AoR 90: Key Performance Indicators to Measure Ranch Financial Health, with Stan Bevers

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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. We're continuing a conversation today about managerial accounting and managing finances on the ranch with Stan beavers and James Rogers. And we're joined today by Jack Fields with CKP insurance. And we're going to spend a little bit more time talking about some of the performance indicators that we just began to get into in the previous episode. Jack, Stan and James, welcome back.

>> Thank you.

>> Stan, you mentioned in your article about key performance indicators that one of the only ways that you can ensure that you're individually profitable -- because people tend to not be very good at measuring those things -- is to measure some indicators that are the drivers of profitability. And it's important to measure something that is a reliable indicator. In the world of rangeland monitoring, you want to -- if you're trying to determine whether or not livestock grazing is affecting rangeland condition, you have to measure something about rangeland condition that's responsive to livestock grazing and not something that is entirely climate related or has nothing to do with grazing impacts. And although I know very little about the world of ranch finance, I understand the same thing is true there. Just for those who haven't heard the previous episode, can you describe briefly what you mean by key performance indicators and maybe what they're not? And then we'll jump into some specific ones.

>> Yeah, sure. So what I've done in the past -- in past lives of extension and all that was come up with about 12 or 13 KPIs. And just as we visited on the last podcast, there's several things about KPIs before you kind of really start measuring them. First off is to make sure they're being calculated the same way over time. And as we mentioned last time, you get the garbage in garbage out acronym, that if I don't have good inventory data, if I don't have good managerial accounting information and combine those into KPIs, my KPIs are going to be somewhat suspect. So it's always good to start with good information, as we know, to have and end up with good results. So to make sure that I can look at those KPIs and they're calculated the same every year -- and again, not only from trying to identify how the ranch did in one particular year, but one of the goals of using KPIs is to be able to trend those KPIs over time, the same number and look at it over time and just see how -- as an example, we were visiting earlier about the cost of hay production. If I'm in a ranch operation, and I'm producing hay to feed to my cows, and that's the primary purpose that I'm raising hay obviously, a KPI would be very important to me. It would be the hay production cost. So again, trying to identify that I calculate that the same every time. And if, in fact, that KPI is kind of -- that hay production KPI is somewhat in the neighborhood of what I expect, am I, in fact, fulfilling the goals of my ownership? And that's the whole key of a KPI or a set of KPIs is to know that if I'm achieving the KPI numbers that I'm trying to work towards, by achieving those numbers, I'm fulfilling the goals of ownership. And to me, that's the whole point of trying to do this. So you're tracking them over time. It's important to calculate them correctly if you're going to try to benchmark them with somebody else because, again, we always want to be able to compare apples to apples and not apples to oranges. Few other things. You balance the use of KPIs. To use one KPI at the expense of another doesn't fulfill goals of ownership. It doesn't move the ranch forward. As an example -- and we'll get into the specific KPIs here in just a minute -- but if I've got a -- if I've got a low feed cost KPI purchase feed or raise feed costs per cow, and my productivity from the cows are high or low by adjusting cow, the feed cost numbers one way or the other, am I in fact making a positive impact on cow productivity? So you can actually start to correlate these things and say, okay, if I do this to improve the feed KPI, am I, in fact, improving the productivity KPI? So again, you start making these correlations. So it's pretty important to look at them in that respect as well. To focus on one at the expense of others isn't moving the ranch forward. And the perfect example of that is for the last 50 years, it seems like all the outside industry of cows has been, well, I'll increase your weaning weights for you, or I'll increase the weights of your calves. That's all fine and good. And certainly, we want to have as good of weaning weights as possible. But that's got to be balanced in respect to what my feed costs are, what my bowl costs are, my cow costs are. To sit there and focus on weaning weights alone at the detriment of feed costs doesn't move my ranch forward positively. So again, you've got a correlation there. So again, there's about 13 or so of them that I believe from a ranching and a cow calf, specifically ranching situation, that we look at. But anybody and everybody will have their own set of KPIs. Not all the ranches that I work with produce hay. But certainly, brush control costs and things like that, from a range standpoint, is very important. So that's just some opening thoughts, guys, to think about.

>> Yeah, one quick question before we started talking about some of the individual ones. You mentioned that the individual -- the specific values for each of the various KPIs, you have identified through kind of some long-term analysis of looking at herd data from lots of different parts of the country. But we were also talking just in the conversation before we started recording that there are certain places in the country where the physical circumstances are just different. And you may not have access to year-round grazing. And hay cost is going to be a larger percentage of somebody's input, total input costs in some other part of the country. To what extent are the values for these individual KPIs sort of universal? And to what extent should they be adjusted a bit by region?

