What I thought I would do is I'm just going to briefly kind of go over this win-win situation and kind of give you a gist of where ranching is today and how custom grazing fits into that. And I'm going to kind of read these notes and you've got them so you don't need to read along with me.
You know, you can read them later. But anyway, I'm going to start off with this thing of what business are you in? You know, all of us have heard this figure of 3% return average in ranching. And you know what average is?
That's where the worst of the best meets the cream of the crop. Okay? And not a soul in here that's an average rancher, right? The Amazon River, on average, is six inches deep. But I guarantee you don't want to try to walk across it on the average depth.
So I was just doing some research, you know. And in today's economy, in any business where skill is involved, and well, we're going to talk about this later, there's a lot of skill involved in this manipulation of grass and turning it into animal protein or high-value human protein.
That half of the total profits of that industry are made by the top 2% of the participants. Half of all the profits in an industry are made by the top 2% of participants. So what does the average tell us?
It tells you that the average producer is below water most of the time. If 2% are making half of the profits. When we look at the top in ranching, and this is from several sources and some of it you're going to hear tonight, Dave Pratt, when we look at the top rather than the average, we find that the top 15% of ranchers are able to carry an annual return of around 8%, or roughly equal to what a well-run manufacturing business would generate.
Publicly held manufacturing business run by a guy from Harvard. He can generate about an 8% return. Ranchers are able to do the same thing. Are there any ways to get this figure up? Yes, there are. Ranching has been described as a business of land and livestock.
However, it's really a land business and a livestock business, and this is a key point. If we take the deeded land out of a well-managed ranch and make it 100% lease, we will often see the net returns increase from 8 to 14, 15% per annum.
This is because lease rates are tied to production profitability, whereas land prices aren't. And this is particularly true of deeded rangeland. Currently in Texas, the land cost per cow on deeded rangeland in 2003 was $18,000 a cow.
A 3% return on that investment would require that you net $540 a cow. That means that the total gross revenue you're going to produce has to be net. So you have to have zero end costs in order to get a 3% return on the land cost as it is in West Texas today.
Today's truth is that if you have enough money to buy a deeded rangeland ranch large enough to provide you with a living, you have enough money to live without working. You don't need to work at all if you've got enough money to own a 100% deeded ranch today.
Currently, low-risk government bonds are paying over a 4% return. An inflation index government savings bonds showed a 10% return in 2004. I had written down a 6%, and I looked that up, and it was wrong.
It was 10% is what you got in a government inflation index inflation bond last year. It's priced by its aesthetic and recreational value rather than its ability to produce a profit from traditional ranching.
Is this a trend that will continue? Here's a statistic that indicates that it may for a while. I recently read that 70 million urban Americans are planning to move to the country. Thanks to computer technology and the internet, the best and the brightest can now live virtually anywhere they want.
There's no shortage of people who want to play the role of a rancher, and by role I mean as in a Hollywood movie. They want to have a big hat and a big belt buckle and pointy boots, but no work. Just want to look the role.
Very few people want the daily responsibility that livestock require. It flips over on the other side if you're following along. A byproduct of the world economy is an increasing need to travel frequently and at short notice.
This has made people commitment phobic to anything requiring daily responsibility. While this urban cowboy phenomenon will mean that deeded ranches will become increasingly dear, it also indicates that grazing leased ranches could actually decline to zero and beyond.
What is beyond zero? They're going to pay you to graze their land. Once we remove deeded land costs, the key elements in the high return ranches are that they own a minimum amount of machinery per head, no more than $40 worth of machinery per head, than this top 15%, feed a minimum amount of hay per head, no more than 1,000 pounds of hay per cow per year, and they keep their cows' reproductive rate above 85%.
You know, the production rate's not that exceptional. I haven't ever met a rancher in my life who didn't have at least a 100% conception rate, right? And all we need is 85% to be in that top 15% that's getting that 14% to 15% return.
The high-return producers do not produce above average weaning weights or any other production factor. They concentrate on keeping capital and labor costs per head low. As Bud Adams, a famous Florida rancher, told me, ranching is really a simple business.
The hard part is keeping it simple. The key point I'm making is that any ranch that is 100% deeded property will necessarily show a poor percentage return even with exceptional management. It will do this because the value of the land is not correlated with the production profit of the land.
It doesn't matter how good you are if the land is valued for the view. If you're trying to sell beef or sell grazing or whatever. Interestingly, the return on investment has everything to do with the price of land and very little to do with the price of cattle.
I examined the books of Argentine ranchers who are earning 18 to 19 percent annual returns selling two-year-old grass-fed steers for 40 cents a pound. It's all a ratio. It doesn't have very little to do with the price of cattle.
Today, starting a ranch and paying for it from its own production is impossible if 100% of its land is deeded property. It is this paradigm of deeded land that is keeping young people out of ranching far more than the price of cattle or the return of cattle.
What is needed is a change of paradigm. That's what this whole meeting is about. He's trying to create a change of paradigm in a small group of people here that we can spread this around. Today, a leased ranch can generate enough money to pay for land on a piecemeal incremental basis.
That's what you heard Greg Judy talk about. Now, he's going to talk about that some more. Once Greg quit trying to own every land that, every acre of land that he grazed and started leasing a lot of land, that 250-acre farm became very easy to pay for, didn't it?
Where it was impossible to pay for before. So that's what I'm saying. You know, just because you're leasing land doesn't mean that you don't own land. It means the leasing land makes buying land much more feasible.
Okay? Of course, the greater the percentage of deeded land you start with, the more frugal your personal lifestyle will have to be. This is because land payments can only be made from after-tax dollars.
Now, a big problem that we have with ranchers is they don't like to pay taxes. And we all know this game of depreciation. We don't ever have to pay any taxes, right? Just go buy a bunch of useless machinery we don't need and we never have to pay any taxes.
