Can Small Scale Operations be Profitable?

by Dallas Mount

chickens

I often hear from people operating on a smaller scale that their limitations of size make it impossible for them to be profitable. “I only run 12 cows and operate on 30 acres. I can’t possibly be profitable!” The limitations to profitability are usually self-induced. When we look inside this operation what we will likely find is that they are ranching entirely on owned land, choosing to run 12 head of breeding cows and wanting to own all the stuff a typical rancher would own. No wonder this operator feels like they can’t be profitable. Here are some considerations for those choosing to operate a smaller scale ranching business:

  1. Cows are a rich-man’s hobby – If you are going to choose to run cows, keep in mind that your competition will be every doctor, lawyer, accountant or other independently wealthy person who just enjoys running cows. They don’t have a profit motive and are willing to sell at a loss because they enjoy running cows. They are likely selling into the same market you are. On a long-run analysis, owned cows are usually the least profitable enterprise to run. Of course, there are always exceptions, but unless you have an unusual competitive advantage, you might reconsider cows as the enterprise of choice. Cows consume an enormous amount of feed per dollar of revenue and usually lend themselves to one marketable product a year (weaned calf). Also taking into consideration the bulls, heifers and other support enterprises that most choose to have on hand when running cows and you’ve got yourself a hot mess. If grazed forage is your limiting resource, cows are likely not the right choice.
  2. Good grazing – Running smaller groups of animals makes it difficult to practice good grazing management. The extremely small pasture size needed to get any meaningful herd effect or high stock densities often isn’t practical. If land scale is the limiting factor, look for enterprises that are seasonal and can double or triple the number of animals for a shorter period of time allowing for better grazing in a more practical way. For example short season cows, stockers, custom grazing or other enterprises that can be run for 3-6 months instead of 12 months
  3. High value enterprises at scale – Many small-scale producers have a direct market or some type of value add. How can you scale that part of your business? For example, let’s examine the producer who is selling beef direct and owns the animal from conception to consumption. When we break this apart the real value add is likely the 900 lb. animal becoming a finished animal and then the marketing of the meat. If the place didn’t have cows and they sourced 900 lb. yearlings from another ranch who’s practices fit their story, they could do 5 times the number of animals. Maybe this example doesn’t fit your model, but the principle is to identify the 1, 2 or 3 enterprises you are doing that are creating good margins, and scale those parts of your business.
  4. Poultry and small ruminants – From a gross margin per acre basis pastured poultry are hard to beat. However, the same rules of economics apply. Keep overheads low, margins/unit high and crank the turnover. Small ruminants can be a competitive advantage. Providing grazing services can open doors, but often presents other challenges like fencing or predators. If small ruminants appeal to you, consider ramping up to a scale that a labor unit can be supported. Running 50 sheep or goats is a distraction. Running 800-1200 is a job for a labor unit that should produce profit for the owner.
  5. Eliminate the stuff – Turning sunlight into grass and converting that to something marketable shouldn’t take a lot of expensive stuff. There is always a long list of new shiny thing-a-ma-bobs that would be fun to own, but few of those thing-a-ma-bobs put money in your pocket. If you’re ranching on a small scale then you likely don’t have the numbers to justify the depreciation and repairs costs. Take for example a pickup. A 5-year-old pickup is still $50,000. At 20% of present value for annual repairs, depreciation and interest that is $10,000 annual cost to own this pickup. If we follow the guideline of $50/cow to service machinery overheads then it takes 200 cows just to cover the pickup. Add tractors, skid steers, side-by-sides etc. and now you have the typical ranch that is underwater in too many overheads.
  6. Mindset – All limitations are self-imposed. If you keep telling yourself you can’t be profitable because of your scale then you will allow yourself to use that as an excuse. What will it take to build the ag business you want to meet your profit target? What is the next thing you need to do to move toward that goal?

While at the Texas Chapter of Executive Link, I asked the EL members to share their advice for someone ranching on a small scale and wanting to do it profitably. Here is their advice:

Ranching Advice

I’d love to hear from those of you running smaller-scale ag businesses. What is your competitive advantage, how did you develop it? What would you add to my list? Which of my suggestions would you challenge?

