Ranching for Profit is an organization started by Stan Parsons, recently run by Dave Pratt, that has been helping ranchers work on the business instead of in the business for decades. Dallas Mount, former Univ. of Wyoming Extension economist and now co-owner of Ranch Management Consultants, talks with Tip about ranch finance competencies, common weaknesses in ranch financial planning, and fundamental steps livestock producers can take to understand costs and put assets to work for them. This episode introduces a new grant through Western Extension for Risk Management Education that will provide outreach on ranch finance and use of livestock insurance products. Tune in for a teaser on fixed assets and working capital . . .
AoR 80: Should Ranching Be Profitable? with Dallas Mount
>> Tip Hudson: Welcome to The Art of Range, a podcast focused on range lands and the people who manage them. I'm your host, Tip Hudson, Range and Livestock Specialist with Washington State University Extension. The goal of this podcast is education and conservation through conversation. Find us online at ArtofRange.com.
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Welcome back to The Art of Range. I've got a couple of things to say today by way of introduction before I introduce today's guest. I've received some grant funding from the Western Extension Risk Management Education Center to do outreach on ranch financial resiliency. And part of that effort will be a series of episodes on The Art of Range on various financial competencies, including how to properly use livestock insurance. There will be a -- these episodes will be followed by a series of in person workshops around the West, taught by folks that know a lot more about ranch finance than I do. Who we will introduce soon. But the challenge we're trying to address and a challenge that today's guest has been working on for a long time is that Western livestock operations are often owner operated. Not just around the West, in all of the United States, many of the -- most ranches are owner operated. These really are true family farms, where the owners, managers, laborers, accountants, marketing agent, website designer and truck driver's all the same person, or a few employees, plus the owners playing all of these roles. And most people are not competent in all of these areas. And building financial competency is not what most ranchers dream of enjoying when they wake up in the morning. But a ranch that is not profitable won't survive. And financial stress can cause social conflicts which might not otherwise exist, or it makes them worse. And if a ranch uses an accountant, oftentimes it's just to keep their nose clean with the IRS not to adaptively manage ranch financial moves. So that's a long winded pitch for some future podcast episodes. And keep an ear out for these live workshops that will be in 2023. And some stuff for today's guest Dallas Mount with the Ranching for Profit Schools to dig into right now. Dallas, welcome to the show.
>> Dallas Mount: Thanks Tip. I'm excited to be here.
>> Tip Hudson: Well I have a number of friends who has benefited greatly from the Ranching for Profit Schools, as well as Executive Link, and these may be new names for a lot of people. But the ranching crowd doesn't easily throw those complements around, so that tells me you're doing something that works. I should add that I'm not receiving any money from you to talk about this. So before we get into some of the meat of that, do some self-introduction. Tell me a bit about yourself and how you ended up doing Ranching for Profit Schools. I believe your background was an Extension was it not?
>> Dallas Mount: It is yeah I enjoyed 17 year career with University Wyoming Extension and I loved it, had a lot of great times there, made a lot of good friends. And I felt like made some made some meaningful impact. And part of that career was spent delivering a program we called The High Plains Ranch Practicum. And that's an eight day school that we did over the course of six months, people would come to that. And Aaron Berger was my partner in developing and delivering that, and we had a had a great run at that, it was a lot of fun. But when we were doing that we looked around for others that were working in this space and it didn't take long to find the Ranching for Profit School. And so I actually attended that school to kind of almost as a spy of sorts, right, to see what was going on to see --
>> Tip Hudson: See.
>> Dallas Mount: Yeah, what could we bring back in our program. And when I went to it, I was pretty blown away. It felt like this organization had developed 20 years ago what we were trying to build from scratch and had spent the last 20 years refining it. And so I got pretty excited about that. And I actually approached Dave Pratt, who was the owner of the company at the time, and said, hey, I'd really like to be an instructor for you and work with you. And he was in the middle of delivering a class and kind of blew me off, understandable now. But anyway, long story short, we circled back around and he and I started working together on some other things. And then he invited me to look into becoming an instructor. After a couple years training of that I started teaching classes. And that's probably been about eight years ago now, maybe ten years ago, time moves fast. And after I'd been an instructor for a few years, he brought up the idea of maybe -- He asked me, he said, would you be interested in owning this company? And I did -- I thought about it for all of five seconds and said, yes. And we -- it took us about three years to transition the company. And we've done that. And I'm just finishing my third year of running the business and it's an amazing organization. I always like to remind folks that I am standing on the shoulders of the giants that have come before me. Right. So Stan Parsons was the founder of our company. It started in the mid '80s and Dave Pratt ran it for 20 years after Stan. And so I'm now carrying that on. So we've been around for 35 plus years.
>> Tip Hudson: Wow. And was the Executive Link program originally connected with this? Or was it a separate organization that eventually came under the same umbrella?
>> Dallas Mount: So I was knee high to a grasshopper, right, when EL was developed. So I might get some of this wrong. But the way I've been told is it -- so Ranching for Profit started first. And then as these things grow, right, people say, hey, Stan, we want you to come to our ranch and give us some one on one consulting. And eventually he saw that that was going to run out fairly quickly of his ability to deliver that. So he brought a group of RFP alumni together and said, we need to develop a way to help ranchers implement the principles that we're teaching here, and to help them grow through these adjustment periods. And they were the ones that came up with EL. And it was -- they started it, it had some stops and starts, right, it didn't work from the beginning. But it's been going strong now for probably 20 years. It's been going strong. And now we have 120 businesses in Executive Link. Just real quickly, some of you might or might not be what is EL.
