Ranch financial health

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>> Welcome to the Art of Range, a podcast focused on rangelands 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. My guest today is Matt Griffith with WSR Insurance, out of California. Matt, welcome.

>> Thank you, Tip. Nice to be here.

>> Well, I appreciate you jumping on. We've, we've interacted just a, a few times, and, but Matt is a partner on this current grant on ranch financial resiliency, and specifically the grant that we're working off of is trying to put people together with insurance providers. We've, We've done a fair bit of discussion about livestock risk protection, and have talked less about pasture, range, and forage insurance. And most of these insurance companies that serve livestock producers handle all of those. But WSR Insurance has been around for a long time, and Matt has been doing this long enough that he, he knows his stuff. Matt, how did you get into, how did you get into doing livestock insurance?

>> Well, Tip, that, that's kind of a funny story. I'm a fifth generation rancher from northern California, and the product, pasture, rangeland, and forage, was presented to me in 2011. I became a customer of the product, and I worked with it on that side to see kind of the backside of the policy that the customer sees for three years before I became an agent and was licensed to sell the pasture, rangeland, and forage product.

>> Yeah, and were you, were you part of an insurance company before that, or just raising cattle?

>> No, I, I didn't have any type of insurance background before that. My, my only occupation had been on the ranching side, and I was a partner with my father in, in the Griffith Livestock, and unfortunately he was in an accident, and Jim Van was working here at WSR, and he offered me a position to come in with the PRF product, and because I had experience with it, I felt comfortable with showing it to, to others in the ranching industry.

>> Yeah. I want to come back to the, to the, some of the ranch history, but what else does WSR Insurance do?

>> Well, Tip, WSR was established in 1917, and we're a full-brokerage agency. So no matter what you're looking for, if you're looking for your commercial and liability, or your worker's comp, health and benefits, there's somebody within the office that can service all of your insurance needs. We have a large crop insurance book that is my focus, but within the agency there's an agent that can handle any of, anybody's insurance questions or their needs.

>> Got it. Well, going back to the ranch, you know, California's notorious for being especially volatile in terms of rainfall and forage production, and maybe that's, that's somewhat the case all over the west, but it seems to be more that way in California, partly by virtue of having mostly annual grasslands that tend to be flashier than perennial grasslands in general. But what was your, what was your experience raising livestock in California, in terms of, you know, forage availability?

>> Well, where we're based, Tip, we're an hour north of Sacramento in a town called Williams. It's on the west side of I-5, and really it's kind of a feast or famine type scenario. Historically our rainfall is right around 16 inches annually, so on a normal type year, we have a real heavy clay soil, and the feed production is outstanding. We, we run yearlings in, in our spring months. They'll do two to even two and a half pounds per day when there's adequate rain. The trouble with that is it's hard to know when that rain's going to happen. A lot of years we are on definitely the drier side of the state. So that's why PRF was so appealing, as a customer, just due to the fact that we're bringing in yearlings, expecting them to gain 250, 300 pounds for the spring season, and if it doesn't rain, they kind of go out the same weight they came in at.

>> Uh huh. Yeah, and at 16 inches, if you get 50% more than that, that makes for a lot of grass. If you get 50% less than that, that's a pretty extreme forage-short condition.

>> Absolutely. Without, if, if we're going to be 50% less than our historical average, things get pretty bleak pretty fast, and it's not, it's not a scenario anybody wants to be in, because then you're kind of scrambling to find other inputs, and nobody wants to be in that situation, and it can escalate quickly over here in, in the northern part of California.

>> Yeah. Yeah, we definitely feel it in the central part of Washington State. I live in Ellensburg, which receives an average of, like, eight and a half to nine inches of precipitation annually. But because the wintertime precipitation pattern, that is relatively reliable, and we don't usually get, you know, large swings away from that. And, and because you get some winter precipitation, you know, something happens every year. But if you're relying on more growing season precipitation or, you know, you run out of moisture by the first of May, that, that really puts a clamp on things.

>> Yeah.

>> What, what does the volatility look like in, in your part of the world?