>> Well, that's a great question because if you think about the KPI numbers that we'll talk about specifically here in just a minute, I start at the overall ranch level. And predominantly, one of the one of my look at is what is my rate of return on assets? And that number in and of itself is applicable, clear across the country and for that matter across industries within a country because, again, if everybody is calculating it the same, what's my net income divided by all my asset values, then that number is very applicable across all ranches. And again, I'll just -- if that number is one to one and a half percent, that's going to be about what a ranch will do. I don't care whether it's in Florida or Montana or even in Hawaii. Again, it's going to be somewhere in there. So to some degree, it is an industry wide number. But as we mentioned last time, we talked about the dark side of benchmarking and benchmarking with these KPIs. There are numbers that you just cannot apply from Texas to Montana because, again, down here in the western side of Texas, we just don't produce a lot of hay for our cows. I mean, our grasses are strong enough. We tend to stay moderately stocked that we don't have to feed hay through the winter. Some level of supplementation, protein supplement, typically gets us through the winter months, where in Montana, somebody is going to put up an average of one to two tons of hay per female to get them through the wintertime, through the entire year. So obviously, when you look at feed cost, you can't compare those two. So there's always that dark side. Somebody will take one of these numbers and say, well, gosh, Stan is saying it's 83% calf crop -- weaning percentage for calf crop. I'm doing 90. Well, that's all fine and good. But --, and if that's the KPI you're focusing on, that's fine. But let's look at not only that number, but let's also look at the cost per female number or the cost per weaned calf number, because you can have a 95% calf crop if you choose to. But I can assure you it is too expensive. When it comes to what it actually costs you to wean those calves, you're putting in way too much feed. You're probably putting in too many bulls per cow. There are several things. Now I'm not saying that somebody can't achieve a 90% calf crop. And in fact, they do. But you've got to be able to measure it against also what it costs me to do that as well. So again, that's kind of the dark side. So the question, yeah, some of them are relative across the entire industry and across the country, some of them just absolutely not. And I am always in favor of first, compare yourself to yourself over time. Be your worst critic. If I'm at $900 per cow per year, how do I make that 880 next year? So I want to be accountable to myself over time. I can let somebody else say, well, you know, you're at 950, and you should be at 890 because that's what the industry is. Well, you don't know what my situation is. I mean, one of the -- one of the other things that really comes into play is ranches that have debt. So what's the interest cost on one operation versus another? Some of these ranches out here in West Texas operate without any debt. So if you don't have an interest cost, that can be huge. Now if you've got some debt, you're trying to buy some more -- mortgage some land or something, even buy some cows at this point, you're going to have an interest cost that's going to really influence that total cost per weaned calf or total cost per cow.

>> Sure. And going back to your previous comment about the marginal cost of increasing, say, a calf crop by a percentage point. If you're trying to operate where marginal revenue equals marginal cost to optimize profit, if one ranch's marginal cost of increasing that by a percentage point is going to be different than another ranches marginal cost to get the additional marginal revenue. And a person can only evaluate that specific to their own operation. Well, I don't know whether you have these KPIs listed in order of importance. So I'll let you decide which ones to jump on first. But we have talked about calf crop a bit, and that seems to be one of the ones that people are somewhat familiar with. So that might be a good place to start.

>> Okay. Well, let me kind of start at the top of a list that I have. And there's two that aren't even KPIs as such. But they are massively important. One is -- so if you think about trying to put this in perspective for ranchers out here and those that are wanting to analyze ranches. What's a set of data that that you really need and what's the KPIs that you really need to do a good job of analyzing not only am I profitable today, but how do I move to profitability? So number one, and I always list it at the top anytime I analyze a ranch, is what's the number of breeding females? And that sounds so simple. But I want to know how many females you had that could have, would have, should have weaned a calf that particular year and put that number as of the start of the fiscal year. Now as we visited last time, most ranchers use a calendar year basis, So January 1. So as of January 1, start tracking and make it an effort that on January 1 or somewhere real close to that, I'm going to know the number of females that I have that could have, would have, should have weaned a calf in those next 12 months. Okay.

>> So that should be everything as a first calf heifer and older

>> There you go. Absolutely. Yep. Yep. And why that is so important -- and as we move down through these KPIs, one that people -- they don't like to focus on it because it's hard to deal with, and that's the fixed cost of the operation. We briefly talked about them last time. But we'll get to it in more detail here in a little bit. Well, what's the fixed cost of my operation? Once I determine what my fixed cost is, the easiest way to reduce my fixed cost on a unit basis is to increase the number of females that I apply against it. If I've got $10,000 in property taxes, which would be a fixed cost, I'm going to have property taxes whether I run a cow on it or not. If I had $10,000 in property taxes and I only have 100 cows versus $10,000 in property taxes and I have 10,000 cows, that changes that fixed cost structure. So what's the balance between what the fixed cost of the operation is relative to what I'm generating -- what I'm using to generate as a tool to generate revenue? And that's the cow number. So that's the number one really pertinent number. Now the number two number that necessarily isn't -- that isn't necessarily a KPI, but that's rainfall or deviation from normal rainfall. I'm in a 26-inch annual rainfall area. And right now it looks like I'm going to end up with about 12 inches this year, unless it starts raining pretty quick. I've come through my heaviest rainfall months, and right now I've only got less than 10 inches of rainfall. So now, obviously, the deviation from rainfall impacts my decisions on number one, breeding females. Correct? So now if I'm sitting here and knowing that I'm in a drought, then I'm also probably making the decision to destock my number one, which is breeding females. And in my previous life as an extension economist, I did an unlimited number of drought meetings. And I'll bash myself, like I should, because we would get in here and we'd start telling these folks, well, you know, we're in a drought, you need to be destocking. And that's probably true. Well, it is true. But we never gave them the second verse to that song. And if I'm going to destock -- again, the greatest influencer of the breeding number is against the fixed cost. If I have the second verse of that, if I'm going to destock to 50% of my normal capacity, guess what, I also needed to cut 50% of my fixed cost, which meant sale pickups, sale trailers, quick build and fence, all those other things. If I don't, my fixed costs on a unit basis explodes.

>> Right. You've got all the same infrastructure and half of the production to back it up.

>> There you go. Exactly. So I've seen Board of Directors just hammer GMs because all of a sudden, their cost production or cost per female just exploded. And the next number I always went to, well, what's the deviation in rainfall? And well, I only had 50% of normal rainfall. Because of that, I destocked. And because of that, my cost exploded. And a board of directors doesn't -- well, I heard it was dry, but I didn't know how -- I didn't know what you were doing to react to that. Well, I reacted by destocking, you know, 50%, 70%, whatever. Well, we should already know that, oh, my gosh, my fixed costs are going to explode as well. So those two numbers right there, more times than not, one of them we control, one of them we don't. We control the stocking rate number, but we don't control the rainfall. But those two numbers in and of itself will determine any one year whether a ranch is making money or not. I mean, I know people talk about, well, it's calf crop percentage. It's pregnant percent. No, it's not. It's the relativity between stocking rate and fixed cost and the rainfall. Those are the big influencers. But again, we don't know -- we don't control the rainfall. So that --

>> Quick question before we move on.