But we can never expand our land base without paying taxes because land can only be paid for with after tax dollars. A lease you can pay for with before tax dollars, okay? It's 100% write-off, your lease thing.
But land, it has to be made out of after tax dollars. It has no depreciation tax dodge to it. You know, it's like buying a brick of gold or a diamond or any other investment. There's no depreciation allowed on land.
Paying for land has been described as a forced savings program. Savings have been defined as deferred consumption and saving rather than spending is no more popular down on the ranch than it is in urban America.
We like to spend money, not save it. Land principal payments are much more onerous than lease payments due to the tax laws, just as I went through. Tax law considers land to be an investment, not a production expense.
Investments are designed to protect wealth. They are not designed to create it. Okay? You know, owning gold may be a good way to protect wealth, but is that gold ever going to send you a dividend check or an interest payment or anything?
No. Is that diamond ever going to send you a check in the mail? No. No. But it's designed to protect wealth. It's designed to keep you where you are. It's not designed to push you ahead. For example, the interest returned from a bond is never enough for you to go borrow money to buy the bond.
Investments are structured so as to protect wealth, not generate it. So has ranch land been a good investment? I'm sitting here bad-mouthing ownership of land, but when you look at land as an investment, has it been a good investment?
Since 2000, ranch land has significantly beaten the returns from non-stock financial investments. In many areas, the increase in value has been on the order of 10% per year over the last three years.
And this is in non-urbanizing areas. Boy, you get on the outskirts of Dallas, Texas, or any other city, and you can see 30% increase per year. However, this increase has not been driven by any factor within the control of the rancher.
That's an important factor. Yes, it's been a good investment, but your management is not making that land go up. It's factors beyond your control that are making that land go up. And it's factors beyond your control that could make that land go down.
And what we're talking about things is what can we control in our life? Because that's what management gets paid for, is creating a return from something that it can manage. Few of today's ranchland investors remember that farm and ranch land fell in value by 50 to 80 percent from its value in the early 1980s.
I had lunch with a guy from Nebraska today. This year is the first year that land in Nebraska has returned to the same price it was in 1981. My family's farm that my dad sold in 1973, we sold it for $4,000 an acre in 1973.
And it went as low as $500 an acre and now it's just up to $1,000 an acre. So, you know, everybody thinks, well, you know, we've never seen anything like this. Oh, yes, we have. Those of you guys that are over 50 can remember the 80s.
You know. Young people think, well, this is all brand new. No, it's not. It's been there before. Land is said to exist in only three stages. These are fully priced, falling in price, and recovering from a price collapse.
Of these three, only one is a profitable investment. So you've got one chance out of three of buying land being a profitable investment. And the time it's a profitable investment is after a price collapse, not when it's fully valued.
You know, that's because land has to increase for it to be a good deal. This makes land a very high-risk investment. Despite an uncertain future, the land business has been a good investment for the last 25 years since the 80s, but it is only feasible for people who have surplus after tax dollars.
Startup operations do not have these because family living expenses eat up the majority of the cash flow and surplus after tax dollars are few. So, in review, we have a land business that's a good business and a livestock business that's a good business, but a combined land and livestock business that's a poor business.
And that's what we usually study as we, you know, combine the two. What we see is that the best way to increase the return to ranch management is to eliminate land ownership. But what if we eliminate cattle ownership?
What if we just sell our management on a per head or per pound basis to others? That's what we're talking about today. Well, this is when things get really interesting. We can see returns jump from 18 to 14 percent to 100 percent a year.
This is because two factors. One, services drop much more of the gross income to the bottom line. It is not uncommon for service industries to operate on margins generating 80%. That means 80% of what is built because you're selling knowledge.
You're not selling a thing. You're selling knowledge. You're selling management. When I told you, we're in the management business. Two, livestock are a big investment and a risky one. All you guys know that.
You've been around, have you ever seen cows this high before in history? That's scary, isn't it? Scares the heck out of you, doesn't it? Yeah. A lot of people think that's neat. In real dollars. In real dollars.
That's right. Are they still the highest they've ever been? Yeah. Sure are. Broodstock, which tends to dominate ranching, loses value as it ages. Ever think about that? That's why they allow you to depreciate those cows because they're actually losing value.
Cow depreciation makes cow-calf operation a better tax dodge than a generator of after-tax dollars. This cow depreciation factor is amplified by the cattle cycle. Okay, now listen to this. If we take the decline in the value of the cow between the top of the cycle and the bottom, we find that this normally exceeds the total after-tax return of all the calves the cow produces.
And with stocker cattle, it's not much different where the majority of the positive production margin is eaten up in negative price margin. And we're going to show you that through some examples here in a minute.
You know, that what you sell a calf for is not that price, but it's the value of the gain between what you paid for it and what you sell it for. We're going to do some tests on that. Another big factor is that custom graziers tend to be seasonal and to only have livestock during the green season.
Boy, this whole thing we've talked about this morning, a variable stocking rate. Boy, it's really hard to do that with owned cattle. You know, and it is exactly like Jim said, you know, it's that these guys that live up in the Rocky Mountains and only got a 90-day green season, boy, this ideal custom grazing thing.
Because they've got that radiational cooling at night. They get really good gains in the summer when those of us lowland ranchers don't get very good gains. It provides a viable alternative in areas such as the southwest where there can be multiple year droughts.
Ranchers are loath to sell cows during dry times because of the negative spread between what you sell them for during a drought, what they'll have to pay to replace them when the drought ends. Custom grazing shows more clearly than any other activity that you are not in the cattle business or the beef business, you're in the job of managing livestock to harvest grass.
Don't need to own either land or the cattle to sell this knowledge. Okay, now this is where I'm coming to for this session. This increase in efficiency extends to the cattle owner as well. Custom grazing offers the livestock owner the ability to buy both land and labor on a per head basis.