>> Well, most years, I mean, the volatility factor is fairly extreme. Looking at, like, last year in 2022, it, recent history, January and February, we came in at pretty much zero, and those are our two wettest months. So it's really devastating whenever you see any decline from your normal precipitation, but to have it be absolute nil, I mean, it was devastating as far as, not only your, your, your grasslands, but your drinking water, kind of everything, it kind of all hit at once. And, now that was an outlier. That hasn't happened before. Last year was the driest for, for that, that 60-day period in recorded history, but even the year before that, when we were in a La Nina pattern, La Nina typically means drier than normal for most of California, and to have it be, it was just compounding year after year, because we received 40% of normal the year before for our, our wettest two months, and then to go with a zero on top of it the following year. As these drought conditions, as these drought conditions just stack up on each other, then the result becomes even more extreme.

>> Well, we're talking today on the, in late March 2023, and I don't even watch the news, but I'm aware that California's been getting hammered with a lot of rain, and it's causing some problems. Is that, is that occurring everywhere, and is that going to be useful in July, or, or is all that water going to run off and not do you a whole lot of good.

>> That's a, that's an interesting question that has lots of different levels that we would have to unravel, but yes, for the state has a whole, from the top to the bottom, 2023 has been, for the most part, well above average for most everybody. And without jumping into too much of the politics of California, a lot of our issues come from water storage, but it looks like this year, if you're going to be in an irrigation district, say you have permanent pasture, you're going to be in good shape. Now, the trouble that we have is with the outflow and what we have to release on an annual basis. We kind of have to have normal to above average precipitation annually for that, that year's summer to have water availability. It's a, it's a complicated question where you have lots of different agencies fighting for the same water, and we're not great on storing any extra in the state.

>> Uh huh. I realize that WSR covers an area larger than California. I'm asking questions about California just because I, I know less about it, but in California, it looks like most of the beef cattle are down the central valley and in the, the foothills on either side towards the coastal range, and then toward the Sierra Nevada's. How much of, how much of beef cattle production in California is reliant on irrigated pasture, and how much on, you know, rangeland or dry forest types?

>> Yeah. I don't have the exact answer, Tip, but the permanent pasture situation in California, people have been removing pastures just because of the lack of continuous water, and they've put in some other type of crops. If I was going to estimate it, I'm going to say, you know, it's going to be somewhere along the lines of 90% are on non-irrigated pastures, where you're dependent on precipitation for your grass growth.

>> Yep.

>> There's just too many other commodities that have came in, that have kind of taken the, the pasture ground away.

>> Yeah, that have higher per acre revenues.

>> Exactly.

>> Profit margins on irrigated ground, yeah.

>> Exactly. What we're seeing is a lot of trees have gone up in the state, just because when, when the water source is lower, and you're having to pay an additional cost for that water, the trees were the better option. Now, that dynamic has kind of changed this last two year with, with the price of almonds, walnuts, pistachios, but for the previous decade before that, a lot of, a lot of ground went that way.

>> Okay. Do you happen to know off-hand how many beef cows there are in the most recent ag census for California? What's the beef cattle inventory?

>> Well, I'd have to look that up. I apologize. I [inaudible] per head.

>> Oh no. Yeah. It's quite a few. It's a lot more than, Washington State actually has roughly equal amounts of beef cattle and dairy cattle, and that's part of where my question was going to go. Is it roughly an equal split in California as well?

>> No, I think the beef cattle now would be well ahead of the dairies. We've seen a lot of dairies leave the state, and it's a, it's, it's a sad dynamic, and a lot of that is, you know, state regulations and what not, so the dairy industry has been, has, has suffered.

>> Yeah. I actually don't know that much about pasture, range, and forage insurance, other than what I've read, you know, briefly in preparation for this interview, but the idea of insuring, insuring against rainfall seems like it would be a, a difficult proposition. So this is one of the federally subsidized risk management products available or provided sort of through USDA Risk Management Agency. Can you describe a little bit of, of what the program is and, and how it works?