>> Absolutely.

>> Would you include replacement heifers and the breeding female number? Because they're -- they may not be producing right now, but they're contributing to overhead costs.

>> I do not. Developing replacement heifers, I do not . Again, I don't have a problem if somebody does that. But you just hit on a major issue with KPIs and how you calculate, and that's consistency. If you're going to put them in, leave them in every year. My recommendation is back to, just because it's easy to remember, is the could have, would have, should have. All those females that could have, would have, should have weaned that calf that year. But developing replacement --

>> So [inaudible] exposed and they would produce next year?

>> Actually, it would be your yearling heifers from the previous year that are being developed and being bred but won't win a calf until the following year. Two-year-old across three calendar years. Right?

>> So Stan, this is James. So are you capitalizing those replacement heifers, then, and then using -- you're picking up that value in depreciation?

>> Okay. And that's back to the managerial accounting question. And yes, I would recommend -- yeah, I would recommend ranches to do that. Now, again, I know that changes their accounting system, but hey, that's what it's about, again, pushing the tax accounting back to the backburner and moving accounting -- managerial accounting to the front burner. And I would isolate those costs of replacement heifers beginning with what it cost me to wean any calf on the ranch. Let's say it costs me 800 to wean a calf on a particular ranch. I start adding to those, to that expense, until the point where she weans a calf, which is two years later across three calendar years. And at that point -- and again, some -- that finishing point, sometimes, some people do it one way and some people -- I do it another way. The question becomes, at what point do you stop accumulating expenses? And put that total number on a depreciation schedule. Some people will use when she's bred positive. I've believed that she has not proven herself to be a mother yet until she weans that calf. Any female can get bred. But not every female can wean a calf. So again, I take it clear to the point where she weans her first calf. So then she -- yes, then she -- that value then gets added to the depreciation schedule. And I start depreciating her over her useful life. Great question.

>> Stan, this is Jack. Could you talk a little bit about on the vein of females, the concept or how you get over the idea that on the ranch, we have to raise all of our own females versus being able to go out and purchase them and have a basis in them?

>> Gosh, see, and that's the whole key of changing the accounting. You do have a basis in that female. If we would take the managerial accounting approach and start isolating expenses, kind of like what we talked last time -- we've got cost centers, support centers and profit centers. Well, those replacement heifers, let's say a 20 -- this is 2022. So a 2021 female that I tagged to be a replacement female, all of a sudden, I take the value of what it's cost me to wean all those calves from 2021. And that value then gets added to the balance sheet as an investment in growing breeding stock. It's a current asset as opposed to a fixed asset. I am building now my basis number by doing that. And as through 2022, as I add expense to her, I bring the bulls in, I try to get her bred, in the fall of 22, I preg check and see which ones are open, which ones are bred, I'll sell the opens which goes against. It becomes an expense reducer, those coals, coal replacements, they become an expense reducer. She has a calf next year in 2023. She finally weans the calf in the fall of '23. And therein, all of a sudden, I have a basis number which, again, from a trackable standpoint, I can say, okay, well, this is what it cost me to develop my own replacement heifers on my ranch, which, again, if I'm a commercial operation or -- commercial or seedstock, for that matter, one of the KPIs that you should be looking at is what it costs you to develop your own replacement heifers relative to what I could go out there and buy those heifers for. Now, again, there's a lot of -- there's a lot of devil in the details in there because, again, if I've got 100 cow total, and I only need 15 replacement heifers, well, I can probably go find 15 replacement heifers that are comparable to what my cows look like and fit my system. Now if I'm 2,000 cows or even possibly 10,000 cows, can I find them in the quantity that I need in a consistent manner? So in some cases, we're probably forced to develop a replacement heifer just like if I'm going to run cows in Montana, I'm forced to hay produce. Again, that's a cost of doing business. But that means that KPI is so much more important because that's something I have to do. It's a loss leader, if you want to think about Walmart and all that. That's a loss leader. I have to do that in order to maintain sustainability in my operation. So great question. Lots of stuff there. So if we go back kind of to the 30,000-foot view, as I mentioned -- so we've got the number one and number two, just the number of females that I'm carrying plus deviation from rainfall. Now I want to look at the 30,000-foot view of my operation. I don't care what all profit centers I have, what all call centers I have. But I'm looking at rate of return on assets. I'm looking at what my fixed cost structure is through what I call the Support Center ratio. And those two things -- and then depending on how much debt I'm carrying, and if I'm carrying debt, obviously, an equity, the asset or a debt to asset ratio is paramount. Again, knowing what those numbers are and tracking them over time, if I'm carrying debt and I'm trying to reduce that debt over time, what is my debt to asset or what is my equity to asset, either one? Again, it's yours -- it's whoever gets and wants to pick them. But I want to know over a two-year period, a three-year period, that that debt to equity -- debt to asset ratio was going down over time. Again, that tells me I'm fulfilling the goals of my ownership of why I'm actually owning the land in the first place. And I want to stop for just a minute. And there's a couple of things because, again, when you think about KPIs, there's the database or the benchmark average of a particular database. I've got a database of all the ranches that I've worked with over time. And I've got the average, which, again, that's kind of an industry average because, again, those ranches are all over the country. And I'd like to be able to see those and compare. But again, knowing, as we talked earlier, that I can't necessarily compare Florida with Texas on a lot of stuff. But then this next thing is I have a target. And the target should be individualized. This is what I know my KPI number was. This is where the benchmark is. Again, that just -- a benchmark is just telling me I'm in the ballpark. It doesn't, again, tell me what my resources are, what the benchmark average resources are. But I've got my KPI figure. But then I'm going to come out here in the following -- you know, at the end of the year, and I'm going to make a target for that KPI for the following year. And that's based on what I believe my productivity numbers are going to be for my females, how many females I'm going to have. I don't know what rainfall is going to be, obviously. But I have to kind of adjust for normal rainfall. And then based upon -- we talked last time about what a ranch manager or GM should do every year from a financial standpoint. That's two things. One is develop a cash flow budget. So now actually, I have an estimate of what my expenses and what my revenue is going to be. So I can actually go in and project a target KPI. And to me, you've just done a poor job of ranch management. As one ranch owner and ranch -- he's a GM. He has numbers now for about 12 years. And his testament was, Stan, using these numbers has -- I don't know how to operate the ranch if I didn't have these numbers. And honestly, nothing about this management scares me now. Just tell me what the circumstances are going to be that I'm going to have to deal with i.e. a price drop. Price has dropped 20%. Or tell me I'm going to be in a drought. I'm going to have to reduce my stocking rate by 20%. Knowing what my numbers have been for the last 10, 12 years, within about two hours, I can inform the Board of Directors already in March or April for the end of December, this is what the ranch is facing. I can already be preparing them based upon what I projected from the KPI standpoint. So to me, that's a testament of somebody taking this information, having the good accounting, good inventory system, a good range monitoring system, and then being able to project in time, this is what it's going to look like this coming year. So again --