This is extremely important as matching labor and land resources with a stocking rate is the most difficult management job in ranching. And those of you know that. Fixed costs do not stop because there's a drought and you sell the livestock, but as a buyer of custom grazing services, my land and labor costs end immediately with the sale of the livestock.
This is by far the most labor and capital efficient way to raise livestock. For the example, the average cow calf producer who has a cost of around $400 a cow a year can buy land and management from Greg Judy for half that amount.
Doesn't have to do anything. You know? Go out there and you'd let him fish in the pond, right? And he's spending double that amount to produce it himself. You got the guy that owns the land you're talking about?
I'm talking about the average rancher. And what? That's leased land. That's not owned land. That's a lease. It's about $400 on average. The guys in the top 15% are able to produce that calf for about $260 a head.
The big cost in producing that calf isn't what Mr. Garris is going to talk about tomorrow, is hay. If you can take the hay out of the cow calf business, it becomes very profitable. John said $250 is too high.
$250 is too high for leasing it? For a year? Yeah. We'll let you negotiate that then. Custom grazing also offers an easy way to geographically diversify and buy complementary climate forage resources.
You may live in cow country, but you can buy yearland gains elsewhere or the same thing. Don't own nothing. Even rent your shoes if you can. You want to sell knowledge and not cattle. Livestock owners must be specialists in marketing to offset the high risk of owning an asset that can quickly lose value.
Graziers must be specialists in producing meat from grass. I have yet to meet a rancher who is good at both. Custom grazing offers an easy way for the best of both worlds to work together. It's a win-win deal.
And that's what I'm saying, you know, that almost everything that we find, we find that some people are good at marketing and some people are good at production. But boy, there's very few people that are good at both, or they like to do both.
So custom grazing is a way of putting these two people together. In your handout sheet, a lot of you have never seen average daily gains by month and what they are. There's a handout sheet in there. Looks like this.
It's in your green folder in the back. And this was put together by Annabal Portomingo, who teaches our grass-fed beef school. And of course, what we're, you know, in grass finishing, we've got to have an average daily gain of greater than 1.8 pounds per day in order to have the animals marble.
And a lot of people just never had seen that a lot of these grasses, perennial grasses, won't do that, except on a seasonal basis. In the stalker business, that's not so critical because usually your client's not wanting you to produce fat.
You know, they want to do that in the feedlot. In fact, they don't really appreciate it if you put fat on them on grass. But just take a look at that. And what you start to see is that, you know, it's exactly what Jim says, all your high gains, all those things are all in the spring of the year, and then they fall pretty low out there in July and August.
And one of the things that we've been trying to tell people about, it's almost impossible to get most of these forages to give you that 1.8 pounds per day in the fall of the year. Go down the month of October.
Is there any forage listed there that will give you 1.8 pounds per day in October? One, cereal oats. That's in November. It's not in October. And so while we're telling people in the grass-fed beef business, sometimes the best thing to do is to just skip a couple of months.
Okay? It's very difficult to do. Yeah. Yep. Yep. This northern hemisphere. Let me tell you, this is based on 40-inch rainfall at the same latitude as Tulsa, Oklahoma. I was going to ask the temperate was, and we don't really have that.
Well, you're doing Tulsa, Oklahoma. Everything north of the 30th degree latitude is temperate. South of that. And the 30-degree latitude runs from San Antonio to New Orleans to Biloxia to Jacksonville, Florida.
So everything north of that is temperate. But anyway, one of the things that's really interesting is look at what adding vetch does down there. You know, just that little bit of legume, boy, really pops that stuff.
The other thing that's intriguing is on the back here is all the stored forages, the popular stored forages, and what you can expect as an average daily gain on them. And by good alfalfa hay, we're talking about dairy quality alfalfa hay.
And just dairy quality alfalfa hay will put 1.6 pounds a day on an animal. Yep. White clover and grass hay will put 1.7. Now the problem that we have is that there is no stored forage that will finish cattle.
Can you see that? None of the gains are high enough for you to produce marbling with any stored forage. So what we're trying to do is that you notice that we're awful close. The alfalfa hay at 1.6, we're only two-tenths of a pound away.
And what we're finding out is you can have that steer go on annual ryegrass or wheat or oats or whatever for a couple hours a day and he'll fatten. They just need just that little bit. But don't think that you're going to finish an animal on any kind of stored forage by itself without an energy source.
And that's why they supplement grain in the feedlot. But anyway, these are just kind of things that you can get a chance. You can take a look. If you want to do a year-round program, what Annabal does at his school is you put together a forage chain so you can keep high gains year-round.
I talked to, I had Richard Perry from Durango, Colorado down with me this weekend and he is finishing lambs in Durango, Colorado at 8,000 feet in the Rocky Mountains on cereal rye this winter. Grazing all winter long.
Talked to Meg Cattell in the front range of Colorado. She said, triticale, beautiful green, this tall, deer cows. She says, you know, Annabal's right. She says, by God, there's a lot of things we can grow everywhere in North America, including Alberta, that'll stay green all winter long and produce those 1.8, 1.9 pounds a day.
So need to take a look at that. One of the things that you'll find out is take a look at any perennial forage and you'll find out it's a very seasonal situation that doesn't produce high gains traditionally other than in the spring and the early summer.
Mississippi State did some tests. Those of you from the deep south know what a difficult time we have producing high animal gains in the summertime in the heat and humidity. And they took 850-pound steers off of annual ryegrass and put them on green corn, green leaf corn without a head on it.
Produced 4.7 pounds a day for 100 days in Mississippi's summer. Anything you can do in the feedlot, we can do out there on green forage if it's the right kind of forage. So Jim, I don't know how much of it is the effect of the weather and how much of it is the effect of the weather on the forage.
But we found out we can take those Angus steers and have them gain four pounds a day in July and August in Mississippi, South Mississippi. Yeah. Well now there's nothing you can do in October and November other than feedlock then.