>> Tip Hudson: Yeah.
>> Dallas Mount: So Executive Link, or what we call EL, we put businesses on boards of directors for each other, they meet three times a year. There's six businesses on a board. You spend five-sixth of your meeting in an advisory role looking into somebody else's business. And then one-sixth of that meeting is them all looking into yours. You leave each meeting with an action plan developed. The first thing that happens at the next meeting is that board holds you accountable to that action plan. And then you start developing the next action plan. So it's based on the idea that when you're self-employed, you work for a lunatic, right. And I think people can understand why we say that, right. Because that that lunatic lets you do the things that you enjoy and the things that you're good at, not necessarily the things that need to be done in your business. So EL is what we've come up with to help ranches transform their ranch into real businesses to get those business results.
>> Tip Hudson: Yeah, that seems to have been effective. The ranchers that I know that had been part of Executive Link are -- tend to be the sharper ones. And they're the ones that yeah, I remember seeing, oh who was it? I think it was, was it Harlan Hughes? Harlan was an economist with North Dakota State University.
>> Dallas Mount: Right. Yeah, Harlan worked with us. We worked with Harlan in the High Plains Ranch Practicum. So he had had the unit cost of production model that we started with. The Ranching for Profit model uses a different one than that, but there's some overlap to them.
>> Tip Hudson: Yeah, I remember somewhere I saw Harlan in person, and I can't remember now where it was. But he was showing a graph that the ranchers that are careful, smart, whatever adjective you want to use, about their financial management, but able to make a little bit of money when the markets down and make good money when the markets up. And that is one of his big thing was focusing on cost of production. But I remember seeing that graph, you know, where even on a really bad year, you could either break even or make a little bit of money when everybody else is losing their shorts. And that seems to be a characteristic of the people I've known who have been part of Executive Link. They tend to be more, I guess, operationally nimble, where they're prepared to make moves that prevent them from losing their shorts, I guess.
>> Dallas Mount: I agree.
>> Tip Hudson: And that seems to have been effective.
>> Dallas Mount: Yeah, it is. And I, you know, I've worked in this area for quite a while now. And the EL program is hands down the best program I've been around, of helping ranchers implement strategic level change and analysis to their ranching businesses.
>> Tip Hudson: Yeah. Yeah and this idea of working on the business versus working in the business has come up in some succession planning workshops that we have done through WSU, a colleague of mine, Andy [inaudible], has this Ties to the Land Series. Mostly focused on forest owners, but we've -- because it's really designed to address anybody who has a land based business, where you have a lot of assets, but not a ton of cash, it tends to work for both farms and ranches, as well as forests. But one of the big ideas is that most people, it's easier to spend your day doing the next thing that needs to be done, instead of thinking about what ought to be done in order to grow the business or, you know, to adapt. And that also seems to be one of the characteristics that, of the people I've known who have been part of Ranching for Profit Schools, they're always thinking about, you know, what could be or what should be, instead of just I've got to get around to that hay truck and get it unloaded right now.
>> Dallas Mount: Exactly, exactly. I actually just finished writing an article for our blog, that'll go out next week. That, you know, it's interesting, when you look at a ranch business, I'd say the average family farm -- family ranch that I look at has overhead, somewhere around $300,000 to $400,000 a year, right. So there's a lot of value moving in these businesses. And if you'd break that down and break that out to the work day, the average work day of the year. OK. So let's say somebody actually only works five days a week, and then they take two weeks a year vacation, I know, most ranchers are kind of probably rolling their eyes at that, right. But I think that's a reasonable metric to use. So that gives you about 250 work days in the year, right. So if you've got a $400,000 overhead business, right, every day you fall out of bed you need to create about, let's call it $2,000 worth of value in your business, right. So are you going to do that by chasing whatever the wheels are falling off of today, you know, the, you know, running out to the stock tank to fix the water thing that's, or, you know, the axle just came out of the stock trailer, right, whatever it's going to be. Is that the way you create $2,000 of value in a business? Or do you do it through looking at high level strategic economic issues, right, about asking questions about what enterprises should we be running, right. What should be our, you know, our gross margin on these enterprises? What kind of value needs to be left at the end of each cow, right, to -- and what scale do we need to be operating? If we want to push that scale, what are our leverage points to be able to do that? And that's obviously where you find the answers to that. But so many of us get caught up in the day to day of our businesses that sometimes we spend so much time on the minutia that we forget the big picture. So that --
>> Tip Hudson: Yeah, and that stock tank's still got to get fixed. But the point is, you've got to -- that's never going to just make way -- the clouds are never going apart so that you feel like you're free to spend time on this thing that maybe feels like mental exercise and isn't even very pleasant. You're going to have to make time to think about the business instead of just fixing the stock tank.