>> I think that is remarkable. One of the reasons for that is I suspect there are a lot of people who don't want to know.

>> And that's -- you're exactly right. Now the question is, that one person that doesn't want to know, who are they accountable to? If I'm just accountable to myself, which ultimately is going to be bad enough, because chances are I've got to be accountable to somebody, even if it's a lender, because at some point, if things aren't going well, I'm going to end up borrowing money against my land. But if I'm being held accountable to a set of board of directors that -- two of them that probably doesn't even know about ranching at all, all they know is financial numbers, I better have my ducks in a row. And because the last thing -- picture yourself, if you're a GM and you've got a board of directors, and two of them are outside family members, and one of them is a venture capitalist that doesn't know the wrong end of a cow. But all of a sudden, at the end of the year, this ranch has lost quarter of a million dollars. What is that venture capitalist going to say? Could you not have told us this? My goodness, why weren't you -- why weren't you stirring the Titanic away from this iceberg that sank us? Well --

>> If you can't see the iceberg.

>> Exactly. If you can't see the iceberg, you can't change. I loved your analogy last time about the dipstick. Well, you can't just change the dipstick. You have to try to change what's going on in the car. So great comment. So those are the 30,000-foot views. Again, the KPIs for support centers, how much is -- my expenses are made up of fixed cost relative to the revenue that is generating and things like that and rate of return on assets, debt to equity, those type of -- those type of KPIs. Froom there, then, you jump to each of the enterprises or centers that make up that operation. What's the cows doing if I've got a yearling operation, if I got a wildlife operation? And most predominantly, this is falling into a cow calf situation. So moving then to cow calf KPIs, we kind of start on the production side. You probably go by -- some of us are familiar with what was called the beef cow calf spa program or SPA, standardized performance analysis. And that was a standard way to calculate productivity figures for cows, one of them being the most predominant production number was pounds produced per exposed female. So how many pounds is one cow -- again, back to the could have, would have, should have number. How many pounds is one female weaning, regardless whether she had a calf or she didn't? She was a part of the herd. And right now that number doesn't change a whole lot because, again, cows can only have one calf a year. That ain't changed in the last 50 years. That's probably not going to change in the next 50 years. Relative then to what the weaning weights are, you multiply those two numbers together and you get pounds weaned per exposed female. And the average right now is about 460 pounds per female. But that -- again, that's an industry wide number. I've got ranches down here that that number is over 600 pounds. But I've also got ranches that it's 300. Again, it's -- that's one of those numbers that you have to really first identify what the goals of the ranch is and ranch ownership and what the resources are. If my operation is selling 400-pound or 350-pound [inaudible], well, I don't need 600-pound weaning weights. I need smaller weaning weights. But again, it's still important that I have the greatest number of calves weaned that I can have. So again, that's trending over time. Again, as I mentioned, you use -- in order to come up with pounds weaned per exposed female, you have to have two other numbers. That's weaning weights and then weaning percentage. We'll come back to the weaning weight here in just a minute. But again, a weaning weight is a KPI.

>> This seems like an example of one where the specific number is sort of specific to the ranch. Maybe I'm missing something, but it seems like the elephant question is, it makes a difference whether you're -- if you calve on May 1 and wean on October 1, that's going to look a lot different than if somebody calves on January 15 and doesn't wait until middle of November.

>> Exactly right. Again, you've hit it on the head. That wean -- and that's why it gets kind of frustrated with the industry that sits here and tells cow calf guys, "We'll increase your weaning weights." You may be driving me right into the ground by making those recommendations because that's not what my system is. My system is, like you say, to wean a six-month-old instead of nine-month-old. Or use black cattle instead of polka dot cattle. That's what my system is. So you can't -- and I'll just tell you or ask the question. We'll talk about it. What's the three greatest influence on weaning weights? And I usually ask that in an audience. And usually, the response is, well, it's the breed or it's feed, how much I'm feeding, it's the quality of the bulls. Well, you've just talked about number three. All inclusive, you just talked about number three, which is management. And everybody will scratch their head. Well, that's not the greatest influence on weaning weight. What's the greatest influence on weaning weights? And the greatest influence for weaning weights is deviation from normal rainfall. If I have the best genetics in the world and I only get 40% of normal rainfall, my weaning weights are going to suffer. Right? So weather or deviation from normal rainfall is number one. We've already said what number three is. That's the management collective of breeds, nutrition, feeding and all that. That's number three. Number two, then -- Tip, you've already mentioned it. Number two is what?

>> Day since birth.