>> Absolutely. So, Tip, with the pasture, rangeland, and forage program, commonly referred to as PRF, what you're doing is you're insuring two-month, what we call intervals, up to their historical average rainfall amounts. And that rainfall data is collected by the NOAA Weather Service. So it isn't the rain that you get on your location, it's an area-based policy. And that area is typically a 12 by 17-mile grid, and within that grid, hopefully there's a NOAA weather station or at least one. Most grids in California have more than one that is collecting the daily precipitation data, and that number is recorded on a daily basis to use as your 60-day average. So each two months is its own mini insurance window. It doesn't, a lot of times people have the misconception that PRF is drought insurance. That is absolutely not accurate, because each interval has its own average and its own, it's its own insurance policy. So, like in California in 2023, as we speak, January and February is, is not going to pay any claims. But that doesn't mean that April-May is affected, because there's no, there's no carryover for the extra rainfall. You just start again at zero. So what we try to do is much coverage in the intervals that have, there's a couple of moving parts, but in theory, you want to coverage in the intervals that are most important for your grass growth, and within the state of California, depending on where you're at, those interval options that are available change at the bottom of the state. If we're in, say, Brawley, you're going to have January, February, February-March, and then November-December that you can have protection in, that you can pick from. If I'm up in, say, Alturas, in Modoc County, I have the whole year available. So we have such a, the state is so diverse in our weather patterns, the intervals that are available change county by county, but it's still the same principle. You would like to insure your intervals that are most important to your grass growth, and then what we also do is we look at the frequency of a claim to know which intervals have the highest opportunity of, of actually capturing a loss. But, with that being said, pasture, rangeland, and forage is a program that is available to every rancher. You don't have to do all of your acres, and there's different coverage levels that have different subsidy amounts available as well. So if I choose to insure 70% of my average rainfall in that two-month interval, then the USDA has a subsidy of 59%, meaning the rancher can receive 100% of the claim activity, or the benefit of PRF, and only be paying 41% of the total premium. If I go, and that's the lowest amount, the 70. Now if I go clear up to the highest, at 90, which we don't write a lot of 90, usually there's a better option, but if you wrote it at the 90%, covering 90% of your historical precipitation, then the subsidy decreases to 51%, meaning that the rancher is now responsible for the 49% of the total premium.

>> Huh. Yeah, that's interesting.

>> And it's all based off of these NOAA weather stations, so when I sit down with a potential customer, the first thing we do is we map out your ground. I need to see what grids the ground lies in, because each grid has its own history of how PRF would have performed. And so typically when I'm sitting across from a, a potential customer, we pull up 20 years' worth of data, we show the, the frequency of claims, what general has generated the highest claims, and then we kind of work our way backwards to come up with a budget that fits the, the, the rancher, that operation, just because of the fact that it's a per-acre basis. You don't have to do all of your acres. We actually, at WSR, encourage customers to, to take us, take us for a spin first, and then we can always add to the policy if it's beneficial to the rancher. Our agents come from livestock backgrounds, every one of them that works with this product, so we kind of understand how, you know, the ranching industry as a whole, a lot of years there's not a lot of profit margin there, and our goal is to always do what's best for the customer. I, I, I kind of feel like, by starting with a budget, we're safe that way, knowing that, hey, if it's a wet year, that you're going to be able to pay the premium, either based off of your, your highest stocking capacity or your, your, your weaning weights, or your yearling gains being [inaudible].

>> Uh huh.

>> That's how we, that's how we can offset the cost.

>> Uh huh. How does it work on, on leased ground? Yeah, most, at least around here, most ranchers are running on a variety of properties that, that aren't necessarily deeded property to them. You know, lease to another private owner, or state ground, or federal ground. How does it work on, on land that you've got a permit or a lease on?

>> That's a good question, Tip. With PRF, there is no difference between your owned, your deeded ground, and your leased ground, whether that's a lease that you have with your neighbor or BLM, Forest Service, state lands. The rates are all the same. And it.

>> You just have to verify that you've got the lease.