 

8 Responses to “Can Small Scale Operations be Profitable?”

October 27, 2021 at 4:51 am, John P Haskell said:

Great article Dallas! There’s nothing wrong with being small, just don’t act like you’re big. The high turnover comes automatically with small animals like chicken or pigs lends itself perfectly to small acrage and small capital investment.

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October 27, 2021 at 6:22 am, Rafa Flores said:

There’s a difference between an enterprise that is profitable and an enterprise that has the scale to pay you a salary. Ex: Wildlife Photography is a non-consumptive use of your habitat. In this example, you do nothing but allow a photographer access to your land. The photographer pays you for the trespass. Voila! 100% profitable enterprise… However… you cannot eat for a year with this enterprise, let alone, take the family out to eat. So the big difference is can small places make money? The answer is as Dallas describes using our principles absolutely yes. High turnover, profit margin, etc. But one thing to consider: you can’t get 6 gallons out of a 5 gallon bucket. If you need 6 gallons from your operation and your land at peak performance can only produce/hold 5 gallons, your operation might be profitable, but it cannot give you the 6 gallons to sustain you.
Here’s some WOTB/WITB Think bees/honey. Think ducks/meat/eggs. Chickens/meat/eggs, think photography, biking/hiking/jogging trails. as in holding or sponsoring races with entrance fees, prizes, etc. Organic vs chemical in any kind of enterprise. Cow share.This means 8 families can own a cow that is ethically raised whereby you sell the animal cut and wrapped but since the shareholders own it, no need for USDA inspection. They are slaughtering their own animal… they each own 1/8th. Your cow sells for retail at $8/lb… Plus many more ideas for small scale. Food for thought.

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October 27, 2021 at 7:02 am, Craig Kennedy said:

We finish grass finished cattle on a high carb forage before slaughter. We are in the country but also close to suburbs so we have not started home delivery

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October 27, 2021 at 7:06 am, Troy Dillard said:

well i am a small scale not profiable operation. I work off farm and run a 45 head cow calf operation. i hope to attend Ranching For Profit in 2022 to figure out how to make it at least break even. i have started buying hay and not doing my own and i think that is a first step. I want to change genetics next and i also rotational graze with cover crops. still trying to make it work

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October 27, 2021 at 7:33 am, Derek Schwanebeck said:

Credit to Willie Nelson,
Mamas don’t let your babies grow up to be cowboys……., let them be doctors and lawyers and such.

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October 27, 2021 at 7:49 am, Garry said:

1) Small farm, bigger marketing effort. Perhaps leverage your marketing efforts to sell products from other small farms.
2) Cannot do everything that a big farm does. Decide what you can’t afford to do. The greatest efficiency comes from eliminating a job entirely.

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October 27, 2021 at 7:51 am, John+Marble said:

A couple of decades back a friend of mine told me something that really stuck:
“There are only two ways to make money in agriculture: Production and Marketing. And there is a lot more money made in marketing than production.”

Turns out, he was right. Using grass to produce a pound of commercial calf only really works if you are at tremendous scale. For those of us who refer to a gooseneck (as opposed to a semi-trailer) of calves as a “load”, I’d suggest that finding a way to capture the full retail price of your product is absolutely necessary. And that is only accomplished by designing an enterprise that results in a product that can be directly marketed to a target audience that has the dough to afford a high-priced/high quality item.
On the other hand, there’s nothing wrong with having a hobby, as long as that is your objective and you can afford it. Either way, let’s be sure we’re having some fun.

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October 27, 2021 at 8:55 am, Dave+Pratt said:

Terrific article. One of the things I always found frustrating, and this isn’t just the small guys, is that they actually think they are profitable… of course they own the land so the cows don’t pay rent, and they don’t pay anyone (including themselves) for the work they do … to them, if the margin is positive, they see it as a profit.
On the other hand, there are some smaller-scale businesses that do make a profit … No one ever said a business has to be full-time, or year round.
Great list of ideas from the TX EL!

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