Don’t Screw Up the Windfall Profits

by Dallas Mount

fancy steer

2023 is shaping up to be a record profit year for many in the cattle business. I know not everyone is participating as there are regional droughts and specific situations for some, that will take you out of this opportunity. Nevertheless, for some the stars have aligned.  

The last time we saw record profits in the cattle business was in 2014 and poor decisions made by ranch managers in 2014 resulted in many hard times for the years to follow. I feel like the crusty old guy sitting at the coffee shop when I say, “Don’t make the same mistakes this time!”.

To understand what these mistakes are, we need to look at the economic and financial structure of most ranching operations. Here are some common problems we find in the way many ranches structure their business:

  • Too many employees and people for what the business can support in a healthy way.
  • Too much wealth tied up in fixed assets that don’t produce cash flow in excess of their costs.
  • Too little money in “liquid” assets.
  • Lack of business management knowledge by key people.

Let’s explore each of these problems a bit deeper.

Too many employees: We have a benchmark at Ranching for Profit called GP/FTE. It stands for Gross Product per Full-Time Employee. The most economically healthy businesses are usually exceeding $400,000 Gross Product per Full-Time Employee. If you don’t speak RFP, you might think Gross Product is the same as Gross Revenue. It isn’t. Gross Product is the economic value the enterprise creates. Most ranching businesses have way too many mouths at the table for the value the business is producing.  I’m not saying these people are lazy. Usually, it is quite the opposite. However, they often aren’t engaged in tasks or enterprises that are good at adding value to the business. When income is high and money is rolling in, it is tempting to bring Junior home or add people to the business. If your business isn’t exceeding this benchmark or getting close to it, you might be making a problem worse by adding people.

Too much wealth tied up in fixed assets: We all love stuff. Especially machines that make our work easier. As a business grows in maturity it is tempting to invest profits in things we enjoy and things that make our lives easier even if it doesn’t make economic sense. Our rule of thumb is that equipment has an annual ownership cost of 20% of its current value. That means a tractor that is worth $100,000 today, has an annual ownership cost of $20,000 per year. That might strike you as unreasonable, but when you think of repairs, depreciation, insurance, interest, taxes etc. it begins to make sense. If that tractor isn’t producing well in excess of that $20,000 per year, then economically you shouldn’t own it. Most ranches have way too much of their wealth tied up in fixed assets that don’t produce cash flow in excess of their costs. Your neighbors are going to pile their profits into machines that they want but can’t economically justify. This is often done in the name of tax avoidance. Don’t be like your neighbors. Pay the dang tax if you have to, or deploy the money somewhere in the business that will improve profitability and make the tax problem worse next year.  

Too little money in “liquid” assets: Liquid assets are cash, or those things you can quickly turn into cash.  If you had to get your hands on cash in 2 weeks, how much could you comfortably come up with? What are the annual costs of keeping the doors open on your farm or ranch? What % of your annual operating costs are available to you in short notice? Our recommendation is that at least 50% of your annual operating costs should be available to you with short notice. For many farms and ranches this number is closer to 5 or 10%, well below the target. This often leaves the business with their back against the wall when things go bad. The next drought, flood, fire or market crash is just around the corner. Prepare yourself by having adequate reserves.

Lack of business management knowledge by key people: Ranchers are often very skilled at raising livestock, but many stink at running a business that raises livestock. Does your ranch have clear roles and responsibilities, economic projections for the coming year, cash flow budget and plan, clear mission and vision for the business, grazing and operating plan, regular strategic work sessions, regular operations work session, a clear succession plan that is communicated.  

If your business has some holes in the list above, you’re not alone. But the profits from this year could be an opportunity to invest in your key people, to help them build the skills to produce the results your business needs. Ag business owners are rightly taught to be frugal. Unfortunately, this frugalness spills over into being cheap when it comes to investing in our people. Our recommendation is at least 1 month’s salary per year in professional development. If that isn’t occurring on a consistent basis that is a problem.

I hope 2023 is a record year for you. I hope you deploy the profits from 2023 to build a stronger and more resilient business for the years ahead. I would be honored if Ranching for Profit can be part of helping you build that business. Registrations for our 2023-24 schools are at an all-time high. Many of our winter schools are close to full. If you want to attend a school this winter I strongly recommend that you get registered now with a deposit to secure your spot for the school you want to attend. We look forward to seeing you in the classroom!

13 Responses to “Don’t Screw Up the Windfall Profits”

September 13, 2023 at 8:29 am, garry said:

Now is the time to diversify your investments. There won’t be any investment opportunities in the cattle business at this point in the price cycle.


September 13, 2023 at 8:53 am, Dallas Mount said:

Hi Gary. Thanks for the comment. I’d like to push back… I appreciate your thoughts on diversity and being cautious about jumping in to the cattle business now. I’m a big fan of being good a one or two things, the opposite of diversity in some sense. I think what you are suggesting is perhaps pulling money out of cattle and putting it somewhere else. That might be good idea. Depends on lots of factors. One being how profitable your ranch is. As far as opportunities in cattle I agree now might not be the time to purchase a breeding herd that you plan to own for a long time. However, there are huge opportunities now in buying the right animals now that you can add value to and sell for good profit and cash flow.