>> Dallas Mount: Exactly. Exactly. So yeah, so we make the distinction between working on the business, what we call the what be jobs, which are oftentimes the $500 to $1,000 an hour work that happen in any business, right, no matter what your business are there, those kinds of things. Versus the working in the business, the wimpy jobs, the $15, $20 an hour stuff that most of us get so caught up in doing, that -- I mean really, look -- step back and look at that. What kind of boss would let an employee work on the $20 an hour jobs, while the $500 an hour jobs went undone, right. That boss would be an idiot. But lo and behold most of us that are self-employed, and I'm including myself in this right, most of us that are self-employed, we do this on a daily basis almost. So we've got to develop the self-discipline and the aptitude to do those things that really create value in our businesses.
>> Tip Hudson: Yeah. And you've said that most people who are in livestock were taught how to raise livestock, not how to run a business. And that's a whole different set of skills.
>> Dallas Mount: Exactly. Exactly. So I mean I loved the words you used in the opening part. You talked about developing the competence to do this, right. And I want to be really clear, I don't think people in agriculture are not smart, or that they're lazy, right. they're very, very smart. And they're not lazy at all. But we often don't have -- we haven't developed competence in these skill areas to be able to do this, right. And to break our business apart economically and to look at where are we creating value, where are costs occurring? What can I do about it? Right. And that's essentially what we're talking about here is developing that confidence and comfort to be able to work on that part of our business.
>> Tip Hudson: Yeah, I want to ask about what some of the limiting factors are to successful ranch businesses. But it obviously begs the question, what does it mean to be successful? And of course, by success, we have to at least define that as profitability. And I feel like we're in a weird cultural moment where sometimes there's some pushback against profitability, like that's not something people should wish for. And I think ranchers feel some of that when they're talking with people that are not part of agriculture. Because so many people are not trying to run a self-run business, they're working for wages. And this idea of profit is a little bit odd. But, you know, for those who are not familiar with running a business, I think it's worth talking just a bit about profitability. My guess is that, you know, part of what this means is that, in a ranch business people often don't pay themselves. Which of course, when you use those terms, anybody who receives a paycheck, you know, can identify with that. It would be weird to do work and not get paid for it. But in a ranch business, you're often doing work and not getting paid for it. And I -- this is one of the things that I consistently hear from folks that have been part of ranching for profit, is that you have to plan to pay yourself, or you're not really making a profit. Am I getting anywhere close to the mark on that?
>> Dallas Mount: Yeah, you're opening several things that I'd like to pull apart. So paying yourself, I mean absolutely right. We need we need to create that on the front end. Not -- so many times, there's the idea that OK we'll just -- we'll run this business and if there's anything left at the end of the year, that's what we'll do something with for ourselves, right. Well I mean what's going to happen when you have that approach. There's always a list of something else that the ranch could use, right. It's not like we're ever going to get to the end of the year and say, you know what, there's nothing to spend money on, on this ranch that I do -- so let's just take that money and put it in my own bank account, right. I mean -- So what we tell people is what would it cost to replace you in the ranch business, right? Now let's budget that on the front end and set that over here in your personal account. Now if you actually want to write a check and loan that back to the business, you sure can do that. Right. That's a choice you make. But that's a very different way of running the business from saying, well I'll just run it and then take whatever's left at the end of the year, right. They're very different. But the good -- circling back to the profitability thing. So I think it's important to identify what is -- really it's a part of the mission and the vision of the ranch. But there -- underneath that is a question about owner value, right. So the owners of this asset. And let's even back up another level. And in any asset there's three levels to this thing. There's the owner, the management and the labor, right. So oftentimes one individual or a set of individuals, you know, mom, dad, junior perhaps, are all wearing all those hats. But let's just have them put on their owner hat for now. OK. We're the owner of this. Oftentimes, it's a multimillion dollar asset. OK. So what do we want out of this asset? What do we want this asset to do for us? And profit might be one of those underlying issues there, might be one of the answers to that. I want this asset to produce a profit for us. Sometimes owners come to that and say, you know what, profit is not a motive of this. But I would push back on this and say, well do we want it to at least cover its own costs? Do we want it to cash flow? OK. And so several of our clients are billionaires who own ranches as part of their assets. Right. Now most of those people want this asset to cash flow in terms of its operations. OK. So we want the agriculture operations to cover their own costs. And I think that's a very reasonable expectation. So profit could be defined in all sorts of different avenues. Now if you go to a mom and pop type ranch, a profit motive -- then we start looking at what would we do with that profit, right. If we start dissecting that down we can use the profit to service debt, we could use it to build reserves, we could invest it back into the business for some capital improvement project we want to make, we could invest it off farm. Maybe we want to buy rental houses in town, right, or whatever those might be. So once we've identified those uses for profit, now we can start saying OK what's the profit target? And then we identify that profit target and then we can reverse engineer from there. But I will make the point that you started -- you touched on in your introduction that a business needs to make a profit or it's not sustainable. And I think that's 100% true. I look at these ranches that are -- let's pick on these billionaire owned ranches. Right. And so if a billionaire owns a ranch that's a toy or maybe it's part of their larger portfolio strategy, but it takes a lot of money to keep that thing running. You know, I've -- there's ranchers that take a half million dollars injected every year, just to keep the thing moving. It at some point, the owners are going to grow tired of that. OK, so maybe it's when it does a generational transfer, and now it's the kids that have this asset that takes a lot of capital to keep it going. So I don't think I've ever seen a ranch that is not profitable, that has long term survivability. At some point, people are going to get tired of propping that thing up with off farm money, with working for free, with having to subsidize it in all these different ways that we choose to subsidize these farms and ranches. So, you know, let's be real about it. At some point they have to make a profit, or it's going to cease to exist. I don't care how rich you are. I think that's true.