Is that what you're saying? Nothing that we can do other than we may have to come up with a supplemental energy source. Okay, so like you can give them grain out on the pasture or... Well we found out we'd rather give them something other than grain because the grain messes up the rumen.
We might want to give them molasses or beet pulp or some non-starch feed that doesn't get their rumen upset. When I first read grazing, about grazing corn in the Stop a Grass Farmer, Feed South, it was recommended to begin Labor Day for 60 days for that fall drought because you're not gain on that corn in September.
Yes, I'm sorry, that's a good point. The late planted corn, you sure they'll gain excellent in the fall. And in fact, Annabal said that, and it's not in that chart, but that's the only forage that they found that you can finish cattle in the fall is on late-planted corn.
And of course, they stagger plant the corn. They don't plant it all the same day. You know, they're planting it all through the summer. And they graze it when it's about shoulder high to use when you start grazing it.
Alan, I've seen some really variable data on corn grazing results, and I don't fully understand it, but I think part of it is people are kind of grazing pretty mature stuff. Do you have any comments on that?
I just made one. Well, the big variability, there's two variabilities. One is that they're all got silage mentality, you know, and they're waiting for it, you know, to be ready to cut for silage before they start grazing.
And then is you start at this high. And then the other thing, don't ever make that steer graze that stalk. You just want to graze the leaves. And you can come along with cows later and graze the stalk off, but don't have that high-gain animal graze the stalk.
Your tonnage yield is pretty low, but you've got high-quality feed. The tonnage yield is equivalent to what the corn is. What we found out in Nebraska research is that if you harvested that acre of corn and fed it in the feedlot, it would produce exactly the same amount of yield per acre as you grazing the green leaf corn.
Even when it's only shoulder high. Even when it's only shoulder high. And here's the thing about it, okay? You've got to pick up some energy from the sun for the next 60 days, though. That doesn't sound right.
Well, you've got a staggered planted. You're not grazing it all one day. You know, you've got an electric fence and you're rationing it out, strip grazing it, you know. And what you can do with dairy cows or something that needs a protein is you can put four rows of corn and two rows of soybeans in.
And they can get all the protein from the soybeans. You look in there, your average daily gain on soybeans in the summer is about 2.2 pounds. Yeah? You don't get a good performance, but when you double-tail that into the fog, and you have that bed individual rat out there that the winter annual is in, that is where we begin the farmers in the fall.
Right. I'll fill in that bed red. That's a good point. One of the things that Annabal did say is that you can supplement cattle in that early time on the winter annuals, and it'll double their average daily gain.
But it still won't go to 1.8. It'll stop out about 1.6, 1.7, something like that. They haven't been able to push it into that marbling phase yet. I'm pretty sure I can pull some data on the computer at about 2.8.2.
Well, that'll do it then. But, you know, that's a piece of supplement to get blooded on with that dead craft. Right, right. That's right. That early stuff doesn't have enough dry matter in it. I got a paper from New Zealand.
They're having the exact same thing that Annabal was showing, the real poor animal performance on their dairy cows in the fall pastures because of that protein energy imbalance. Freeze, once you get a frost on it, it's fine.
It doesn't recover the balance? It brings the energy level up, yeah. But once they get a frost on it, they can finish cattle in. How many days, is 1.8 do you have to get to marvellous? About, it's like a feedlot, about 60 to 90 days.
And what you can do is that you can have cattle go, you know, like through June at two pounds a day, and then they can go on into August at a declining rate, and they can carry that marbling over. But it's pretty well used up by, you know, the middle of August.
The problem that we have in the fall is we have animals going through at a low rate of gain and then going to a low rate of gain. What does that lower rate of gain do to the meat? Lower rate of gain does to the meat, the ones that's no marbling.
And the big problem that we have with marbling, lack of marbling flat, is that that fat is what produces a lactic acid that preserves the meat and keeps this what they call gamey flavor out. The gamey flavor comes on meat that's too lean because it won't, you know, it won't drop the pH fast enough.
You've got to have that lactic acid produced to drop that pH in a hurry and preserve that meat. How long does it take to get rid of that as far as if they go back onto it again? 60 to 90 days. Okay, so.
I think somewhere where if they are gaining and then they stop gaining, you get a lot of connective tissue. Yeah, yeah. Well, the connective tissue has a lot to do with age. You know, the lower rate of gain is they're getting older.
And the connective tissue is usually found where they're walking a lot and stuff in the legs and all that stuff. And like I said, this is not a grass finishing thing. We're going to have a grass finishing school this summer that Annabal is going to teach, and I recommend that you do that.
But anyway, I just thought it would be interesting. And Jim, I'll get that stuff from you. We haven't been able to find that. All the other stuff showed a pretty low rate of gain in the fall. It'd be interesting to see that.
This just give you a general idea, okay, of average daily gains and when it'll produce them. Okay. Let's go to this one that says client relations here. I cannot trust you if I doubt your skill. Okay, let's just talk a thing about that client that we're trying to develop.
One of the problems that we have is that the majority of our clients that we have for custom grazing are feedlot-oriented people. And as Jim has talked about, is that what they are typically doing with custom grazing is positioning cattle to go on feed, to come off of feed at a certain time of the year that the futures market shows that that's going to be the highest price to sell finished cattle.
Okay? And then that's why, you know, like you say, they're trying to get them longer and all this, and they're always, you know, doing that. What we would like to do is we would like to develop clients that are feeder cattle clients because they're much more flexible.
Anybody be able to find that says client relations? Got trust builders, got value of gain chart and all? You should have gotten. Okay, you may want to flip it over to one side. It may say what a difference a year makes on the other side.
Flip it over. It's printed both sides. Anybody got one? Like I said, we're going to try to develop our own investors. Forget about that other thing. Anything about what is that guy most concerned about when you've got his cattle?
Are they going to be there, right? Have you got a fence that's going to keep those cattle on that place? Or are you like Jim Garrison? They're all over in your neighbor's place and thank God he brings them back, you know?