September 13, 2023 at 3:03 pm, Derek Schwanebeck said:

Thanks Dallas. This topic is close to my heart right now. I’m old enough to have seen a couple cattle cycles. They are always the same. Bankers loan too much money for expensive cows. This ends up breaking people, when the very same cattle cycle makes others.
Investing in the Ranching For Pofit school right now could potentially save folks from making hundred thousand dollar mistakes; while at the same time opening their minds to hundred thousand dollar opportunities.


September 13, 2023 at 3:37 pm, garry said:

My comment comes from personal experience: not having put enough profits into passive income investments means we have to continue to operate the farm to fund our retirement. Time catches us all in the end.


September 14, 2023 at 12:16 pm, Vance said:

Great article Dallas, the most important I think is investing in people, school maybe even a vacation. To further discuss profits, perhaps you, Jordan or JH could follow this up with what to do within the tax system to delay income realization to next year, delay capital gains on herd dispersal, etc.


September 17, 2023 at 10:19 am, Jim Forbes said:

Vance, while I’m sure that Dallas and his crew would have some good general ideas, but it really depends on your operation’s previous tax strategies and resources as to what can be done within the current tax regulations. That’s where your management team (accountant, lawyer, banker, etc.) can provide more specific advice based on your operation’s situation.


September 17, 2023 at 5:22 pm, Vance said:

100% Jim. What always astonishes me are the thoughts and ideas that come from the RMC crew, but also EL and RFP alum. Never know what out of the box idea may be out there.


September 15, 2023 at 5:12 am, Garth Gatson said:

Thanks Dallas. I really enjoy Profit Tips. I have a very small technical point of contention. Shouldn’t a benchmark for adding employees be expressed in gross margin per FTE rather than gross product per FTE? Employees are overheads. Gross margin is the money left to cover overheads. It seems the logical unit of comparison to me. I can buy more gross product by increasing my direct costs, but if I haven’t increased my gross margin in the process I’m no more prepared to increase my FTEs. Again, very small and technical point and I very much respect and appreciate what you’re doing here.


September 15, 2023 at 1:11 pm, Dallas Mount said:

Hi Garth. Thanks for the kind words. I think you may be right. I’ve gone back and forth on this. Other industries use a number similar to GP/FTE so there is that, and the other reason is ‘we’ve always done it that way!’ LOL… I think you make a great point though. If a business wants to convert it to Gross Margin per FTE, I’d recommend increasing the number by 30% so a rough target would be $520k. In primary farming businesses this target is too low since equipment costs consume so much of the overheads. Thanks for the friendly challenge.


September 15, 2023 at 11:05 am, Tara Smith said:

Great article with impeccable timing, Dallas. Do you have any recommendations for passive income opportunities or investment accounts for people with excess cash this year?


September 15, 2023 at 1:15 pm, Dallas Mount said:

Hi Tara. Short answer it no. Long answer is diverse mutual funds are a nice easy passive way. Real estate that you won’t be tempted to self-manage might be another. The question of timing for how long you plan to park the money would be an important consideration. There’s a good argument for staying in the game that you know. For example if you know livestock, maybe putting livestock out with someone? I’d enjoy hearing Clay list of creative ways to invest. I’m sure it might be colorful!


September 21, 2023 at 11:53 am, Vince Adrian said:

Thank you for the article. I have a question. In the example of the $100,000 tractor, you recommend charging the business $20,000 per year in expenses. How long do you do that? 5,10 20 years or as long as you own it? If it is for an extended period of time and I have that tractor for 20 or 30 years am I not punishing myself for being frugal, taking care of it or prolonging OEM shoulders,back,hips or knees? I took the RFP school several years ago and I have wrestled with this issue ever since. Land ownership is sorta the same issue for me. If I buy land and pay it off as fast as possible, why am I punishing myself by charging myself cash rent in the ensuing years? I can see that thinking with inherited land but we started from nothing, hence the 20 to 30 year use of a tractor. The 80’s are my 30’s so any windfall profits always go to debt reduction or off farm investments.


September 21, 2023 at 1:21 pm, Dallas Mount said:

Hello Vince.
Thanks for the comment and question. The 20K would be for repairs, capital replacement cost, and time value of the money (opportunity interest). Those costs never stop, so we encourage clients to budget those costs for as long as you own it. Sure, things fully depreciate, but eventually you’ll need to replace it and if you’ve budgeted for that you’re ready to go when the time comes. I’m not saying don’t own stuff that makes your life easier and work more enjoyable. That’s one of the benefits of building and running a successful business. However, I often see businesses over-extend themselves on these luxuries that then can’t afford to own them when the market goes back to more normal levels. Opportunity rent on land isn’t intended to say should we own land or not, or should we pay off debt on land or not. The reason we encourage you to charge your ag operation opportunity rent is to see if the operating business is profitable if it isn’t subsidized with cheap or free access to land. Buying appreciating assets and reducing debt to a level you can comfortably cash flow is a great way to build wealth. Sounds to me like you’re doing a lot of things right!


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