By Larry Stalcup
Call it "putting a pencil to it — to the 10th power." Or think of that dreaded exercise that takes you away from why you're in this business — saddling up, the joy of working cattle, breathing fresh air or still shedding a tear over a newborn calf.
The ranch business plan is essential to any successful operation. There are hundreds of thousands, even millions of dollars in play through numerous input costs, good production management to keep calving rates high, and being able to work around a drought, wildfire or other disaster.
Pat Bagley, Ph.D., former professor and head of agricultural sciences at Texas A&M University and now dean of the Tennessee Tech University College of Agricultural and Human Sciences, says a written ranch business plan outlines the goals for your cattle business and keeps you focused. It should include long- and short-term goals along with specific methods for achievement.
"Review the plan periodically and make adjustments to the operation and the plan as required," he says. "Include budgetary information: equipment purchases, fencing and structure costs and maintenance, and costs to purchase and maintain cattle.
"Incorporate risk management in the plan: how to handle disruptions in feed supplies due to inclement weather, unexpected replacement cost for cattle culled due to disease or non-productivity or increases in supply costs or taxes."
Determine your pasture and forage capabilities, he and other specialists say, noting that "successful forage management is key to managing your cattle business. Determine the type of soil your pasture has by having it tested."
Plan for a catastrophe
Jay O'Brien, long-time Amarillo rancher, cattle feeder and industry leader, has massaged ranch business plans since the late 1960s. He has been part of management of the XL Ranch north of Amarillo since then. O'Brien, Dale Smith, and Teel, Tom and Mark Bivins operated the ranch.
He is also part of the management team at the monumental JA Ranch, which sprawls beside and within Palo Duro Canyon in the Texas Panhandle. The legendary ranch, once operated by Charles Goodnight himself, remains a major cow-calf and stocker producer.
O'Brien is mentor to Andrew Bivins, son of the late Teel Bivins, who along with Panhandle ranching and other enterprises, was a former state senator and later ambassador to Sweden under President George W. Bush.
"The whole thing about planning is you must have a sense of your mission, where you want to be," O'Brien says. "That's normally to make a sustainable profit, while improving your assets. That's important for any long-term business."
However, O'Brien has learned from much experience to have a plan that can handle the worst. That means not pushing resources to their limit. In the dry, semi-arid Panhandle climate, that includes babying grass. It's a message he has repeated to Bivins.
"I've learned a lot from Jay about running a ranch enterprise," Bivins says. "He reaffirmed to me that when developing the plan and looking at the country you're going to stock, you determine the carrying capacity of the country — then cut that in half.
"We stock at 50 percent of what could be normal cow herd and stocker numbers. That has allowed us to maintain the cow herd and keep a little grass."
He emphasizes the need for a conservation stocking plan. "It must be part of our ranch plan and should be for others. In years when we have lots of rain, we can put stockers on the grass. Since I've been here we have 3 good years of grass growth and the rest has been drought. You have to be delicate with it. If you take the grass away, you have nothing."
O'Brien says that while many ranchers had to liquidate cow herds in 2011 and into 2012, the JA and XL sold stockers and only cull cows. "When we hit the drought in 2011, we destocked yearlings pretty fast," he says.
"We did it because if we had destocked the cow herd, it would impact profits for years to come.
"When you sell off production, there are many costs. That must be addressed in your ranch plan. There's a cost of drought. You have to plan so you can adapt to it. There are lessons to be learned from famine."
Having a plan to hold back cows proved fruitful for 2012.
"Cow prices stayed healthy, which also kept calf prices high," O'Brien says. "We had the grass to handle the cows." He notes that some ranch plans may have a provision for adding hay and other supplemental feed during drought. "However, the cows will still graze your grass. It needs rest," he says. "We must take into account that the grass plant takes longer to recover than you think."
"You need flexibility in a plan," O'Brien adds. "If you utilize all of your resources all of the time, you don't have flexibility. Just remember that restocking has to come slowly."
Restocking plans must take into account the potential for disease and other situations. "While you have long-term goals, you must plan for short-term," he says. "If you see disease breakouts, have a plan to isolate those cattle from your overall cow herd so that you don't put your whole herd in jeopardy.
"We ran into a grass termite problem in 2011, even on a laid-out pasture that received a rare 2-inch rain. I was counting on that as my safety pasture — and it was basically gone. You have to be ready for situations like that."
Those are lessons Bivins has taken to heart. He graduated from the Texas Christian University Ranch Management Program in 2005 to join the JA and XL management. Bivins makes sure to select replacement females that will perform best in a particular climate.
"Match breeds with the climate, taking into account humidity and heat," he says. "If you're thinking about starting a ranch, match your cows to the environment. At the ranch north of Amarillo, English breeds do really well. But when we get to a lower elevation off the Caprock, you need a little different cow."
Bivins is working to diversify his ranch and other business activity. The JA Ranch has multiple enterprises. There are commercial hunting and social event gatherings.