They keep your retail. Yeah. Good perimeter fences are good truss builders. You know, one of the things that anybody that's very sophisticated, he comes to your ranch and there's no internal pasture subdivision, it's like a guy saying, I'm going to take you for a ride in my taxi cab, but I don't have any steering wheel or brakes.
I just turn it on and we just go. You want to ride with that guy? You know, what you think about all this internal fencing and MIG and all that, that's the steering wheel, that's the brakes, that's the clutch.
It allows us to slow them up, you know, speed them up. It gives us a control. Internal fence subdivision is control factor. And that's what he is most interested in. Are you in control of these cattle?
Willing and eager to run cattle on a per pound of gain basis. Now, I know a lot of you guys want to sell it that way and the clients don't want to buy it that way. But I guarantee you, if you're trying to make money in feeder cattle, you want a guy that can put gain on cattle.
And the best way that you know what you're doing is you're willing to sell gain on a per pound of basis, gain basis. Periodic weighing and reports. The biggest wrecks in custom grazing is a surprise to the grazier as it is to the client.
Most people don't know that the animals aren't gaining weight. Most people don't understand that 85% of the gain is made before the 4th of July. And what's what you need to explain to your client? Because exactly what you've heard Jim and Judy say, that grass is worth a lot more in the winter to get those places off of your animals off your place so you can sell that gain at the winter at a higher gain.
Backup stored forages. Well, we see a lot of that in winter annuals in the south where normally it's a nice winter, but about every, I don't know, 25, 30 years, we have one of these Alberta Clippers, pardon my French, come through and freeze the heck out of all the winter annuals, you know?
And so, oh, sorry, I didn't have any hay, you know? Sorry about that. That's what they want to know. You don't have to feed it, but show them, hey, I've got this hay in case, and have in your contract how that hay is to be fed.
And you put it in your contract that, you know, that you're going to charge them to feed that hay because you're in the grass business, you're not in the hay feeding business, you know. One of those negotiation points you need to.
Referrals and past animal performance records. That's, you know, one of those things. Prove to me that you know what you're doing. The hardest thing you will ever do, and I think Greg will attest to this, is the first set of cattle that you ever graze because you have no track record at all.
And what you usually need to do is to get your father-in-law to run that set of cattle, you know. Is your son-in-law not even in here hearing this? Clean, uncluttered farmer ranch. You know, one of the things that a lot of you don't understand is that if you go to a guy's ranch and it has just got every piece of equipment to every guy and they're all falling apart and this, that, and the other, you know,
generally they will tell you that's pretty much a sign of a person that has a cluttered mind too. Is that tidiness has a lot to do with the way that guy's going to manage his business? So keep in mind you want a nice, clean, uncluttered farm.
Professional attitude and appearance. Boy, I mean, you know, if you want to really impress somebody is have Joe Blow's custom grazing company on your shirt. You know, make it look like you're a professional.
Yeah, this is the business I'm in. Here it says, right here. Or on your hat. You know, have a uniform. Have all your employees have a uniform, a shirt that's common. Okay, how much you can charge is determined by the value of gain, not by the price of cattle.
What you need to understand is what's that guy's situation right now? And the way that you figure out how much money he can make is how much you can figure out how much you can charge. Because there's times that you can make a lot of money, you know, grazing cattle and times that you can't.
The cattle price structure of North America is such that lighter weight cattle bring more per pound than heavier cattle. Therefore, a goodly portion of the client's gain must be spent in just overcoming this negative price margin.
The value of gain is what is left over after this negative margin has been absorbed. Okay, this is the number one average steer price in the United States for January the 7th, 2005. These are Texas and other places for less than what we're showing here.
These are number ones, okay? So you've got 450 pounds and you put 100 pounds on it. How much is the market willing to pay you to put 100 pounds on it? Okay. Is it willing to pay you $1.18? It's only willing to pay you $52.
So do you figure out that $60 of everything that you just made, you got to pay the market for the privilege of owning that calf? Tommy, you got to own the calf? $60. Okay? All right, and 550 pounds, let's put another 100 pounds on it.
What is the market willing to pay you for that? You understand what I'm doing there, just subtracting from the figure above it. It's willing to pay you a little bit more for that. $63. Now why is it willing to pay you more for that next hundred pounds?
Because it's not its premium price a weight of cattle. When people call up and order a load of cattle, what do they say? Send me some four and a half weights, four weights, four or five weights. Don't ever call up and say, give me some 550 weights.
It's not traditional. I've got some friends again. They're probably making money, right? All right. What about that next 100 pounds? What's the market willing to pay you for that? $68. Getting better, isn't it?
Why is that? What in the hell does the market not want? A six-weight calf. It has no idea what to do with a six-weight calf. A lot of times you get close to that seven-weight, they'll give them to you.
Yeah. But, you know, this whole thing, you've always heard you need to be producing 600-pound cattle. Well, boy, the market's not paying you for them, folks. They're paying for the little ones. They don't want the big ones, you know.
Okay, let's make some real money. Let's put them on feed. Right now, that 750-pounder is worth $780, and he'll come out in 150 days at 1,150 pounds, or $1,009. And by goodness, the market will pay you $57 to do that.
And $52 to do it. The average net return in the feedlot over the last 20 years per head is an amazing $7 a head. And that's because most cattle are placed on feed at a break-even, not at a profit, but they're priced at a break-even.
And they want to hope. They hope and pray that it'll go up. And it's got to go up for them to make any money. Okay? So, what we want to do is this thing of a sell-buy that you heard Jim Garrish talk about it, and those of you who have been through Bud Williams School know that you've got to deal with things that you can manage, things that you can control.
And the only things that you can control is what you sell enamel and what you buy its replacement back for on that same day. Okay? You can control that. You can't control buying this, and you might sell it for something in six months.