>> Correct. If we, once we get in an audit situation, I'll need documentation showing that you have the lease for the acres that we have insured, and that's kind of the only requirement for the actual ground itself. The other thing you have to do is you have to be the person owning the livestock or having an insurable interest in the livestock to participate. So if I'm an absentee landowner and I lease out the whole ranch, I can't do PRF. I don't have any interest in it, unless there's a few, few minor instances where you could be taking cattle in on the gain, and there's some opportunity there, but for the most part, if you just lease out the ground as a cash rent by the acre, you're not eligible for the product. That goes to your tenant, who now how the insurable risk, because he's paying you. So if it doesn't rain, he's the one that suffers the loss.

>> Yeah. Do you find that people sign up for the program depending on what the various weather viewers are saying about what the year's going to look like? Like, right now they're saying that we're, we've got a strengthening El Nino that's going to potentially take over, or do most people just sign up every year, knowing that no matter what the weatherman says, there's a fair bit of volatility, and you can't trust anything?

>> Well, every scenario's a little different, and every customer has a different outlook on that, but as a whole, I will say, the El Nino means, for a lot of the state of California, we're going to be wet. A lot of our customers, we'll advise them, hey, let's short, let's shrink your coverage, and maybe we focus on the back end of the year, if the projections are that we're going to have a really wet winter, because the El Nino, that, when we have that forecast, we, that's fairly accurate, where we know, especially for the southern half of the state, that they're going to receive rainfall, at least typically in the winter months. Now, the funny thing about that, and looking at the 20 years on a software program that we have, we'll just pull up El Nino years. And so we can show you over, actually it goes back 70 years, where we can pull the El Nino data to show which intervals still are drier than normal, and then we just, we just relay that information to the customer, and they kind of make a decision. But typically El Nino years mean people have a little less coverage overall, up and down the state.

>> Uh huh.

>> When I get to the, when I get to the, the top of the state, El Nino typically isn't a good thing. So as I'm approaching the Oregon border, they're, they're less likely to receive the rainfall that, say, the San Francisco bay area will on an El Nino year.

>> Uh huh. Yet in terms of the signup period, you said you want to insure intervals that are most important for grass growth. Like in the Pacific Northwest and probably some of the areas on the other side of the Coastal Range in California, you know, we, for cool season grasses, we're dependent on April and May precipitation, which usually isn't much. If, if I wanted to insure, you know, April 1 to May 31st, is it too late to sign up for that?

>> Oh, yeah, no, Tip, and, because it's an annual-based policy, that's a very good question, and that does pop up a lot. We have, our, our sales season typically begins with the next year's rates on September 1st. So if I'm looking at a 2024 policy, because it's an annual policy, and we're too late for this year, rates come out the first part of September for the following year. We have to have applications signed by December 1st. So that's our sale season. It's pretty short. It's 90 days.

>> Got it.

>> And, and that covers the entire 12 months of the following year.

>> Okay. No, that makes sense. So now's a good time for people to be considering signing up for 2024, because they've got a few months to think about it and they can start signing up in September?

>> Absolutely. Yeah, we're doing meetings right now with customers that are interested, just to show what the product looks like. The first part of September, when we have rates, then we circle back and we can talk about what the premium could look like in coming up with a, with a plan for the policy before that December 1st deadline.

>> Right. A couple more questions, can you describe a scenario in which PRF would not pay anything out? Say I'm a, a rancher in, you know, central valley California, and I'm interested in, you know, whatever would be the, the most important window for growth in that part of the world. What, what kind of circumstances would result in me paying a premium but, but not receiving any payment back, and then vice versa, you know, what does the scenario look like in which PRF does pay?

