The Business of Grazing
By Steve Kenyon
BUSBY, Alberta:
We ranch near Edmonton, Alberta and we manage over 2500 acres of land. Currently, we own three head of livestock; one donkey, one pony and one heifer. This might seem a little under stocked to some people but we also custom graze about 1000 head every summer. We have a custom grazing business called Greener Pastures Ranching Ltd. We have four different cattle customers, including one, for whom we manage a year-round herd of 150 cows. Did you know that you do not have to own the livestock to be a farmer?
Did you know that you do not have to own the land to be a farmer? The 2500 acres of pasture
land that we graze is all leased land. In our area, the land is too high in value for agricultural purposes as we live 45 minutes outside of one of the largest cities in Canada with an ever-increasing population. As an investment, land in our area has the ability to be quite profitable because of appreciation and the demand for acreages; it, however, does not cash flow very well for an agricultural business. We have 12 different landowners we lease from. Allan Nation once said, “Land is a great investment with after tax dollars.” What he meant was that investing in land usually improves your balance sheet because of appreciation but you need to be able to cash flow it and that is getting harder and harder to do. The business of farming is separate from the business of real estate. In many cases, these two parts of a business have been blurred together over the last couple generations. Most of the farmers true wealth has been created from real estate appreciation, not from farming. But today we live in a different world, it is very difficult for this generation to cash flow the purchase of land like the previous generations have done. One of the key points that young producers need to know is that economics and finances are two different parts of a business. Very simply put, economics is
profitability, and we manage this with a gross margin analysis. Finance is your ability to cash
flow a venture, and this we manage with a simple spreadsheet cash flow. Two separate sets of books.
Economics. A gross margin analysis is really quite simple. If you have a big number and you subtract a small number from it, you have a profit. We just do this quite a few times in all the different profit centers. Let’s start by defining a profit center. A profit center is one component of your business. You may have many profit centers that make up your farm such as a hay profit
center, a feeder profit center, a grazing profit center, a cow-calf profit center or a grain profit center (just to name a few). Hopefully, your gross product (the big number) minus your direct
costs (the little number), of each profit center gives you a positive gross margin. If not, you will
know what needs to be fixed. Either the big number needs to be bigger, or the small number needs to be smaller.
Each profit center can be broken down to determine the margin it creates which contributes to
the total contribution margin. This in turn then has to cover all of your business overhead costs. If it does, you have a profit. Now this analysis has to cover all of the costs, even the non-cash
costs. After you have paid for all of your labor and all of your cash costs, you need to cover opportunity cost, depreciation and inflation. If you can do this, you have made a profit.
Finance. My cash flow is a financial tool. It is not economics. It helps me plan ahead and predict what my bank account will look like in advance. I feel it is very important for a business to be
pro-active on its cash flow. What I mean by this, is to make sure you have a good understanding of your monthly cash inflow and outflow to be able to accurately predict what your bank account will look like 10 to 12 months in advance. If you can plan ahead month to month and see when your finances get a little tight, you have plenty of time to re-plan, and figure out a way to make your cash flow work.
Let’s look a little closer at one of our profit centers here at Greener Pastures. You might ask
me “Why don’t we own cattle?” Well, that is because I determined a few years back, that on our
operation, the economics did not work, and the risk was too high. Some years we could make a profit but not consistently. I do make a profit from our custom grazing almost every year
and I do not have the market risk, the breeding risk, the cow depreciation risk or the death loss risk. That does not mean that I will not own cows in the future. I believe
that in the cow-calf profit center, the revenue created from selling the calf can provide cash flow for the operation. The profitability of the profit center comes from the ability to manage the value of the herd, watching for appreciation opportunities and avoiding depreciation. Cow depreciation is a huge loss that most producers don’t account for because it is hidden, but believe me, it is a big cost and needs to be in your numbers. Our style of custom grazing
actually has its own built in risk management strategy. By managing the land with an Advanced
Grazing System, we limit the amount of risk we have in the crop we grow. By managing for
the grazing concepts, (G.R.A.S.S.- graze period, rest period, animal impact, stock density & soil
armor) our only risk is weather. Temperature and rainfall limit our growth potential, but we
always get to harvest our crop. Snow, hail, frost? We can still harvest, and because we manage
to improve the health of the land, we reduce the risks. We build organic matter and leave residue which helps to absorb rainfall and reduce evaporation. It also helps to control soil temperature in order to maintain a longer period of growth for the plants. Healthy pastures are profitable pastures.
Our ranch is also a low-cost operation. We use very few inputs. We have not used any
chemicals or fertilizers in over 25 years. Our pastures are managed to recycle nutrients and improve forage quality by understanding the grazing concepts. We manage for weeds and pests strictly through management. We try to build ecosystems. We manage the biology of the soil to keep them happy and healthy, allowing nature to work for us, not against us. These organisms in the soil help us import and recycle nutrients. Legumes are a very important source of nutrients for us. Did you know that the air we breathe is 78% N? We just have to under-
stand how to get it. We also have very little equipment. We have never owned a
tractor. Our goal is to get the animals to do the work for us. If we have minimal investment, we
can lower our risk. But how do we feed? We own a bale truck. We can move round bales when need be with our bale truck, but we try to use it as little as possible as Well. Quite often we swath graze or bale graze in the winter. When we chase what is produced. We have
developed ourselves as a market to other producers. We will take oat crops, barley crops, salvaged crops, crop residues or whatever else is offered. With minimal equipment, we use less fuel, spend less time turning circles, have a lower repair bill and incur less depreciation and opportunity cost on those assets. It is those costs that really sneak up on a
business without you even realizing it. When we have to feed, we still use a grazing mentality by
bale grazing. Here our big savings is in lowering the labor and equipment costs of winter-feeding. That’s it. Simple, low risk ranching: Greener Pastures style. (Special thanks to Greg Judy with his book called No Risk Ranching.) Here at Greener Pastures Ranching, we feel we need to stay on top of our economics and our finances. If we can keep these in check, the rest falls in place.
Thanks and God bless.
Steve Kenyon ranches in Busby, Alberta, Canada, and can be reached at [email protected]. www.greenerpasturesranching.com or on Facebook at Greener Pastures Ranching. His book The Calendar of the Year-Round Grazier is
available from the SGF Bookshelf