Economic Planning

Dwight Eisenhower said, “In preparing for battle I have always found that plans are useless, but planning is indispensable.”  

Eisenhower might as well have been talking about ranching. Speaking of planning … How is your economic plan coming along for next year? Things are changing rapidly. Costs and returns have taken some dramatic shifts in the past few years. The way a ranch made ends meet a couple of years ago might not work. Some might suggest that planning is a waste of time because things will change as the year unfolds, but as Eisenhower pointed out, entering the battle without a plan is foolish, but once the battle begins the plan changes.

I’ve been seeing many cow-calf gross margins that are surprisingly low. Even with higher market prices than we’ve seen in a while, many ranch’s margins are thin or non-existent. At Ranching for Profit, we teach participants how to calculate Gross Margin per Unit for each enterprise. This allows you to compare the economic efficiency of one enterprise to the next and to plan for profit. Gross Margin is the total value of production (Gross Product) minus the Direct Costs. Gross Margin can be viewed as that enterprise’s contribution to cover overheads and for profit.  

Lately I’ve been seeing many cow-calf Gross Margins less than $300/cow. Some even less than $150/cow.  Remember Gross Margin needs to cover Overheads like land and labor. Let’s say a Gross Margin was $200. One way to look at a Gross Margin for a cow is to ask the question, “Can I cover the value of the grazed forage, and provide the full cost of labor including machinery for that cow for a year?” If you think you can for under $200, heck I will send you some cows to provide graze and care for.  

Gross Margin per cow should be a minimum of $350 and I’d feel much better if it was greater than $400 before we really have something to work with. For those of you with smaller scale businesses, or businesses with higher overheads, you’ll need to exceed $400 GM/cow to find profit in this game.

You don’t need to wait till the end of the year to calculate your Gross Margin. You should have it figured now. Do you have an educated guess on how many calves you’ll wean? How many cull cows you’ll sell? What your feed and health costs might be? If you can make educated guesses on those and a few others, you can calculate a Gross Margin.  

So, what if you sit down and calculate a gross margin for the coming year that stinks? That’s great news! You can do something about it! If your battle plan predicts you’ll lose the battle before it even begins, then tear up that plan and start fresh. Maybe Eisenhower didn’t know he was talking about ranching when he made that statement but it sure applies for making your economic plan for the coming year.  

Our Ranching for Profit Schools this winter are filling up quickly. There are still a few with openings. If we can be a part of helping you make your economic plan for the coming year, your ranch should attend. It might mean the difference between winning and losing the battle.