>> Tip Hudson: Yeah, so that's the, I guess the -- one of my questions is, how do you define a healthy or a successful ranch business? And my suggestion was that the first element is that it's got to make a profit. Are there other things I'm not thinking of that are part of a healthier, successful ranch business? I mean I can think of you've got the classic three legs of sustainability and profitability addresses economic sustainability. And of course, there's some social stability that is tied to economic sustainability. And, of course, this is why it gets talked about is because these three things are all interrelated. If you're doing work -- ranching in a way that is not ecologically sustainable, that also will not be economically or financially sustainable, because you run your base of production into the ground literally. So what are -- those are, you know, my pontifications about what little I know about successful ranch businesses. What else would you say about that? What is it -- how do you define a healthy or a successful ranch business?
>> Dallas Mount: So I guess I'm -- I don't feel like it's my place to define that. I feel like it's the owners -- that's part of the owners job is to define what do we want from this place, right.
>> Tip Hudson: Sure.
>> Dallas Mount: If -- you mentioned ecological health. I would expect most reasonable owners are going to have some measure of ecological health as part of that measure of success. The economic and financial piece could be part of that as well, right. We want the place to support itself, or we want it to make $100,000 a year profit or a 2% ROI, right, whatever that target is. I think we need to be clear about that and identify that. And then another piece could be the enjoyment factor, right. Its, you know, for a lot of ranch owners, especially in the West now, there's something about, you know, it's a place that I like to go, it's a place where I feel welcome. It's a place where I can bring my friends and my family and, you know, and have pride in being there. Right. So and I'm thinking a lot about off farm ownership now. But even on farm ownership could identify those things. As, you know, what are these pieces of owner value that we really need. And then I think there's one element that we haven't mentioned yet, and that's customer value. So any business that's a real business, at some point must create value for their customers. Right. And so you need to really step back and say, what's the -- what problem are we solving for our customers? What kind of value are we creating for them? So if I'm just raising commodity cattle, right, I'm still solving a problem for that customer, right. My customer is the person buying my calves, or buying my bred cows or my coal cows, right. So I'm producing a product that you can count on at a, you know, that's delivered at a fair price, right. So there's that element as well for a business about what's that value we're creating for our customers. So we really push our clients to be clear in identifying those things. What -- what's the purpose of this business? What do you want it to do for you? And then we're going to reverse engineer it from there to try to create those things.
>> Tip Hudson: Just a quick parenthetical here. About half of the listeners to this podcast are not ranchers, they're range cons, biologists, researchers, students, other I guess what I call natural resource professionals. Ad one of my objectives in the podcast is to help those folks that are themselves not ranchers, but who are usually somehow connected to ranching in various ways, help them understand the social and financial world of the rancher. We had talked previously about some of these limiting factors. You've been doing this for quite a while now and have talked to an awful lot of ranchers all over the country. What do you see as some of these limiting factors to successful ranch businesses, regardless of how they define it? These are things that tend to be, you know, commonalities across the board. We've talked a bit about competency, people just don't know how to do this stuff, because no one ever taught them. And you guys are filling some of that role. Are there other competencies that you commonly see, are missing in people that are otherwise, you know, motivated and doing a good job?
>> Dallas Mount: Yeah, so let's dive into that competency bit a bit more. And we've touched on it some here, right. But when somebody gives you a job to do that you really aren't clear of what the result looks like at the end of that job, and it's kind of a mystery to you as to how to go about doing it, right. What what's the first step? What's the second step? What's the third step? Right. How excited are you going to be about starting that job, right?
>> Tip Hudson: Not very.
>> Dallas Mount: Not very, right. And so that's kind of where we come to on this idea of doing an economic analysis on your ranch business, right. Is OK, we know that we need to do it, we know that there's value out there. But my gosh when I start thinking about this, if it's not something I've done before it feels like a monster, right. And I'm really not sure what the result of that looks like, what am I trying to produce, and then what's the steps of doing it? So that's where we've been serving that role for quite some time, is helping ranchers develop a basic level of competency at it -- understanding what is an economic analysis, what is it telling me? And then and then how do I do it? You know, if I've got -- if you've got a cow calf business, you've got some real complication in doing an economic analysis. Because you've got this factory that every year the items in this factory are changing class, they're changing value, they're -- some of them are leaving as [inaudible], some of them are staying as replacements. We've got some replacement costs in that, we've got some salvage value coming out of it. How do I handle all these moving parts of this? OK. So we start breaking this thing apart, and say, OK, hey we -- here's the way to do it. The first step is you do this breeding herd statistics chart, and then you do a stock flow, and then you do a trading account that creates our gross product, right. So we just kind of break these things apart into step one, step two, and step three. And the end product of this exercise is where we take every enterprise on the ranch and we say, what kind of value is this enterprise creating and where are costs occurring? And the number at the bottom of that is what we call a gross margin. And gross margin is simply, you know, what's the value minus the direct cost, right. So every time I add a cow, what's the value that that cow creates, and what are the direct costs with running that cow? And the number leftover at the bottom is the gross margin. So the gross margins become contributions to overheads. OK. And so in any business we've got costs that are overheads and we've got costs that are direct costs, you know, or fixed costs and variable costs, whatever you want to call it. So we need to be able to look at this business on one sheet of paper and say, what are these different enterprises, where am I creating value, where costs occurring? And then how are these doing at servicing my overhead? That number at the bottom. Now I could put that paper in front of anybody and, you know, a 13 year old kid can look at that paper and in five minutes he can say, hey, this is working well and this is not. OK. And so we need to be able to look at our ranches in that kind of way and be able to put our finger on those things. And unfortunately, the way most ranches are run is, as you said in the intro, it's tax accounting. It's, you know, the financial accounting for tax purposes. And we take our papers to our accountant and we say, hey help us meet our obligation to the IRS. And he gives us a printout at the end of the year and it's like, oh thank goodness, I don't have to pay any taxes, and away we go, right. And that's not the way competent management runs a multimillion dollar business. You know, and even if your business isn't multimillion dollar, if you're running 20 cows, you should be able to do this, right. Because that's the skill that's going to let you grow 20 cows into 500 cows.