>> It's days of age. Days of age is the second greatest influence on weaning weights. I'm sorry. So one is weather. Two is days of age. Three is me. That's not necessarily something that I can influence to a large degree. Now that's not to say I want -- I don't want to try to maximize them. But I want to maximize them within the resources that I'm willing to put out there. That says a lot out of this horse's mouth. I want to maximize them relative to the resources i.e. the feed that I want to put in them, the amount that I want to spend for bulls, the amount I want to spend for replacement heifers. I want to maximize them within the resources I'm willing to spend. I don't control number one. I somewhat control number two. Now, again, within a two- to three-week period, I don't necessarily influence when the calves are going to hit the ground. But I do influence whether they're six months old or nine months old. So that's the weaning weight issue. The second component of that pounds for female then is weaning percentage. And obviously, weaning percentage starts with pregnancy. How many cows am I getting bred? How many are open? Within classes of cattle, how am I getting them bred? Are my first calf heifers and then, heaven forbid, the second calf heifers, which we all know tend to be the hardest to get rebred? But again, being able to track those over time. So those are the primary cow calf numbers of KPIs that I want to look at. There's others there, just from a stocking rate standpoint. What's my stocking rate look like over time? Cow females per acres or animal units per acres, however anybody wants to calculate it, whether you use just a head number or whether you use an Animal Unit number, whatever. I don't have a problem with that. Some people want to talk about pounds per acre. Mean. Some people want to talk about pounds per cow. As I mentioned earlier, pounds of weaned calf per exposed female. So again, pick what you want, but then track them over time. Make sense? And the funny thing is you can correlate them. And people want to -- they don't necessarily want to talk about this. But from an analyst standpoint, visualize this chart for me that across the bottom, I have percent normal rainfall. Somewhere around where the axis would be in the middle is 100%. So I got 100% of what my normal rainfall is. Up and down the lefthand axis, I have pounds per exposed female. And all of a sudden, you get this chart that says, well, if I'm going to get 90% of normal rainfall, then I'm going to expect my weaning weights to be 20 pounds less. You can actually start doing these -- now you can start doing these correlations. Now do I expect ranch managed to do that? Heck, no. But if I'm a consultant out here or even guys from the insurance business, you can start doing these correlations for people. And it's pretty amazing what it looks like. But again, you got to have the data to do that. So there's several things from a cow calf productivity KPI standpoint that you can take a look at and really start analyzing the operation as a whole.

>> James, did you want to add something there?

>> And I just -- I guess I'm going to point out, and maybe Stan, you can confirm, you obviously have the current year's weaning weight that also is going to be affected because of the cattle not milking as well or whatever. But you're going to have future years because that's when you get -- the breed up is worse because of that dry condition. So there's a lagging effect of this performance that goes on. So we don't see it in one year. We see it in multiple years. Am I correct?

>> Oh, no, absolutely, you're correct. Absolutely. There is a lag. It does affect the current year, but it also affects the coming years as well. And that's something that we don't necessarily always think about in a drought. It's bad enough in 2022.

>> With the current calf crop.

>> Yeah, with the current calf crop. But all of a sudden, I'm out here looking at my females. And I just turned my bulls in. And my females are in a body condition score three and a half and four. Wow, I should immediately know -- but I'm out here. As I turn the bulls out, I'm looking at my calves. And those really good managers will be looking at their calves and their cows and have been looking at their cows, thinking, okay, I'm going to turn the bulls in in 60 days. And these cows are in a 3.5 or 4. I better start doing something today. But that's not -- I'm not going to reap any benefit on that or any detriment if I don't for the next year. But that's what ranch managers need to think about is, okay, I got to also be thinking about the following year because it's going to impact pregnancy rates this fall and weaning percentage next year. So absolutely, that's a great comment.

>> Yeah. And it's a difficult compensation to try to figure out, I guess, because if you -- even if you call heavy and reduce the number of females that you're trying to maintain, if you have poor range condition, you're still going to have difficult breed back even on the smaller number of cows. And so now you've got fewer calves in the future year as well as poor body condition on the cows. It hits you twice.

>> And hopefully, what you haven't done is tried to feed yourself out of it, because all of a sudden, you've not only really hurt the productivity, but you've also increased your cost as well. So again, that's the whole dynamics of a drought situation. So as we then move away from the production and start moving --

>> Stan?

>> Yeah, go ahead.

>> To your point there, what would you say would be the receptivity to producers on a nationwide basis that -- to that last point you made? I mean, you can't feed your way out of a drought. That's something that we've seen in Australia. They understand that very well, very quickly. But it seems that here in the States, at least for quite a while, that that hadn't been as readily adopted. What would you say -- would you say that's something that's well understood now by producers, at least those that you work with?

>> Yeah, and just to follow up on your reasoning there, Jack. People are going to feel like I've done a lot of work to develop a cow herd. If this is a blip on the radar screen, I can take a hit this year financially, and then I'm going to be okay next year. And we'll just ride it out.

>> Yeah. Wow. Those -- that's a great question and great comment. I would like to think that we have learned our lessons. Any drought in Texas seems to be a prolonged drought, it seems like. But other areas are just dry areas. I mean, we're in a 10-year period down here. We're eight years into drying drought and have one to two years of wet within a drought. So we kind of know we can't feed ourselves. So our response to that -- and again, it's a ratcheting effect. Our response to that is we try to stay moderately stocked. Well, that's all fine and good to stay moderately stocked. But we go back to what I said before on what's the stocking rate relative to the fixed cost? You guys know as well as I do what pickups cost and what they did cost even five, six years ago. Well, now instead of paying 40,000, I'm paying 65, 70,000 for a ranch pickup. Well, that's a fixed cost. And I don't know that I can stay moderately stocked anymore. But therein, I raise my risk of what happens to me if I am in a drought. So I would love to -- I would love to think that ranchers are recognizing that they can't beat themselves out of a drought, but I also feel for them because I had cows myself. I mean, I know what it takes to have good cows and a good herd and use the great bulls and really try to fulfill my objectives. But it's a risk there. So I don't really have a good answer for you, except for -- it just -- it comes back and really portrays the importance of monitoring over time, even the rainfall. Back in August, it started looking like we were dry. I mean, August, September, October. And if I had my data right, which, thankfully, I do, I could see that, oh, my gosh, for the last three months of last year, I'm already -- from a growing season standpoint, I'm already 30% behind on moisture. And if I don't get it in March, the coming March -- I know I'm not going to get anything in January and February. I typically don't. But if I get to March and I'm still dry and I'm somewhat below normal, you know, guys, I got to start taking action immediately because the rest of the year, there's just no way I'm going to recover. So again, it comes back to the monitoring of these numbers over time as much as you can to really be proactive instead of reactive. I floundered back and forth. So I didn't answer your question, but I've tried to dodge it as best I could.

