Economics of Ranch Management

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Economics of Ranch Management
Martin Beutler, Ranch Economist Dan Oedekoven,
Area Management Specialist SDSU West River Ag
Center, 394-2236
10/2000
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Economics of Ranch Management
Is your management better than this?
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Economics of Ranch Management
Know, Understand and Utilize the Unique Set of
Resources that make up your Ranch

• Every Ranch is Unique
• What to concentrate on?
• Biological performance or
• Input costs
• Balance is required
• Directed by goals

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Management Goal Maximize Return to Limiting
Resource
Economics of Ranch Management
Resources
Marketable Products
Land
Labor
Capital
Management
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Economics of Ranch Management
Ranch Resources

• Know your land base
• Forage
• Ownership
• Improvements
• Weak Links

• Genetics
• Know what you have
• Keep an eye out for improvements

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Economics of Ranch Management
Ranch Resources

• Management Capability
• Be aware of new ideas
• Combinations of old ideas
• Involve everyone on the ranch
• Watch practices of others
• Be alert
• Be willing to change

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Economics of Ranch Management
Ranch Resources

• Understand Technology
• Dont jump at every new thing
• Not all that is new is good
• Be aware
• Learn evaluation skills
• Not a substitute for good management

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Economics of Ranch Management
Ranch Resources

• Use Finance Production Records
• Less than 10 of producers know costs
• Records are for more than taxes
• Need not be complex
• Feeds account for 60 of total cow costs

• Balance Production
• Difficult to produce your way out of a losing
  situation

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Economics of Ranch Management
Grazing Management Economics

• Why consider change in grazing mgmt.?
• Land competition
• High priced feed substitutes
• Scarcity of
• Hope of higher returns, more profit
• Improve the forage resource
• Just because your neighbor is. - Bad Choice!

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Economics of Ranch Management
Grazing Management Economics

• How to proceed?
• Inventory resources
• Evaluate management skills
• Know what your alternatives are
• Develop measurable objectives, overall and
  specific
• Get Help!

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Economics of Ranch Management
Grazing Management Economics

• Consider Alternatives
• Burning
• Seeding
• Chemical Treatments
• Mechanical Treatments
• furrowing, pitting, plowing, ripping
• Grazing Systems
• Intensive vs Extensive

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Economics of Ranch Management
Grazing Management Economics

• Evaluate Alternatives
• Put them down on paper
• Evaluate pros and cons
• Economic evaluation criteria
• Cost/Benefit Ratios
• Internal Rate of Return (IRR)
• Net Present Value
• Management strengths and weakness

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Economics of Ranch Management
Steps in Selecting Range Improvements

• Determine what you want to do (goal)
• i.e. higher stocking rates, more livestock
  with current labor, buildings, equipment,
  , etc.
• Determine available Ranch Resources
• i.e. AUMs available/pasture, labor, etc.
• Determine how Im going to get there
• Evaluate feed reqs on a monthly basis
• Find average feed production from ranch

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Economics of Ranch Management
Steps in Selecting Range Improvements

• Determine costs of improvement
• Labor, Interest
• fencing, water developments
• plowing, seeding, drilling, etc.
• reduced production efficiencies
• non-use

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Economics of Ranch Management
Steps in Selecting Range Improvements

• Compute expected returns from
• additional livestock
• heavier livestock
• labor savings
• feed cost savings
• increased production efficiencies
• non traditional uses

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Economics of Ranch Management
Methods of Selecting Which is Best?

• Internal Rate of Return (IRR)
• The discount rate which equates discounted future
  net returns to the initial investment

• I R ( 1-(1I)-n / i

There are inexpensive calculators that compute
IRR!

• I Initial investment
• R Annual net return
• n number of years
• i IRR

• Solve for i

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Economics of Ranch Management
Methods of Selecting Which is Best?

• Benefit / Cost Ratio (B/C)
• Present value of annual benefits divided by
  Present value of initial costs and annual
  maintenance

If B/C is positive ? investment is profitable

• Critical figures are estimates of benefits and
  the discount rate

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Economics of Ranch Management
Methods of Selecting Which is Best?

• Net Present Value (NPV)
• NPV present value of annual (Benefits -
  costs)
• Discounting future returns implies that a dollar
  next year is not worth as much as a dollar today

If NPV is positive ? investment is profitable
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Economics of Ranch Management
Methods of Selecting Which is Best?

• The positive values of the various methods are
  subject to the

Opportunity Cost of Capital
OR

• What return you can get investing your money in
  other investments

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Economics of Ranch Management
Grazing Lands Applications (GLA) Model - NRCS

• Asks questions on Inventory and Record Keeping
• Managers Suitability Questions
• Does the manager have experience in this type of
  practice?
• How expensive is the practice to start?
• Is labor a problem?
• Can a loan be secured for the practice?
• Does the practice fit the managers
  desires/goals?
• Does the manager have the livestock to take
  advantage of the practice?

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Economics of Ranch Management
Grazing Lands Applications (GLA) Model - NRCS

• Projects yearly information on
• Stocking Rate
• Forage production
• Weather expectation impacts
• AUMs current vs projected
• Additional livestock value produced
• Cost of improvements over time
• Net Gain (loss)
• Net Present Value (NPV)
• Internal Rate of Return (IRR)

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Economics of Ranch Management
Pull the Trigger!
Make a decision to begin and get started!