I would include them all. I mean, there are so many times that people leave cost out of the equation but, you know, you're going to have two kinds of costs. You've got direct cost and those are, you know, pretty simple things. They're the actual inputs that are going into the enterprise that you're doing.

>> Right.

>> But then, you've also got some indirect costs and that might be your management or, you know, your bookkeepers cost or maybe it's some depreciation or some of the things that may not feel direct. But at the end of the day, you've got to account for all of those costs on your ranch and they've got to get assigned to some production enterprise so that you can determine whether you're being profitable or not in that enterprise.

>> They're still real, they're just not so visible.

>> Correct. You know, and so oftentimes people just look at the checkbook at the end of the year and if they have more money that they assume their profitable and if they don't have as much money, then they lost money. And I think that's the danger in not really understanding your cost structure, what your breakeven points are.

>> Yeah. And I think one of the concepts we need to really talk about is keep it simple stupid. You know, people get -- they try and make this math way too complicated and we're trying to figure out exactly this and that. You know, when you haven't done anything at all, just doing something is a great place to start and not getting hung up on, you know, the nuances.

>> Yeah. Don Nelson who was WSU's Extension beef specialist for a long time, he was really fond of saying, "Prior planning prevents poor performance."

>> Yeah.

>> And, you know, part of my experience has been that I think people are sometimes overwhelmed by planning but if you start getting into the weeds of trying to understand the numbers, it prompts planning.

>> Yes.

>> The natural response to that when you're looking at it is, "Oh, well, I see where that went. I'm losing money right there. I need to plan to work around that." So, I think even though planning may feel like it's a daunting challenge, trying to understand the numbers makes you plan just because that's what your brain is going to do when you start thinking through it.

>> I think that's excellent, you know, and really a basic budget is a planning tool and, you know, it can be as simple as let's get your income statement for the last two or three years and see what you've spend in certain categories and what we ought to spend this year in those categories. I mean, it doesn't have to be complicated.

>> This was an initial conversation with these guests on ranch finance and we uncovered some topics that we would like to explore further in future episodes. Stay tuned for more from James, Jack and Clay.

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