>> Would you say that it would be -- you'd have a quicker receptivity to destocking from yearling producer versus a cow calf producer due to the, I guess -- and the only way I can say somewhat semi-emotional attachment to the animal versus the investments and all the other reasons you've just alluded to versus if you were going to your neighbor or a sale yard or a local video to purchase X number of truckloads of steers or heifers. Writing that check makes it a little easier to say, well, instead of buying eight loads, we're only going to buy six.

>> Without a doubt. And again, from -- strictly from a cow calf ranching standpoint, I talked about we try to stay moderately stocked. But now it's difficult to stay that way because of the fixed costs that's associated. But that's -- let's just say some magical number here, whatever it is, I'm at 80% stocked. Am I capable of taking those other 15 to 20% and using that with a yearling operation? Well, now I'm not only a cow calf guy, but I'm also a yearling operator on the other 15%. And I'm going to stay off of the five. That shock absorber is now my yearling. So yes, the emotional attachment to some six weight steer out here that's a non-herd that's jumping fences, I'm not going to have a whole lot of admiration to selling -- to that steer. So I'm just going to sell it if things get dry and hope I -- hope those sales gets me through this drought and I don't have to get into the 80% of my cows. So that happens. But there's always devil in the details, because now as I mentioned earlier, now you're not only a cow calf operation, but now you're a yearling operation as well to a smaller degree. And you guys know as well as I do, it takes a different set of skills to be a yearling operator versus a cow calf operation. I mean, you got to have two different sets of brains here because, again -- but again, you start talking about what's the KPIs on a yearling operation. And the two things in my mind -- and I've looked at these numbers on various operations. From a KPI standpoint, from a yearling's, what's my gross margin? Sale value versus the buy value on a herd basis. And what's my cost of gain? I mean, those two numbers are paramount in a yearling operation. That is not the case in a cow calf operation. So it sounds good. And that's what a lot of us try to do. But it's a balance in there to try to maintain both of them at the same time. Okay. So just kind of moving then to the cow calf operation. I know -- as we all know, we always run out of time more so than we'd like. But from a cow calf standpoint, there's two numbers from a financial side or, really, from an integrated side, production and financial. First off, what does it cost me to run a cow a year? And again, this is one of those that it can vary across the country big time. My data right now says it's about 950 bucks to run a cow a year across all my clients. Now that number is trackable. I can look at that number. The greatest influence or that number two is the fixed cost and the breeding female number, that could have, would have, should have number. Again, I can change my inventory number, and I can affect that number very quickly. I can stop by and fix stuff and affect that number very quickly. The other number that I would have more preference to look at, though, is what does it cost me to wean a calf? And that number takes into account that all my females aren't weaning calves. So again, the could have, would have, should have number divided by total cost -- in this case, total number of calves weaned. And that number right now is about 1125 bucks a calf. Well, you guys know as well as I do, you're not getting that much for a calf right now. Now it's getting closer, and it probably will get there in the next year or two. But it gets pretty rough to try to come up with that number. But again, tracking that number over time. Again, that's an average number. As we talked, I hope everybody is on the bottom side of that average. But we also know it's an average, so which means there's people on top of that number as well. So those two numbers are incredible.

>> Stan?

>> Yes, sir.

>> Could you touch a little bit on in looking through your KPIs, you've got hired labor, depreciation, repairs and maintenance -- can you touch a little bit on the idea of owning all of your equipment to do your work, say, if you're talking about an operation that has a hay component versus custom hiring it? Granted, you're still writing a check. But have you run into a preference of one over the other or a benefit of one over the other? There certainly are differences tax wise. And then I guess take care of that. And I'll hit you with the follow-up, if you have time.

>> Yeah. So a lot of those -- one example specifically, and we mentioned it, too, before we came on the air, was somebody that's got 4,000 cows -- 2,000 cows in Montana. If you're going to run that number of cows in Montana, you're probably going to have a hay enterprise. And you're probably going to do the hay enterprise yourself. And it's not so much from a cost standpoint, albeit it can be, but the problem is the quantity and the quality that you have to have to run that many cows in that state. They're just not going to be that many people from a custom harvest -- from a cost of growing standpoint and harvest standpoint that can supply the tonnage to maintain that herd. Now if I'm 100 cows out here -- and I don't mean to offend anybody. But if I'm 100 cows in East Texas, where you will grow hay, I call that recreational hay. You just like to get out there on that tractor and you like to get that baler behind you, and you just like to cut hay and bale hay for your cows. So that's all fine and good. Wouldn't you be better off if you had somebody come in and do that for you or you go buy your hay? Well, as long as you can find the quantity and the quality that you're looking for, yeah, that's probably a component of your operation that you could actually make some efficiency changes on. You could just cut your tractors out, your balers out. But again, understand that the risk has now shifted to that grower always being able to provide you. And the next thing you know, instead of $110 around bale, it's going to be $160 around bale. Oh, well, gosh, I just can't afford it. Well, I'm sorry. That's what it is. My machinery is going up. Fertilizer is up. Blah, blah, blah, blah. So you're now at that risk instead of the risk of owning your own equipment doing it. So is there a standard, this is what you should do? Absolutely not. If there is, I ain't seen it yet. So it's all what you can handle yourself.