>> Well, for WSR and our customers, 95% of our policies are wrote at that 85% coverage level. So that's insuring 85% of your historical rainfall, and that rainfall began, NOAA started collecting that data over 70 years ago. So one or two really dry years or really wet years doesn't change your historical amount much at all, just because you're just adding another year onto that, but in, in this type of setting, where the PRF wouldn't pay, it would be us selecting an interval like January and February and receiving 85% or more of your average precipitation. This year, for most of California, this January and February interval that we just finished, it looks like the estimated rainfall for the, for the state will be somewhere along the lines of 130%, so we're not going to pay any indemnities. The full premium is owed for that interval. Now, if I have January and February, and let's say I'm only in one grid, my next option to select insurance would be March and April. Now, March looks like it's well above normal for the most of the state as far as precipitation, but we haven't started April yet. If April comes in, and let's say it's average, then that, we're not going to pay a claim for most of the state in that interval either. And after that, if I'm in the central part, that might be my last interval to, until the Fall. So coverage could start back for a lot of the state and the central part, in September-October. So if September and October are 85% or higher, you're going to have a full bill. So what we're looking at is each interval as its standalone insurance policy, and if every interval that we select to place coverage in comes in above 85% or at 85% or higher, then there's no, no credit to your policy. You would be looking at the full premium amount, which, you know, we, we look at 70 years' worth of history from NOAA. We try to come up with a plan, but you know, the weather's an independent variable. So as an agency, when we go see a customer or potential customer, we talk about, hey, this, this is a real-life scenario where you could have the full premium amount based off of the intervals that you select coming in at 85% of your historical average or above. This is the maximum premium that could be owed. Because there is no penalty for going above the average, so when, when we're, when we're in discussions on if a person wants to participate in PRF, we know the worst-case scenario, what the bill would look like, the, the total amount.

>> Uh huh.

>> Our, our thought process is, we want to come up with something, if that's the scenario where you're looking at the full premium, I can sit across from you and feel very comfortable knowing that we have multiple intervals selected. We have our coverage in place to benefit the rancher, whichever they choose, and if you have to pay a premium, you, in theory you'd better have a really good grass year. And, you know, the, the extra grass that you have to either, either increase your stocking capacity or increase your rate of gains offsets the bill.

>> Right. Right. No, that's helpful. If you were trying to, as you likely know, a lot of times livestock producers are not real excited about participating in federally subsidized programs, and this is an interesting hybrid, where it looks a bit like an insurance product, but, but the cost of the insurance is subsidized through the federal government, because, I presume because there's, federal government has an interest in, in protecting food producers. How, how would you say you have seen both PRF and LRP received? It appears to me, you know, through the, through the RMA website, you can see some of the historical data in terms of enrollment numbers, both the individual producers that have been enrolled, you know, by state, as well as the number of head enrolled, and you can kind of, I've compared some of that in terms of head enrolled versus, you know, the state's beef cut inventory, and it's still relatively low in a lot of places. How would you say the reception has been to some of these products? You know, with a clientele that I would say has been more skeptical of things like subsidized insurance?

>> Yeah, and, and it is a different, it is a different industry, so with my background, my family, we've farmed and ranched. You know, farmers have bene participating in crop insurance since the 80s, and most farmers don't operate without it. Now, the ranching industry, up until PRF, there really wasn't a product. I mean, you could go to FSA and sign up for NAP, and depending on where you're at and your county board, you know, NAP usually didn't trigger, so a lot of, a lot of rancher were turned of by it. So it has been a slow and steady, gradual climb, I would say. I begin selling, selling PRF in 2013. My first policy years that went into effect were that 2014 year, and at that time, it did take a lot of persuasion. I will say, within the last 10 years, that the environment's changed, and more people now know about the product and how it works. If you do not want to participate in anything that's subsidized, that is totally understandable, and I get that quite a bit still. Like hey, we're, we stay out of anything that's USDA-involved, and that's, that's the rancher's own prerogative. I will say that, you know, with any crop insurance that's available, you're partnering that with, with your, with your food bill, so it goes with the nutrition program, so they, they go hand in hand. The USDA is concerned about food scarcity, and this is just a way to ensure that, you know, the ranching industry stays viable for future generations, is kind of how I look at it. You know, ranchers pay their taxes just like anybody else, and, and this is just a, another offshoot of what's available with that tax, with that, with that tax, with those tax dollars.