>> Tip Hudson: Yeah, to restate some of that. All of that -- there are, as you got animals moving in and out and sales and all of those things have dollar figures attached to them. But a lot of people don't take the time or don't know how even to itemize them and put them together and run some calculations to have any idea where you're gaining or losing.
>> Dallas Mount: Right. Right. You got it. You got it. So yeah that -- we help people figure out how to do that. So I think the number one limiting factor is competency, right. Where this thing feels like this huge monster to learn how to do. It doesn't have to be. But the we need to develop competency in those so that we're clear about what it is we're producing and we have some steps. OK, if this is where I'm at now how do I get to where I want to go? And so I think that competency is that number one thing. I think there's a real factor in just desire. We see quite a few people that have the competency to do this. But the second piece would be just desire, you know, you -- I'll put it this way. Most of us didn't get it, and you kind of said that too during the introduction, right. Most people didn't get into ranching because they like running numbers. OK.
>> Tip Hudson: Right.
>> Dallas Mount: So it's a heck of a lot easier to just say, well, you know what I'm going to go outside and move that bunch of cows. Because that's something that -- that's what I enjoy in the business. Right. So developing the desire and the self-discipline to be able to do these things and run your business in this way. And that's partly what we do through EL is we hold each other accountable to getting these high value things done. And, you know, if you know you're going to meet with a board of directors in two months from now, and you're going to present your economics, right, that's a different level of accountability then. Well I can put this off because the family doesn't really -- we don't have any formal meetings or anything. And you know what, I've never shown it to them before so there's no expectation of that. Yeah, so I think we need to create a system that encourages that desire.
>> Tip Hudson: Yeah. And you said before that what kicks people out of that, I guess I'll back up. There's -- it feels like a double whammy. One is that most the time you would prefer to be doing something else. And then the second thing is that you may actually want to avoid having to think about doing numbers. And so the only thing that can kick you into thinking about it is a problem. But by the time there's a problem, you're usually a little ways down the road from when it would have been a good time to fix the problem. What kind of problems crop up that force people into looking at this, and how is that a, a bigger problem?
>> Dallas Mount: Yeah. I avoid -- there's all sorts of issues that can -- You know, the worst I guess would be at some point the bank's going to tell you I think we're done. Right. We're not going to go with you on another operating loan, or, you know, whatever that might be.
>> Tip Hudson: Right.
>> Dallas Mount: And hopefully we don't let it get to that point. I would say a more common one is a succession event. Where it's somebody's time to step back and it's somebody else's time to step up. And in that event, maybe we're asking the ranch to support another family. Maybe it's just now a change of roles in the business and somebody's like, you know what, I'd really like to look into this thing a bit more and see should we keep running cows, right. I mean I know that we've run cows for the last 20 years, but is this the right thing to do with this business? Or should we keep putting up hay, or in yearlings the right thing for our business? And so when we start asking these kind of questions the way to approach solutions is to analyze the business. So the succession event is probably one of the more common ones to see. Sometimes you've got other owners of the ranch that are tired of subsidizing the hobby. So maybe I'm a third owner of the ranch, and two thirds of the owners live off site and they start looking at their balance sheet and they realize, hey I've got $10 million tied up in this asset that's never produced a dime for me. That doesn't seem like very reasonable financial management. So they start asking questions and looking into the business and it's going to create current management, maybe some desire to change the way things are done. So those can all be impetus for moving us in that direction.
>> Tip Hudson: Yeah, well I -- in our conversation ahead of time, you mentioned that the third limiting factor is the lack of motivation to change, which you just alluded to.
>> Dallas Mount: Yeah.
>> Tip Hudson: Yeah, what else do you want to say about that?
>> Dallas Mount: So I -- sometimes even when we look at the numbers, the response is, you know what the markets will move and I'm just going to keep doing what I've always done. And you know --
>> Tip Hudson: Yeah.
>> Dallas Mount: If somebody can afford to act that way, who am I to tell them they shouldn't do that, right. The thing that gets my goat a little bit is when we have clients that say, you know what, I see what these numbers are telling me but I just really like running cows. But can you help me figure out a way to make this ranch support me and Junior, because Junior really wants to come home and Junior wants to build a life on this ranch, but I don't see how we can make it work. So it's kind of like saying, I want my cake and eat it too. Right. And that -- I lose a lot of patience with that. If they're -- on almost every ranch there is a solution to make it economically work. OK I don't think I've been to a ranch yet where there wasn't a strategy that we could employ that would make this thing work economically.
