«KEY INDICATORS OF SUCCESS IN RANCHING: A BALANCED APPROACH Barry H. Dunn and Matthew Etheredge King Ranch Institute for Ranch Management College of ...»
Proceedings, The Range Beef Cow Symposium XIX
December 6, 7 and 8, 2005, Rapid City, South Dakota
KEY INDICATORS OF SUCCESS IN RANCHING: A BALANCED APPROACH
Barry H. Dunn and Matthew Etheredge
King Ranch Institute for Ranch Management
College of Agriculture and Human Sciences
Texas A&M University-Kingsville
“It is difficult to manage what is not measured.” Demming, 1994 While it has often been recognized that a ranch is greater than the sum of its parts, measuring and reporting the performance of the parts seems to be the common method of measuring the success of a ranch. Depending on the interest of the owner and manager, emphasis may be focused on cattle performance, or range management, or financial performance, or individual or personal accomplishments. Seldom does the discussion of success encompass some overarching measurement. The management tool known as “The Balanced Scorecard,” first developed by Robert S. Kaplin and David P. Norton in the early 1990s (Kaplin and Norton, 1996), has been used successfully in many business applications.
Using both lagging and leading indicators, it measures the progress of an organization towards its vision from multiple perspectives. The balanced scorecard is an organized and thoughtful approach which recognizes that the successful achievement of an organization’s vision is dependent on the achievement of multiple goals organized into the components of the organization. Application of a balanced scorecard in a ranch business may help a ranch owner and manager achieve sustainable long-term success.
MEASURING SUCCESS: THE CATTLESuccessful cattle performance is often the subject of coffee shop gossip, sale barn bragging rights, show barn hearsay, scientific inquiry, and industry discussions. In a single conversation between cattlemen, topics can range from the average weaning weight of a group of calves, to the percentage of a group of fed cattle that qualifies for “Certified Angus Beef®.” Often, a single cattle performance measure is calculated with different formulas, ranked on different scales, or described with terms that have multiple definitions. To correct this, there are four critical criteria for measuring success on a ranch.
1. Every effort should be made to use standardized terms, definitions, methodologies, and protocols and to take measurements accurately.
2. Measurements of interest should be compared to a benchmark that has been created using the same terms, definitions, methodologies, and protocols.
3. Use benchmarks that are from relevant geographical areas and are up to date.
4. Understand that big, more, greater than, or larger isn’t always better.
163 In an effort to standardize the language of the industry, the National Cattlemen’s Association adopted Standardized Performance Analysis (SPA) in 1992 (NCA, 1992). SPA was an effort to develop standardized terminology, definitions, and methodology for the analysis of the production, financial, and economic performance of the cow-calf enterprise.
A stocker/feeder SPA was adopted in 1995 (NCA, 1995). SPA terminology has gradually filtered into reports, articles, conversations, textbooks, and the scientific literature. It is critical for individual operators in the cattle industry to put themselves and their production system in context with the industry. To meet that challenge, in terms of terminology, definitions, and methodology, all participants in the cattle industry should strive to speak one language. The National Cattlemen’s Beef Association also provides a process for changing terms, definitions, and methodologies if necessary.
In terms of cow-calf production, the first biological measure of productivity to address is weaned weight per cow exposed. This inclusive measure is a summary of genetic potential, all facets reproductive performance, death loss and herd health, and pre-weaning nutrition from milk, pasture and supplement (Field and Taylor, 2004). Dunn et al. (2005) reported an average weaned weight per cow exposed from 185 herds in the Northern Great Plains of 451 pounds. Many argue that with advanced cattle production techniques in breeding and genetics that cattle performance on their individual operations is much higher.
Yet a 600 pound weaning weight for calves, with a 85% weaning rate would produce 510 pounds of weaned weight per cow exposed. Pregnancy percent and the percent of calves born in the first 21 days of the calving season are very useful measures of reproductive efficiency. Indicators of herd health are death loss at various stages of production and vet costs per cwt. of weaned calf. Weaning weight is a good indicator of growth rate and milk production. Adjusting weights for age and sex of calf, age of dam, and other factors is necessary for the genetic evaluation of seedstock herds, but is not appropriate for commercial herds.
Discussions in the range management community and literature often focus on topics like grazing systems, prescribed burning, invasive species, and policy of public lands. But the periodic droughts that ravage our rangelands and ranch businesses are harsh reminders of the unarguable fact that regardless of grazing system, the carrying capacity of a pasture or a ranch is variable, and the stocking rates chosen by the ranch owner or manager need to be.
This makes a ranch manger’s job difficult, but not impossible. The use of yearlings as a stocking rate flux, is one option being used by successful ranchers across the Great Plains.
Generally, these operations are choosing to run between 1/4 and 1/3 of their carrying capacity as yearlings, which gives them the flexibility to rapidly de-stock in time of drought or extreme weather.
“A combination of grazing capacity, utilization, ecological condition, and trend information is needed for sound range management decisions.” Holecheck, et al, 2004 164 So what are the measures of successful range management? While it is easy to answer the question with the standard “It depends what your goals are,” generally they would have to include an improvement in range condition, wildlife populations, and cattle performance. These can be measured objectively with well established techniques and skills.
They can be taken by a rancher, employees, can be affordably contracted for with range professionals, or these services may be provided by USDA-NRCS. It requires that a base line of information is established and planned monitoring conducted.