"We're looking for any way to maximize dollars the ranch can bring in," he says. "I like to use enterprise budgeting for each part of the ranch. Income from cows and stockers and income from hunting are separate. They need separate plans to know if one is costing you money and one is profitable."
Not just for large ranches
"As long as the ranch is the size to where you're trying to make a living from it, the issues are the same and you need a good plan," O'Brien says. Stan Bevers, Texas AgriLife professor and Extension economist in Vernon, says there is an increasing need to develop an overall plan for any ranch — a plan that "admires the past, but attacks the future."
He says a plan it should accomplish 2 things: first, evaluate past performance; and second, establish expected performance for the coming year.
Bevers says a meaningful ranch plan should be divided into 2 sections. The first section should establish the ranch's overall status and the past year's performance. "Analysts call this the baseline, or the starting point that future performance will be measured against," he says. "The second section details where the ranch is expected to be at the end of next year.
"The plan should be written down and evaluated following the coming year. Hired managers should prepare this document for their owners, while owner-operators should prepare this for themselves and their employees."
The first section is typically divided into 4 components, the first of which is a general statement of overall observations. This would include rainfall during the year and the overall market situation or any abnormal situations that the ranch had to face during the past year. The first section would then focus on 3 additional things — production, resources and the financial situation and performance — each of which affects the other.
"The best tool available to cow-calf operations is the Beef Cow-calf Standardized Performance Analysis (SPA)," Bevers says. "Using SPA, the ranch management can determine just what the production, resource, and financial performance of the operation was."
Specific production items that should be determined are:
• weaned calf percentage
• pounds weaned per exposed female
• weaning weights
• pregnancy percentage from the previous year
• calving percentage
• calving interval
"The purpose of the production component is to identify the past production level and then, more importantly, to determine where production loss is occurring," Bevers says. "The resources should be analyzed to determine their performance and effects on the production and financial situation."
Bevers breaks down these resources into 4 categories:
• Natural resources — such as the pastures, including the past stocking rate of the ranch, the amount of feed or hay that was fed the past year and the salt and mineral program during the past year. This can help determine if a production loss is occurring due to a mineral deficiency.
• Human resources — if there are employees, do they understand their role in moving the ranch forward towards its goals? Production loss, which influences the financial performance, may be occurring due to a lapse of the employees. "It may not be enough to check calving heifers every 2 days," Bevers says.
• Machinery and equipment resources — repairs and maintenance are major expenses for many ranches. Assess the condition of the machinery and equipment. Finally, the building and improvement resources should be outlined. "The condition of fences can be a major issue," Bevers says. "Are the current water resources (tanks or windmills) conducive for the full utilization of the pastures?"
• Financial situation and performance evaluation — again, SPA provides a good financial analysis of the performance of the cow-calf operation. "Minimal items to include here are net income from operations, net income per breeding female, the total expenses of the operation and total cost per breeding female," Bevers says.
The rate of return on the operations assets and a breakdown of the expenses should also be examined. Know the largest expenses of the operation. "Once the largest expenses are identified, the manager should ask if they can be explained, then determine whether these expenses are manageable in the short term or the long term," Bevers says.
For example, compare high feed costs versus high depreciation costs. Short-term high feed costs can be attributed to drought or other weather situations. High depreciation costs can be explained, but can't necessarily be alleviated in the short term.
A detailed first section of the ranch plan leads to the second section, which again details where the ranch is expected to be at the end of next year. "The second section is relatively easy to complete if everyone agrees on the overall goals of the operation," Bevers says. "A path should be set by everyone involved in the ranch to fulfill these goals."
By analyzing the ranch's overall production and return on assets and investment, production goals should be set for weaned calf percentage, pounds weaned per exposed female and weaning weights. Resource goals could include:
• reducing the stocking rate (depending on available grass)
• reducing the amount of feed that's fed
• improving water resources to better utilize a particular pasture.
Financial goals would include a dollar amount of net income for the operation or per breeding female. Evaluate goals a year after they are set. Were the goals met, exceeded or do the goals remain?
Bevers says a formal ranch plan forces all team members to agree to the past performance of the operation and the future direction of the operation. "Each operation will have to decide who develops the plan, whether it is the owner, the manager or an outside party," he says. "Areas of change are identified and how they will be attacked is determined. A ranch plan will put the ranch operation on a path to fulfilling the goals of the owner."
O'Brien concludes that ranch operations for future owners should be part of the overall plan, even before landowners are entering their senior years.
"It's a tremendous part of a ranch's future," he says. "Estate taxes are part of the long-term plan, whether we like the tax laws or not.
"As a ranch owner, if you don't plan for estate taxes, don't manage for it and want the ranch to remain in production, maybe it's better for someone new to take over that ranch."
Jay O'Brien, left, and Andew Bivins, Amarillo, have had to work flexibility into their ranch planning. O'Brien says, "We ran into a grass termite problem in 2011 … I was counting on that as my safety pasture — and it was basically gone. You have to be ready for situations like that."
Stan Bevers, Vernon, says a ranch business plan should evaluate past performance and then establish expected performance for the coming year.