>> Tip Hudson: Yeah.
>> Dallas Mount: But too often, the owners of the ranch, the enterprises that are there are really hobbies when we get down to it, right. They're the things that we enjoy doing and we like doing them and we can afford to do them. So we can ignore the -- a lot of the economic realities that are putting us in the face, right, and just continue to do that. So there -- on a lot of these places were -- fortunately and unfortunately, were set up in financial positions to be able to ignore a lot of the economic realities. But I think we can only do that for so long. And at some point, it's going to come back around.
>> Tip Hudson: Yeah, there was a -- WSU has historically done enterprise analyses for various agricultural enterprises. And there was one done specifically on cow calf operations in central Washington, this was back in 1996. And the conclusion from the enterprise analysis using, you know, average cost of operation and average returns on cows, that the average operation was losing about $70 to $100 per mother cow, per year. Which goes back to this idea that, you know, whether they can see it or not it's being subsidized from somewhere, usually off farm income. And -- but still people's tendency is -- just what you said, I like running cows, so I think I'll just keep running cows without -- with sometimes without even knowing I think that just running cows is running the business into the ground. There's an old -- there's a proverb from India, I think it goes, everything works out in the end. So if it's not working out, it must not be the end. And we're prone to just keep running things out until you hit the end.
>> Dallas Mount: Yeah.
>> Tip Hudson: And I see what you're trying to do is, if -- is do enough of this mental exercise, the hard thing that we don't want to work on, to find out are we headed toward that cliff. and how do we adjust course?
>> Dallas Mount: Right. Right. Yeah, there -- you know, we -- we're talking about the ones that are losing money and are not doing it. And I do want to bring around that there are people who are very successful at running cows. And it, you know, whether it's running cows or whatever the business might be, that are putting together these ranching operations that are meeting wonderful targets in terms of profitability. So it can be done. It's not that it can't be done, it can be done. But I think a lot of people just to accept what they think is the norm or, you know -- There is a real unfortunate perception that ranching is not profitable and it cannot be profitable, right. And so if that's your perception, if somebody says, well why don't you work on your ranch to make it profitable? Well if you really think it's impossible, I mean that's like saying, why don't you flap your arms fast enough and eventually, you'll fly, right. I mean to -- what an unreasonable proposition to even consider. Why would I waste any time doing it? So I think first thing we need to attack is that whole paradigm that ranching can't be profitable. You know, somebody's making it profitable. And in fact in our EL a couple weeks ago in Billings, we had a member who -- they were in oil and gas originally and then came to ranching after they sold their oil and gas business. And they shared with us ten year financial data of every dollar they'd invested in their ranching business. And looking at this long term, he made the statement, he said, my agricultural businesses are producing returns that are in excess of what my oil and gas businesses are doing. And he said, this is a really good business to be in. Now he wasn't running it as everybody else runs it. He wasn't running this as a, you know, conventional type of, well we're just going to buy the ranch and put the cows out there and hire a cowboy to take care of them and be done with it, right. He was doing some things that were pushing the envelope. But it can be profitable. And if we look at it in different ways and apply financial and economic principles to it, there's some really big rewards at the end of it.
>> Tip Hudson: Yeah, you've also said before that one of the key elements of financial resilience is dealing with capital allocation. That, you know, ranchers are often complaining that this is a business that is asset rich and cash poor. And it seems like one of the challenges is figuring out how do you make money on fixed assets?
>> Dallas Mount: Yeah. Yeah, let's jump into that a little bit. Because this is an interesting thing. So if your listeners would do a thought exercise with me, take out a piece of paper if you want to, you can might be able to just do it in your head. List down all the assets, all the major assets in the ranching business. OK. So down one column of the page, you're going to have the cows, the tractors, the equipment, you know, the other pieces of machinery in it. The land is obviously going to be on there. You know, so list all the assets down one piece of paper, OK. Now put a put a T column across the top. On one side, we're going to have fixed assets. And on the other side it's going to be working capital. Oh and we should put things like cash, we probably should break those livestock down into breeding livestock and in progeny, right. So OK, so now we're going to go down and we're going to put an X next to each of those asset column -- asset categories. Into which of those columns do they fall? Do they fall into fixed assets or do they fall into working capital? OK, now we're going to broadly define these fixed assets and working capital. And economists listening to this are going to fall out of their chair and have convulsions, right, because we're going to make some pretty broad things. So a fixed asset is something I intend to keep. OK. If I -- I'm going to keep this thing and use it again next year, right. Working capital is something either it already is cash, or I'm going to turn it into cash in the next year. OK. So make those marks down all those assets. OK so let's work through them again. Livestock, breeding stock. OK, so as I look at the breeding stock, do I hope my cows are open, or do I hope I get to sell them as a bred stock in the coming year? Or do I hope they're all bred and I get to keep them and run them again? OK, for most ranches their cows, their breeding stock, are fixed asset, right. It's something I hope to keep. When I look at progeny, OK, for most of us that's going to be working capital, those are the things that are producing cash flow. OK. So the machines, the tractors, the vehicles, you know, all the things on the ranch, most of that stuff is fixed asset, most of that I don't intend to sell in the next year. The land for almost all of us is certainly going to be a fixed asset, right. The cash, the amount of cash in the business, that's working capital. OK. So now if -- when you get to the bottom of that page, total those asset categories up. What is the total balance sheet value of fixed assets, and what's the total balance sheet value of working capital? OK. And then look at the relationship between those two things.