“Assessments of the costs of production are the most neglected area in many commercial cow-calf operations.” Field and Taylor, 2004 In a free market economy, people, with their education, experience, time, energy, and money, in the form of investment and re-investment, will flow to where the returns are the highest. As a result, for the long-term sustainability of any business, financial success is not optional, it is required. People have argued and chided that “profitable ranching” is an oxymoron. While it is difficult and challenging, it is an achievable goal. Dunn et al. (2005) identified 16% of the 148 cow-calf operations they surveyed had a Return on Assets (ROA) of greater than 12.9%. In any business, those would be very healthy returns. If success is defined as profit, then the recommended measurements for a business are (FFSC, 1997): 1.
Rate of Return on Assets, 2). Rate of Return on Equity, 3). Operating Profit Margin, and 4).
Net Farm Income.
Rate of Return on Assets, which can also be referred to as Return on Assets, is an extremely useful measure. It measures the percentage return, regardless of source, to each dollar invested in the operation. ROA measures how efficiently the production system was at taking invested dollars, regardless of source, and turning them into Net Income. It can be used to compare performance of a business, or a group of businesses, to other businesses. Its
simple calculation is (FFSC, 1997):
Rate of Return on Equity, or simply Return on Equity, measures how efficient the production system, that has been adopted by management, is at taking the dollars of owner equity invested in the business and producing a return.
Its formula for calculation is (FFSC, 1997):
While cattlemen seldom discuss Operating Profit Margin, it is also a very good measure of financial performance and useful in calculating business competitiveness. It measures profitability in terms of return per dollar of gross revenue. On a cwt. of calf basis, if the net income on a set of calves is $50/cwt. and the gross income was $125/cwt., then the
Net Farm Income, or simply Net Income, is the result of matching revenues with the expenses incurred to create those revenues, plus the gain or loss on the sale of farm capital assets. It is the return to the rancher for unpaid labor, management, and owner equity. It is not a measure of efficiency. It can be expressed as a total, or on a unit basis.
Its formula is (FFSC, 1997):
Net Income = (Gross Income + Gain or Loss on Capital Assets) – Total Expenses Discussions about financial success in ranching often include measures of liquidity, solvency, and cash flow. While important, they are not measures of profitability.
“To get insight into the drivers of your economic engine, search for the one denominator that has the greatest impact.” Collins, 2001 What is the one denominator in cow-calf production that meets the above “Good to Great” challenge? The choices would seem to be per cow, per acre, or per cwt. of weaned calf. Certain production measures are naturally measured more appropriately with one over the others. Reproductive performance is naturally measured on a per cow basis. SPA differentiates the definition of a “cow” depending on whether a production measure or a financial or economic measure is being considered. For production measures, the denominator is the number of exposed females. For financial and economic analysis, it is the number of beginning year breeding females. While ranches and cow-calf production units are commonly evaluated for sale and purchase on a per acre basis, large geographical differences in precipitation and production make this a very difficult measure to use when comparing production and financial measures across region. Per cwt. of weaned calf would seem to be the most inclusive, as it combines reproductive as well as growth characteristics of a production unit. When SPA measures from 148 herds where evaluated with all three denominators, Dunn et al. (2005) reported that the most sensitive measure of statistical differences was on a per cwt. of weaned calf basis. It is also how the marketplace values the primary products of a cow-calf production system.
“The single most important measure on a ranch is its breakeven cost on a cwt weight of weaned calf.” Kleberg, 2005 A recommendation of the most important measure for a cow-calf enterprise has been the subject of debate for decades. Johnson (1930) studied sixty ranches in Montana, Wyoming, and both Dakotas during the 1920s. Among his conclusions were that the average 60% weaning percent on the ranches was too low for long term sustainability and suggested that weaning percent was a critical measure for success in ranching. Oppenheimer (1961) agreed and concluded that weaning percent is the best criterion of the efficiency of the 166 operation. More recently, weaning weight has been the most widely discussed benchmark indicator of success. Having served as Vice President and General Manager of King Ranch for more than a quarter of a century, Stephen “Tio” Kleberg has had extensive experience in ranch management. Kleberg argues that the most inclusive number to measure is total pounds weaned, not average weaning weight (Kleberg, 2005). He advocates that total pounds weaned be the denominator in a calculation of a breakeven. The calculation of a breakeven on a cwt. basis combines the cumulative reproduction, herd health and death loss, and milk production and growth characteristics of the production system with the financial cost of generating that production. Using SPA guidelines, a financial breakeven calculated
on a cwt. basis is defined as (NCA, 1992):
“Ranchers need to know who their customer is and they need to know if they are satisfying their customer’s needs.” Monfort, 1983 Commodity agricultural production does not lend itself to knowing who your customer is, let alone if your commodity has met the needs of the customer. The multiple layers between the ultimate consumer and the producer are usually untraceable. Many times, markets are based on anonymity, which allows for the diffusion of risk, and to varying degrees, market advantages. While a kernel of corn is a kernel of corn, all cattle are not created equally. There are large differences in the genetics and management systems with which cattle are produced that impact their value in the market place. Ultimately this knowledge expresses itself in market premiums and discounts. One can argue that the cattle industry has been on a slow, steady move away from strictly a commodity business to a more sophisticated and differentiated market system. As all segments have consolidated, information on the value of cattle has transferred to the sellers as premiums and discounts.
Consolidation has also removed some of the anonymity of the market place and allowed for more direct communication between buyers and sellers. While retained ownership is one way of getting closer to ones ultimate customer, marketing alliances also allows for information to be passed up and down the value chain of the marketplace. As the marketplace of the cattle industry continues to evolve and mature, Ken Monfort’s 1983 challenge to ranchers only becomes more relevant and important.