A farm or ranch is made up of a given set of resources. This includes land, labour and capital. Capital consists of financial capital, but also knowledge and emotional (or attitude) capital. One of the miraculous things about ranching is that it is one of the few investments where fixed capital such as land can continually be improved. There are not very many factories that get better with age.
DEPLOYMENT OF CAPITAL
One of the challenges of ranching has to be the deployment of capital. This relates to all areas of capital. Knowledge capital is not of much use if new ideas are never implemented. The resource base that each ranching operation employs also determines what may be the most profitable approach. Two such examples would be an operation operating with a largely native land base compared to a mixed farm with a blend of tame, native and crop aftermath. These two operations should have markedly different management regimes based on their resource base. For example, the mixed farming operation may calve earlier so that labour is available for seeding and also wean earlier and graze cows on crop aftermath. The mixed farm may have more equipment per cow, but that equipment may be leveraged across the cropping enterprise as well as the livestock enterprise. The native range based operation may calve later and wean later and may operate with purchased feed. The variety of combinations is infinite and may change over time on a single operation.
Because of the differing type of resource base, the knowledge base deployed will also need to differ. Even the preferred type of cowherd may differ.
COMPETITION FOR RESOURCES
I am a fan of Dr. George Brinkman from the University of Guelph. He has made a lifetime study of examining land prices compared to their productive or earning capacity. There is a very good webinar at farmcentre.comfrom December 2008 where he discusses some of the issues regarding this relationship. In essence his conclusion is that generally speaking Canadians pay way too much for land based on its’ potential earning capacity. It is well worth your while to seek out some of his publications and familiarize yourself with his thoughts.
So what does this conclusion mean in terms of growing an agricultural and particularly a beef cattle enterprise in today’s unique climate? I have postulated 3 points for your consideration.
It is ok to stay the same size (or even contract). Growth may not always have to consist of increasing land holdings.
Seek out alternative structures and strategies for growth.
Options to change earning capacity include a) paying less for resources or b) generating more net revenue from the investment.
OP TION 1 -SI ZING THE OPERATION
One of my favourite quotes is that “farmers are just investors in real estate who farm for something to do while their land goes up in value”. There is nothing wrong with purchasing or owning land as long as the goal and financing plan is clear. In many cases land has proven to be a sound financial investment. In many cases it has also proven to be the iceberg that sunk the proverbial boat. It is OKAY to say no to a purchase opportunity.
Each time an operation expands it reaches a point where it stretches the limits of its resources and then it must makes a jump. It often takes significant cash to make this jump. Take the case of a one operator farm. As it grows the operator is eventually stretched to their limit. In order to continue to grow, new help must be found, however it is not efficient to hire a full time person and have each person working half speed, the business must either contract or make a jump to fully employ the additional labour. When considering the options, the phrase “sustainable businesses are not built with unsustainable effort” is worth remembering. Conversely a business that is not fully utilizing its capital may benefit from expansion, lowering per unit costs.
2. ALTERNATIVE STRUCTURES
It is not necessary to own land, or even cows to be in the beef business. In many cases rental or lease agreements or custom services are a much more profitable way to develop and grow a business. There could be a thousand scenarios presented for alternative strategies to be in the beef business and the majority would still be forgotten.
Are there producers in your neighbourhood who can benefit from working with you? Are their producers of other commodities (eg: Grain) who you can show clear benefits for letting you graze their property or crop aftermath? Are there custom grazing or enterprise choices (cow/calf, grasser, etc.) that can change your growth rate? Are conservation easements that reduce debt an option? Can pooling two or more cowherds together allow for more efficient use of resources for all parties? Can you buy your grain farming neighbour a chaff buncher in return for grazing and improving his nutrient cycling, or the manure from your feedlot pens?
3. PAY LESS / EARN MORE
At first this seems pretty self explanatory, and it is also pretty difficult in some respects. The first option is the easiest to understand but still difficult to do. If the going price of land is high in your area, then it is high. Renting or share cropping are ways to access the resource for less. The other option of generating more net revenue is also the subject of potentially thousands of articles. This could cover everything from fertilizer use, implementation of management intensive grazing or use of multiple species to produce more volume of product from the same land base, or using value chain structures, marketing groups or artisanal production to extract more value from the existing production. The key point is generating net revenue, not gross.Netrevenue can be used for living, paying down debt, or acquiring resources. Increasing gross revenue without working on net, is like running faster to go nowhere and usually comes with increased risk in the form of infrastructure. These are also key ways to expand an operation without purchasing or accessing more resources in the traditional sense of purchasing land.
THE ONLY ESSENTIAL RESOURCE
Creativity and resilience are hallmarks of beef producers and they are traits that remain vital. Remember, the most vital part of your resource base is you, and it is the one you have the most control over.
Sean McGrath is a rancher and consultant from
Vermilion, AB. He can be reached at [email protected]or (780)853-9673. For additional
information visit www.ranchingsystems.com