>> Tip Hudson: Yeah, they don't match.
>> Dallas Mount: They don't match, right. So on most ranches we are in excess of 95% of our wealth is tied up into fixed assets. And only 5% of our wealth is in the form of working capital. OK. So some ranches it's going to be 97.3, 98.2, I mean you might see a --
>> Tip Hudson: With lots of land that's worth something.
>> Dallas Mount: With lots of land that's worth, yeah. So you might see a few startup operations or younger operations that are more in the 50/50 range, right. But that's the underlying problem right there is we put all of our wealth is tied up in these -- in the stuff we want to keep. And very little of that wealth is actually creating cash flow, in the form of things we intend to sell. And then you look forward and you -- like let's go back to 2014, right. We have this record year of calf prices and so there's lots of cash flow into the ranch. What happens to that cash flow? Where does it go? Where do ranchers dump it into? We dump it right into the fixed asset column, right. What happened when we had that year on the ranch? We went out and we bought, we upgraded all the machinery, and we often did a land expansion. OK. Or we dumped it in a capital project, right. We put in a new set of corrals or something like that. So when there is wealth created, we compound that problem, right. We put it right --
>> Tip Hudson: Right, because it takes money to maintain it and it's depreciating.
>> Dallas Mount: Exactly, exactly. You know, that -- all those fixed assets every year they take repair and maintenance money, right to keep that thing going.
>> Tip Hudson: Right.
>> Dallas Mount: And then we've got this little teeny tiny bit, that's over here in the fixed asset thing that's kicking off a little bit of cash flow. Well where does all that cash flow go? It goes right back into maintaining all those fixed assets, right.
>> Tip Hudson: Yeah.
>> Dallas Mount: So there is a miss balance between the fixed assets and the working capital. Now when you're wealthy, when you've got to a point where, oh I've got like two, three, four years' worth of overheads in savings, right. Well then that's an appropriate time to allocate a heavy piece of that into those fixed assets. Because those fixed assets are creating wealth, but they're not creating cash flow. Right. So we can be -- as the statement goes wealthy on the balance sheet and broke at the bank. Right. And that that's the state that most branches are in. And it's from well-intended decision making, but it's not from well informed decision making. Right. So we compounded this with bad decisions. So the question becomes, what can I do about it, right. Well what kind of --
>> Tip Hudson: Right.
>> Dallas Mount: Which of these fixed assets can I liberate, to reinvest them into things that are creating cash flow? When I do make cash flow, then let's not compound the thing, let's invest in things that create really healthy cash flow to help balance this thing out. Right. So that's the strategy to move it forward.
>> Tip Hudson: Would you say there's any more common solutions as to how people begin to address that, or is that really specific to every individual operation?
>> Dallas Mount: Yeah so --
>> Tip Hudson: To put those assets to work.
>> Dallas Mount: Yeah. You know, when you look at that land business, that's where most of that wealth is tied up. Right.
>> Tip Hudson: Right.
>> Dallas Mount: And so if we started to dissect that and say, well what things could we do with this land to create cash flow?
>> Tip Hudson: Right.
>> Dallas Mount: And a lot of us are thinking is centered around the agriculture values of those assets, right. Well I can graze it, I can cut timber off of it, I can do these things. But as we start looking deeper into that, there's all sorts of layers of value into that land investment that we can use it to create cash flow. Now some of those things make us physically sick when we think about harvesting them, right. So we've got to find those things that are consistent with the values of ownership that warrant exploration. So that's another path forward to that.
>> Tip Hudson: Well I know you guys are doing Ranching for Profit Schools, kind of throughout the year in different parts of the country. But maybe to get a bit of the flavor of the kinds of things that would be taught or talked about at an actual school, give us a hypothetical, an example of a ranch that, you know, is in this situation where they've been doing the same thing for a long time, and the same thing may not be the wrong thing. The point is, people sometimes don't know. How do they go about analyzing that, and what are some examples of changes that could be made?