>> In those examples where you have diversified operations and potentially multiple entities i.e. a farming enterprise, livestock enterprise, with your clients, do you recommend staggered fiscal years to give one entity the opportunity to capitalize tax wise on a -- in the year and still pass that off to the next?

>> I think that becomes a bigger -- to try to stagger your fiscal years becomes more of a burden from the person that's actually entering the data. It still comes down to a 12-month period. So instead of using January through December, I'm going to use May through April. It's still a 12-month period. So I don't see -- I don't see the benefit. Now I'm open minded. And if somebody can show me that there is a benefit there, I'll talk to him. But I just don't see the benefit of doing that. Okay?

>> Got you.

>> Stan, this is James. Excuse me. I think the bigger thing that's really impactful here and just my experience being out in the country and I think kind of Jack is even alluding to, a lot of people don't know what their costs are. So they don't know whether it's cheaper to go buy hay or to put up their own hay because they've never actually -- they never really allocated these costs to a hay enterprise. And I think it's really important. And that's what Stan is kind of pointing out. It really comes down to your ranch and your circumstances. But you also have to know what your numbers are so you can make a correct evaluation rather than disguising a bunch of stuff and thinking that you cut that hay cheaper than you can buy hay, when you really don't even know. And I think the point is you should know so you can make that -- a wise decision rather than just a guess.

>> And take that one step farther. And don't lie to yourself. If you tell me you're calculating it and you say, oh, Stan, I calculate that number and I can do it for $45, I'm probably going to throw up the BS flag, because I don't think that's right. You're probably not including your depreciation. You're probably not doing a full cost analysis. Again --

>> And you're probably not paying yourself.

>> Again -- exactly. I mean, again, well, Stan, I'm not worth. Then quit doing it. You know, just get out of the industry if you're just -- if you're not worth it, don't do it. But you got to tell -- you can't tell me that you don't send your spouse to a retail store to buy groceries every once in a while. Well, that kind of -- well, no, no, no, no. If you're going to do it, if you're going to tell me you're tracking it, tell me you're tracking it correctly. And again, it all comes back to doing these numbers accurately and consistently over time. But there's times when you have to throw up the flag and say that's -- I don't believe you one bit. Okay. So you get into the final number that all [inaudible] about on a cow calf standpoint, what's the breakeven cost per weaned calf? And so that's -- at the day's end, I've spent all this money. I've gotten some secondary revenue by selling coal cows, by selling water, by whatever, blah, blah, blah. And I take my total expenses. And I subtract out, as an expense reduce for my secondary revenue, and I take that number and I divide it by the total pounds of weaned calves for that particular year. And I now have what it costs me to produce a pound of weaned calf on my operation. And if that number is $1.50 or if that number is $1.20 or if that dollar is $2, I then compare that with what the market is offering me for my calves. And the difference between those determines whether I'm making money or losing money. And by having that number now and tracking that over time, what you find is that there's a slow march of inflation, that that number is going higher and higher over time. Some years, it goes up a bunch, some years, it just kind of creeps up. And in fact, one or two years, it may actually go down because I had a super weaning percentage or super weaning weights. But the overall trend of that number is probably going up about one and a half to 2% every year. It just so happens there's years where it goes up six. Like this year, if I do a bunch of analysis on ranches this year, I expect their cost production is going to be somewhere between 6 to 8% higher than what it was for last year. And last year was probably higher by about 3 to 4% from the previous year. So the trend over time, though, is this goes up. Now track that, then. And I don't care -- track that against what a market price is. I don't care whether it's the market price of the calves that your -- price that you're getting for your calves or if you just take a Texas average price over time or you take a Montana average price or a Florida average price over time. But just chart them and see what that looks like. And it will scare the devil out of you. Because, again, you now have the three legs of a three-legged stool. One, what's my productivity levels? And again, that comes back to pounds per female. Pounds per exposed female, what's my productivity level? And that's not going higher. I don't care what people say. Weaning weights are not going higher in this country. I mean, I have yet to see a database that tells me that they're going higher over the last 15, 20 years. There was a time when they did , but they're not going up anymore. Relative to what the weather does to us, we have maximized productivity. Now people don't want to hear that we've maximized productivity from a cow standpoint. But we have relative to what the weather allows us to do that year. So now you have maximized productivity relative to increase in cost. Again, if I've got the slow march of inflation, 2 to 3%, sometimes it's 6, sometimes it's negative 1, but the trend is higher. That is a worst-case scenario for cow calf operations and that their productivity is maximized, but your costs are continuing to go higher. At some point, that's a trap. The only thing that saves you, then, is continuing to monitor what my costs are. But again, even there, I can be the most scrupulous cost person. And I can still have higher costs. The third component, then, is what's the market price for the product that I'm producing? In this case, what's the price for my calves? And that better be going higher, or else it's not a sustainable industry. Now --

>> So do you recommend people look for ways to be more creative about how they sell calves in order to get a little bit more money?

>> Without a doubt. And not necessarily just calves. Certainly -- and this is where I go back not necessarily to the calf situation, albeit, yes, sir, try to get as much for the dollars for those calves as I can get. Do as good a job on call marketing as I can. Don't just sit there and take cows to the market. Do something. Call the guys ahead of time. And if they tell you don't bring them this week, don't take them. Stick them in a pan, do something with them. But do a better job of merchandising your calls. Get the best calves that you can -- that the market is going to want. But then also from a ranch standpoint, look for alternative revenue streams, whether it be wildlife, whether it be gravel sells, whether it be bird watching. Again, I know -- and I know what I'm saying here, because all those things come with added risk and probably added expenses.

>> Overhead.