So if you sell a 750-pounder and buy a 450-pound back, that gives you a margin of $183. You put 300 pounds of gain on. That's 61 cents value of gain. Or you can do like MG's friends here, and you can buy a 550 weight rather than a 450 weight and put 200 pounds on them, and your value of gain goes up to 65 cents.
So buying a heavier calf can give you a higher value of gain. What I'm trying to tell you is it's the value of gain is what's important, because that determines what you're going to get paid as a custom grazier, is what is that value of gain.
This analysis shows that the 550 weight is a better buy than the 450. However, the 650 pounder is an even better buy. So, you know, putting 100 pounds on them and turning them more frequently might be something that you want to take a look at.
Or take a look at. What's the reason we stopped at 750 in this analysis? Okay, the reason we stopped it at 750 in this analysis is one of the things that I told you we were trying to develop an investor that'll make money here, okay?
All right, is that feeder cattle, the closer they get to a feedlot, the more reality there is in the price, okay? And to get a maximum return, we want to stay away from reality. Man, this little 250 weight in two years, boy, I bet it'll sell for $8 a pound.
What you want to bet? Give me $10 for it today, you know? And we're selling faith and hope. Boy, we get 850 weight, 9-weight. Oh, God, we're right up there in reality is staring us down the... We're trying to sell it for $1.01 and fat cattle only 80 cents.
Is a correlation between owning a landlord for somebody versus grazing? Is it owning feeding off the cattle? Is it like a landowner? What do you mean? No, putting cattle in feed is like growing corn.
It's the same thrill. Yeah, but a landowner needs some place to put their money to hold the money. Yeah. And that's cattle. People that kill are people that's got excess money they need to put. That's right, that's right.
That's right. And we'll go through that in a minute on leverage still. Is that a $7 a head return can be, if you can leverage 90% of that animal and turn your inventory in 100 days, can be a pretty good return on your investment.
Okay? But that's not the part of this meeting. Okay, let's flip over that page and just kind of show you the variability. Now this is that same price chart from a year ago. Where did those $61, $65, $68 value of gains go a year ago?
Why weren't they there? Mad cow disease. Remember that? Anybody remember mad cow disease this time last year ago? But these guys in Canada remember it, don't you? When did that happen? This time last year.
And this is what we're talking about, about the risk of owning cattle. Is that you keep in mind that all of these cattle, you know, a month before were all worth the same price they are now. And now the value of gain that the market's willing to pay us is down to 40 cents.
Greg, that's why I've always said that the American stocker operator is running on the same price schedule that the Argentine is. We're as good as they are. We run on the same kind of value of gains they do.
They're selling it for 40 cents. We sell ours for 40 cents if you're buying and selling. Isn't that right? Just have twice as much invested. Just twice as much invested. That's right. But anyway, that just kind of goes to show you that it makes a big difference.
Okay. What's interesting is, note down there in the feedlot, it's about a $53 per gain, and today it's about a $57. Okay, if we sell a $750 and buy a $450 weight back, get $149 divided by $3, or about 50 cents a pound of gain, value of gain.
And by $5.50 at $7.50, we get exactly the same value of gain. This means that the people had given up hoping that $450 weight wasn't all this freedom greed. It all went away. It all turned to fear. The market was afraid last year, folks.
But what's interesting, if you study that value of gain over the entire cattle cycle, is you'll find out that it averages between 50 and 55 cents a pound. That's what you're putting in the pocket, or that's your gross net, what do you call it, gross margin that you're doing.
It's always very seldom. Right now with these 61, 65, 68 cents, these are really, really high value of gains that we're getting right now. But they'll be higher when cattle are cheaper. Because it's a price, that's right, exactly what he says.
The value of gain can be higher when cattle are cheaper if these price relations change. If you can buy a calf for 60 cents at 450 and sell it for 60 cents at 750 pounds, what's your value of gain? 60 cents, right?
Okay, now this is what's intriguing. What if you can sell it for more than you paid for? Oh, yeah. Okay, well let's look at that. The only thing that plays in that is the cost of gain Canada, you know, the cost of grain goes way up.
Yeah, right, right. We're going to talk about that just a minute. Have you got a formula for negotiations on regards with town to town? We're going to get to that. Okay. All right, well I just want to keep going to this value of gain.
Okay. And exactly what he said is that when grain is very high is that you get an inverse deal, is that lightweight cattle can actually be negative to heavier cattle. And that is the time to go down and hawk your wife and the kids and whatever.
And boy, I mean, just buy all the little cattle you can and make them heavy, you know. That's when you don't want to be in the custom grazing business. Okay, you want to be in the cattle ownership business when you get inverse business in the grass-fed beef.
Currently, grass-fed beef sells for a wholesale price of $1.75 per carcass weight. A well-finished steer will yield 60% of its live weight. This yield percentage will create an equivalent live weight price of $1.09 per pound.
Okay, if we sell an 1,100-pounder at $1.09, that's $1,155, and buy an 850-weight feeder cattle back at $1 a pound, which is what they're costing right now, that's a margin of $350 divided by $2,500 weight is $1.22 per pound of gain.
You see what just a little bit of forward margin can do for you? It doubles your value of gain. Now you put 1.8 pounds on. You've got to put over 1.8 pounds. That's right. Alright, now let's look at last year's prices.
This is what's neat because they're paying a fixed cost for value of gain. It's not fluctuating around like, I mean, for GrassFit. 1,100 pounds, and we buy 850 for 80 cents like we could do last year.
It gives us a margin of 475 divided by 2.500 weight or $1.90 per value, pound of game. That's when you don't want to be in the custom grazing business. Now tomorrow afternoon we're going to talk about what these grass-fed guys are paying custom grazers for grazing and they are not sharing the wealth, folks.
Sorry. Hey, you're a packer. It shows that a positive margin increases the value of gain higher than the nominal price. Keep in mind that heavy cattle like these have a much higher body maintenance and so do not produce the same gain per acre that lighter cattle do.