>> Dallas Mount: Sure, yeah. Let's talk about that. So at our Ranching for Profit School, the school is seven days long. And each evening -- so during the school itself, we use an example ranch to teach the principles. And then each evening after class, if people want to come back in and work on their own numbers, we've got instructors in the classroom that can kind of coach people through that. So it's pretty typical for people to come in and by the middle of the week, they've got a pretty good handle on what their numbers on their ranch are doing. So we've now broken the ranch into enterprises, we've run gross margins on each of those enterprises inside it, we've got an idea of the overheads that we need to cover. And so we're sitting there looking at this sheet, and sometimes it can feel a bit daunting, right. We're kind of realizing how far we are from maybe meeting our targets. And we're looking at these current enterprises. So there's a couple of different strategies you can employ. And one is, let's say the ranch is running cows, and they really like running cows, right. That's what they enjoy doing. But they're looking at this cow herd that's just not producing very much margin at all. You know, maybe it's in the neighborhood of $150 to $200 gross margin per cow, which is to translate that a little bit that's like saying, I'll send you a cow for a year and I want you to provide her all the grain, feed that she can consume, and full care for her for $200. Right. I mean nobody's going to do that, right. You can't touch that. So they're looking at this and they're like, man my margins on my cows really stink. OK. Well so we start looking into that and we say, well if the margins on the cows stick there's one of two issues that could be the problem. Either the gross product isn't high enough, they're not creating enough value, maybe that could be through poor reproductive performance or, you know, some marketing issues in there. Or our direct costs are too high. OK. So the direct costs, things like feed, vet, you know, all those things that we put into it. So if we looked into that and we said, well gosh my direct costs are substantially higher than what the benchmark ranches are showing. What can I do about that? So now we start brainstorming about ways. Well what are ways I could cut some fed feed out of this? What are -- is there a different type of program that I could trim some costs out of this that aren't going to give up too much on my gross product side? And it's not unusual for people to find substantial pieces of value in there when they really step back from it and look at it from a strategic standpoint. Well if we change this about our cows, we could knock $150 of a vet feed out of that cow herd. Right. So OK then now if we're able to do that, that comes back to our gross margin, and now instead of $200, it's $350. Well I could do something with that. Right. So let's take that and apply that across all 300, 400 cows on the place. Well now we're covering our overheads, right. So it's really an exercise where we let them kind of lead that discovery tour of, of where are the points to work on, and then what are some high leverage places where if we make some changes we can find some substantial value. And start down that track, right. So that would be one example. Another example would be just a complete enterprise shift. Well, you know, hey I'm just running these cows because they were here when I got here. I'm not tied to these cows. What if we did it with yearlings? What if we did it with custom grazing? What if we did it with sheep or goats? Right. What enterprises could we lay on here they would really be good at creating value? And that's a really exciting place to be, is when the rancher starts putting their finger on what kind of opportunities do I have to shift this thing that's going to meet my financial and economic goals for myself.
>> Tip Hudson: Right, and now they've got the tools to put some, you know, some potential numbers behind those things, and analyze how they might produce more profit for their operation. Instead of just shooting in the dark and saying, well this isn't working so we're just going to try something else.
>> Dallas Mount: Exactly. And our goal in doing this isn't to -- for us to come walking in as all-knowing consultants, right. And just say, here's what every rep should be doing, right. Because that's not true first of all. But then secondly, it's also to empower the people that come to the school to be able to do this on their own. Because this isn't a -- we make this shift --
>> Tip Hudson: Right.
>> Dallas Mount: And then we go on for 40 years, right. This is a -- we look at these numbers, we figure out what -- where things are. We do it again a year from now, two years from now, three years from now, and keep this level of intensity into the business management.
>> Tip Hudson: Yeah, that's encouraging. I think I'll probably let you go. But we will put the Ranching for Profit website link in the show notes, if folks want to look into either Ranching for Profit or Executive Link. But why don't you go ahead and call out what that website is, for people that are driving and can't look at their show notes?
>> Dallas Mount: Sure, just RanchingForProfit.com, will get you right there. We do ten schools a year. They're spread out over the country, mostly in the western US, most of the schools happen in the fall and winter of the year. A problem a lot of people make when they look at that, is they say, well I'm going to wait for a school to be near me. And that's kind of a foolish way to approach it. You know, really if you step back and look at this, you're running a multimillion dollar business, and you're -- and the decisions you're making are probably $100,000 a year decisions. From an enterprise scale, it's really foolish to say, well I'm going to let a $300 plane ticket or a six hour drive get in the way of me making $100,000 change to my business. And in fact, you're going to have a better experience at the school when you're with people that are from different geographic regions than where you live. You know, if you're ranching in northern Montana, putting you in a room with a bunch of other people that also ranch in northern Montana is not going to be where you find the solutions to your business. Right. It's going to be putting you in a room with people that ranch in Vermont, California, Nevada, Texas, right. And they have completely fresh perspectives to challenge you with than the people who live in your region. So I would encourage folks to just say, you know what, we're going to make this work. And then another piece is you want to go with the people that you are in business with. If one person from the business goes to the school, and then they come home and now they're trying to explain and, you know, get everybody else on board with a new way of looking at things, it's almost always a dead end. So you want to you want to take those key decision makers from your business and go together, or at least go in the same calendar year so that you can have those conversations.
>> Tip Hudson: Yeah, I appreciate that. I want to say thank you for what you do. Helping people produce real wealth and not just bounce money around, I think is pretty important. And the rancher testimonials I think are compelling that this Ranching for Profit program has been successful and has truly been helping people. So thank you and maybe we'll talk again sometime.
>> Dallas Mount: I appreciate that, Tip. And I also wanted to thank you for what you do. I have felt a change in the education level of people coming to the school in the last five years in particular. And my -- the thing I attribute that to the most I think is the podcasts. And your podcast is part of that. And the other ones that people now who used to use their -- spend their days listening to that same old country song, right, are now using that time to educate themselves. And --
>> Tip Hudson: Yeah.
>> Dallas Mount: I've felt that shift in the knowledge level of the people that are coming to the school. So thank you for what you do.
>> Tip Hudson: My guest today was Dallas Mount with the Ranching for Profit Schools. Dallas, thank you for your time.
>> Dallas Mount: Thanks, Tip, appreciate it.
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