>> But again, from a ranchland standpoint, you got to generate all you can from a revenue standpoint off that land, or else it's going to be difficult. And the kicker is you've got a whole industry that's built on the back of cows. And if the cow number falls -- I mean, we're going to see this in the next two years. I mean, we got packing plants being built or being proposed to be built all across this country at a time when we're decreasing cow numbers. Tell me that's a good situation. I just -- sometimes we get this thing -- more times than not, it seems like this industry gets things backwards instead of forwards. But anyway, that's -- I'll shut up there --

>> That's another webcast or podcast in itself.

>> That's a whole other situation. So anyway -- so I'll stop right there, guys.

>> Yeah, Jack, I've got a follow up question. And then I think we'll see if we can find a way to close this off for the day. To what extent -- as people may be aware, this section of podcast episodes is funded by the USDA grant for producers that are underserved by crop insurance. And we're trying to eventually get around to what is the role of different kinds of livestock and drought insurance as part of a risk management portfolio for ranch finance. So my question is, to what extent is things like drought insurance used to avoid having to do management that's responsive to drought?

>> So are you asking to what extent are producers using crop insurance as a crutch?

>> Yes. What's your perception about that? And then if not, how should it be used?

>> Well, I work with producers around the Tri State area in the Pacific Northwest. And I would say unilaterally, as I have customers that experience, as Stan as talked about, below average precipitation -- and I put myself in this boat. I have a policy on my own range ground. And as Stan has very eloquently pointed out, when precipitation is not there, forage isn't. Either is productivity. I would say the vast majority of producers that I work with, they're putting those payments right back into their operation. If it's to purchase additional feeds, if it's to identify infrastructure that can be enhanced to try to enhance productivity -- I would say to some degree, producers are using crop insurance to help them through those tight spots versus making some tough decisions that might be destock. But on the precipitation side of things, and then as you look to the revenue protection side of the equation, I would say there's been a dramatic increase in producer interest and receptivity to the idea of trying to put a floor and protect themselves from some pretty dramatic market swings that we've seen in recent times.

>> As a safety net rather than as a crutch.

>> Most definitely. And that's -- we saw that most recently this spring. I had a customer that had a livestock revenue protection policy on yearling steers and heifers. It was going to end in March, about the 10th of March. And we'd been in pretty close conversations leading through. And the market had been just appearing to be starting its climb. And then we all know what happened in late February, early March with Russia and their invasion on Ukraine. And we saw the markets go into a free for all fall. Grains went through the roof. That producer was able to certainly protect themselves. They saw -- went from having to pay a substantial premium to receiving a substantial indemnity payment, which basically shored up that loss and market value as to what those yearlings should have brought. I guess, what -- does that answer your question, Tip?

>> It did, yes. Yeah. And we're going to come back and talk a little bit more about that sometime soon here. I just wanted to -- the question about the issue of people trying to ride out a drought instead of potentially making some difficult management decisions to deal with it and to reduce the amount of financial loss. I was just curious, what role has drought insurance been playing in that? I think you answered that question.

>> I know for a fact it certainly helped a number of operations certainly in the Pacific Northwest but also throughout the country through some pretty dry and tough times.

>> Okay. Well, I think we got through a number of KPIs that will be useful for folks to think about. And I would encourage listeners to begin working on some calculations, if they haven't yet. If this hasn't been enough of an impetus to start, at least, wondering what your numbers are, if you don't know already, people should do that. And we will include several links in the show notes to Stan's page and to some other tools that can help you think through how to deal with this. James, you get the last word

>> [inaudible] the last word, but I do want to just make comment to something that's really impactful to me that Stan said today in the discussion. And that is -- he talked a lot about if you're a general manager and you're accountable to a board of directors -- and I had that experience -- growing up on a family ranch, I didn't ever really feel like we were really accountable to anybody. And then I found myself in a role where I was accountable to a board of directors. And it really changed my view on how we were running our business. And it's made me think a lot about that. I think sometimes, this business is getting more complicated all the time. And it can feel overwhelming. And we can tend to kind of put our head in the sand as family ranchers and not really take this as serious as maybe we should. And I think Stan provides us some really good insight into how we can view our businesses a little bit more professionally, because I really believe we are accountable to somebody. And that really is the next generation that we all hope takes our place in this business. And I've really been impressed with the conversation that Stan has brought forward here and just want to encourage producers to really think about the accountability that we have to this next generation and the things -- the actions and responsibility we can take today that maybe we haven't really ever had to before. But I think the day is here where we really need to kind of step up our game. I think Jack is going to speak more to some of these tools and opportunities, which, quite frankly, are kind of a blessing to all of us that there's some tools out there that we can use to run these businesses a little bit more professionally. But we have to be prepared for that with the right information. So we know how to use those tools. So I really appreciate Stan's discussion.

>> Yeah. And I think the consequences of financial failure maybe aren't fully appreciated. The downstream effects when ranches begin to just close up shop because they can't make it are pretty large economically, socially, within a geographic area. And that's -- in the big picture, that's what we're trying to help avoid here. Stan, thanks again for your time.

>> Glad to have been a help. I hope somebody can take some of my comments and try to make some changes or at least -- you know, I always felt like my job, if I'm just an extension person, is to make somebody think about their operation in more detail. Me as a consultant, then, what can I do to identify the strengths and, more importantly, the weaknesses of -- that are there that can -- that's going to prohibit you from moving your ranch forward to fulfilling your own goals? So I appreciate the opportunity.

>> Thank you again and thank you for your work. Thank you for listening to the Art of Range Podcast. You can subscribe to and review the show through iTunes or your favorite podcasting app so you never miss an episode. Just search for Art of Range. If you have questions or comments for us to address in a future episode, send an email to showatartofrange.com. For articles and links to resources mentioned in the podcast, please see the show notes at artofrange.com. Listener feedback is important to the success of our mission, empowering rangeland managers. Please take a moment to fill out a brief survey at artofrange.com. This podcast is produced by Connors Communications in the College of Agricultural, Human and Natural Resource Sciences at Washington State University. The project is supported by the University of Arizona and funded by the Western Center for Risk Management Education through the USDA National Institute of Food and Agriculture.

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