Make the same amount of money. You need a considerably higher charge to grass finish cattle. Keep that in mind. You're dealing with great big heavy cattle. Can't run near as many of them per acre. So you know don't go finish offering the finished cattle for what you can run 450 pound feeder cattle for.
Okay. Don't have a question. Yeah. Well this example here on the dance says 850% on animal is that an animal is going to have totally gradually gained that far. Hopefully it would be. I'm just using it primarily as a price relationship deal.
Whether that matters equation could or could not be. I just took the choice, number one, 800 statistics today is around a dollar a pound. Okay, let's keep him going thinking about the investor here. Let's get this thing of how investors look at cattle.
We're going to talk about the feedlot thing there, we know. Investors like cattle because cattle themselves will stand for a goodly portion of the collateral needed to buy them. This is called leverage and is the way wealthy people get that way.
Wealthy investors can usually leverage calves at a 70-30 ratio. Now I know there's people that do 90-10 and all this other kind of stuff, but in my country about 70-30 is about as good as you're going to get.
And what this means is to get a 70-30 is that you pretty much have to have that much money in the bank, you know, in CDs or some other liquid deal. Are you talking about borrowing from a bank or? Borrowing from a bank, yeah.
Through the feedlot or something. Yeah, and feedlots will loan you. Feedlots even loan you money on grass cattle if you're going to take them through the feed yard. This means that they have to use their own money for 30% of the purchase price of the calf.
Let's take the numbers from our earlier example on selling a $750 and buying back a $550. Okay, we've got $649 for the price of the calf. 30% of that would be $195 he's got to come up with of real money.
$454 he's going to borrow from the bank. If you're a millionaire, you can borrow money from the bank today about anywhere for 7%. That's going to cost you about 9 cents a day on that weight calf. The value of gain is $65,100 weight.
We're going to put 200 pounds of gain on him, $65 times 2. He's got $130 worth of gross margin or gross there. Cost of gain is $74, which we're going to sell it to him for $0.37 a pound. 2% death loss costs him $13.
Interest rate at $0.09 a day times 134 days is about $12 a head. That leaves him a net return of about $31. The average return of running stock this county has been about $40 a head. So we're pretty close to what the average has been.
$31 a head. Now, how many of you guys would just jump up and down over $31 a head? Most ranchers wouldn't. It's not enough. But keep in mind, this investor has not broke one bead of sweat, has not fed one cow, has not left his office building in Boston, you know, with his view of the snow.
And he's made $31 a head on 134 days. And what's his return on equity? So all the thing he's concerned about is how much did he make, because it was a self-liquidating loan. He sold the cattle, it paid off the bank, okay?
So on the $130, I mean the $195, $31 is a 16% return per annum. So you didn't graze cattle for him, but 134 days out of that year, and he got a 16% return for the whole year. Well, those of you who know that the guideline for creating wealth in America, and I'm talking about real wealth, is about a 15% return on investment.
So if you can do a 15% return, you're going to become a very wealthy person. However, what is that guy doing on an annualized basis? What if he went back and bought another set of calves? We figured that on an annualized basis, that $31 that he made is 41% return.
Now, how did you figure that? Well, 134 days out of 365, it's a third of the year. See what I'm saying? Yeah, but if you reinvest that at that same rate, it's more than that. No, I'm just saying that he could take that money and reinvest it.
Or what I'm saying is that if you run that out on an annualized basis, it will within 41%. If the same situation occurred three more times. Before or after tax? It's all before tax. This is an investor.
He's got all kinds of depreciation. He can figure that, I guess. It's about a 2% loss. No. That'd be a real good return. I think you'll get you a better return actually than East Trader. Bell at 30% extra taxes, probably.
Yeah. Yeah. All right, a 16% annual return takes you four and a half years to double your net worth. Alan, I've seen all the studies on Oklahoma, Kansas, where they come up with this $40 a year tech number.
I can never figure out why those guys did it. I figured they would own the ranch and they were doing it for fun. But you're telling me a lot of guys are investing to do this? Yeah. Okay. Well, it's the only clean way to do this.
That's the way, you know, all this other stuff. You know, it's like, you know, if you're an extension or any of you guys, what you've got to do is that the most you can charge, it can cost you is what you can buy it for.
You know what I'm saying? I mean, if Greg Judy is selling it for 37 cents, Greg Judy's making money at 37 cents. Okay? Those of you who have been through Bud Williams school, he said that your cost of gain should include a 10% profit.
So if you just get your cost of gain back, you've made 10%. So it's just like hay. You put the price of hay in at the market price of hay. You put the cost of gain in at the market price of gain. Because every one of you guys is going to have a different cost of gain.
Somebody that's got four John Deere is going to have an awful big cost of gain. A lot of the traditional guys had to look at it like that. You've got the land and equipment over here. You know, it doesn't matter where you make your return on your dollar bill.
14 cents on the dollar, it doesn't really matter where it comes from. That's what I'm saying. Is if you quit looking at the average and you start looking at the 15%, I just saw, Dave, where are you? Yeah.
I saw the University of California's figures on their ranchers in California, you know. Only 15% of them were making any money at all. You know, that's what I'm saying. Look at that 15% that's making the money.
Don't look at the 50%. Look at the 15%. Look at the 2%. I asked the numbers to the CFO of my company. He's like, when you're started, I want to invest with you. When you're started? Yeah, when I'm doing this, he wants to invest with me.
Yeah, yeah. He looks at numbers on the bus. Yeah, yeah. Rich people, this is the way they look at things. Yeah, we don't look at things like that, you know? Anyway, okay, notice that you as a grazier grossed over twice as much as the cattle owner, and yet he's getting wealthy amount of land and labor.
What is limiting your returns? The amount of time you got and the amount of land you got. And by goodness, if you can get something that you can get 14% and you're not limited by land and labor, oh, the whole world is open to you.
It's not the time and it's not the labor, though, if you manage them. It limits you. Right. That's what I'm saying. Also note that a lower death loss and a higher average daily gain would considerably increase his return.
So like a half percent death loss, that adds $3.25, you know, would only be minus $3.25, 1%, $6.49. So if you bring in a less than budgeted death loss, that sounds to me, Greg, like a negotiation deal.
You know, I should get half of that, don't you think? Okay. And look over here on the interest costs. Interest per 100 pounds, 7% on $649 calf, at 1.3 pounds per day, it takes 77 days to produce 100 pounds again.
Well, that's $5.39 in interest. We're doing there at £2 per day, it only takes 50 days, so it's $3.50 worth in interest. So, Greg, don't you think a negotiation point, if you get a higher average daily gain, you should get a piece of that too, right?
But this is what you need to look at as a grazier is to build these performance bonuses in, okay? Wouldn't there be like delivery charges, arcane charges, and stuff like that? Yeah, we're just doing this just clean, just to try to, you know, if it did all that, it just goes on and on and on and on forever.
The beauty of custom grazing for an investor standpoint is that he can buy both land and labor on a per pound basis. When the cattle are sold, all costs stop. There are no continuing overheads. This is by far the most financially efficient way to produce grass cattle.
So what I'm saying is that, you know, we take a look at it, it's a win-win situation for you as the landowner. It's a win-win situation for the grazier, too. You know, we used to sit and run these kind of analysis and everybody couldn't figure out, well, how can that guy make more money with nothing than I can with all this investment I've got?
And that's what it's all about. It's getting rid of all that unnecessary investment. You've heard about the outsourcing thing, right? That's bad, right? We're sending all our jobs to China and Canada, right?
Argentina. And Argentina, yeah, whatever. It's bad, right? Bad, bad, bad, bad, bad, bad. You know? Well, it's a damn good thing if you're the guy doing the outsourcing. Right now, on an Apple iPod that's assembled in China, okay, the factory in China that assembles an Apple iPod makes $4.
Okay? Per day or per iPod? Per iPod. Apple Computer makes $59. Yeah. Okay? You know who makes the real money, though? It's the chip designer who faxes over the design for the chip. He only costs it, or emails it over.
The only cost he's got is the cost of an email, Greg Jr. And how much does he make? Four bucks. Same net return as that guy that's got that factory in China, but all those Chinese sitting there gluing all that stuff together and all this other kind of stuff.
What you've got to understand is that in the urban economy, and this is something that those of us in ranching are wanting to keep up with, we want to keep up with the Joneses, we want to make the same kind of money that our neighbors do that are working in the urban economy, is that net returns in the urban economy are exploding as we outsource.
Currently, the people of the United States are 5% of the world's population, 20% of the world's gross domestic product, and make 50% of all the net profits in the world. Right now, profitability in business in the United States is the highest it's ever been because we aren't investing in things that are losing money, like factories and steel mills and all this other kind of stuff.
We're investing our money in what's up here, and that's knowledge, and selling knowledge and selling management and selling marketing. Keep in mind that the guy who's got the power in the whole value chain is that person who owns the consumer.
Everybody else is way back there in the chain. It's kind of like that guy's the only guy that's the lead dog in the chain, and all the other dogs just get to look at the back end of the dog in front of them, you know.
So those of you who want to know where the real money is, the real money is in marketing. That's what we're selling, you know. You know, there's better money that we can make in production. But anyway, questions?
I mean, it's better to buy this can. It's got to go either to a preconditioning yard or back to the straight. There's a lot of costs right there that need to be figured in when you're done. Well, we're going to get into some of the costs of preconditioning thing tomorrow afternoon.
It should be greater, you know, another sideline business of preconditioning stuff. Very good, very good. Especially in the wintertime if you're in an area, that's a good. And one of the things, I don't know what Greg's going to talk about this, but a major problem that we have in the grazing business is preconditioning yards feeding a lot of grain and screwing up that cash rumen.
And then they come and in the spring of the year when you should be getting over two pounds a day, you're not getting anything because the cash rumen won't digest the forage, you know. So tomorrow we'll go into that.
There are some graziers now who are starting preconditioning yards to feed non-starch supplements, you know, like hay and soybean hulls or hay and, you know, whatever that's not a starch. It won't get that cast rumenol screwed up.
But a lot of these background in yards are feeding grain just like a feedlot. And boy, you put them out on grass. And you've got 30 days to get them to where they start gaining anything. And that's a big, big problem.
Right now, on alfalfa, you're buying the alfalfa hay and the soybean hulls, just figuring the feed cost on background and thing, that should give you around 1.7, 1.8 pounds a day at 3 to 4 or 5 pounds of soybean hulls.
Your feed cost again is in the 20s, mid to low 20s. So you could sell that for 50 cents a pound. You know, double that. What if you do that same thing out on the grass using that? Do the supplement on grass?
Well, you could do that in those times of the year that your gains are going down. In fact, this guy is doing it on grass. It's just dormant grass. It's in Iowa in the wintertime. Just keep in mind is to try to sell a service.
And the money's in solving other people's problems. Not in having problems of your own, but solving other people's problems. Once you learn that all the money is in other people's problems, you'd like to hear these people bitching because there's a business.
I heard a guy one time and he says, you know, I don't know why they can't invent a block that I can just throw out there to the cows once a year and it warms them and dehorns them and, you know, da-da-da-da-da-da-da.
That's all I'd have to do is throw that block out there. How much do you think he would pay you to throw that block out there for him so he wouldn't have to do anything? One of the things that you know about ranching is that, and Jim Garris has talked about this, is that probably the biggest problem with management intensive grazing is the word management intensive.
Because most ranchers aren't interested in anything that's management intensive, you know, even though that's where the money is. Any other questions? We'll get on to something more exciting.