>> Yeah. A couple more questions. You, you said that PRF is not drought insurance. What, what does drought insurance look like, just to kind of draw the contrast and see how they function differently?

>> Well typically, Tip, when we're speaking on drought insurance, that would be on an annual basis for the whole year. So when we speak about drought, that's usually based off of your typical, your water year, whatever.

>> Yep.

>> When it starts in California, you know, we're going to, where I'm at, we're going to run, kind of October through May, and then we don't expect much. But with PRF, and these two-month intervals, it doesn't have to be a drought to trigger a loss. And that's a real.

>> Right.

>> That's a real-life scenario for a rancher. Because I can have all the rain I want in January and February. I might get, like this year, you know, we got 20 inches, but if it doesn't rain in April-May, and I don't have that forage available, I'm still suffering.

>> Uh huh.

>> So PRF is, is an avenue where, that you can have coverage in that timeframe to make up for any losses you incur. So that, that's kind of the difference. Drought is typically your, your annual rainfall amount. The drought programs, like if I'm talking about NAP at FSA, or LFP, you know, they're looking at just the drought monitor, things of the sort, where PRF, you just have these 60-day windows, and whatever rainfall amounts or snowfall that NOAA captures in their approved weather stations, that's what they're basing it on.

>> No, that makes sense. It's quite a bit more relevant to forage production. And, and yeah, in, in much of the west, especially the northwest, we get most of our precipitation as snow, and if you've got 3 feet of snow on January 1 but no rain after March 15th, by the time you get to the middle of May, that 3 feet of snow isn't making much difference.

>> Exactly. And, and for this program, they measure everything as, with the PRF, they measure everything in the amount of rainfall precipitation. So the equivalent would be 8 inches of snow equates to 1 inch of rain.

>> Uh huh. Well, if, last question here. If, if, if somebody is interested in working with a, a rep to look at what PRF would look like for their specific grazing areas, what's the best way to get a hold of somebody?

>> Well, Tip, I appreciate that. WSR has a team of PRF agents now. We're up to 21 of us, and we are spread out throughout the United States. The easiest way would be going to wsrins.com, and that's our homepage for the, for the agency, and then there's a farm and ranch tab. If you click on that, you have the option to go to the inquiry page and shoot over an inquiry, and the agent that's in your regional area will be reaching out to you, and we're doing that as we speak. I am also available at Matt G at wsrins.com, if somebody wants to email me, and I can get them lined up with their, with their regional agent. Those are the, those are the two best ways to reach out.

>> Yeah, that sounds good. We will, I will put those links in the show notes. And maybe just a teaser here for a future episode, one of the discussions that you and I had a while back was talking about the possibility of trying to let people know that there are careers related to agriculture that aren't necessarily working for a pharmaceutical rep, and I think we should talk about that sometime soon. But do you guys have, do you have any thoughts on that right now in terms of young people that are looking for a career in agriculture?

>> Yeah, Tip, absolutely.

>> Probably insurance wouldn't be the first place they would think of.

>> They might not think of crop insurance, but as a career, I've found it very rewarding, and the USDA is always coming up with these, what they call pilot programs, so the crop insurance that my father used and my grandfather used, that world is changing dramatically. I'm going to use a product that's been around for three or four years as an example. Besides PRF, it's whole farm revenue, where you can actually insure the revenue of an operation, and it's also subsidized based on the amount of commodities, but there's things like that instead of doing a single peril, that you can have an umbrella type policy for the operation, and there's these, and younger agents that are coming in, we're, at WSR, we're always trying to find somebody coming out of school that is interested in risk management, just because they're up to date with technology, usually, you know, they're versed in the newer products. It's not like having to reinvent the wheel, so I would say, for a college-age person looking for a career, that crop insurance is a great avenue. I don't think it's going anywhere. Most of the nation is now participating in some sort, and their regional products available, and there's always going to be a need for somebody to go service those, those, those farmers and ranchers.

>> Excellent. Yeah, it, you know, there are, most of the time when a ranch goes under, it's because of financial problems, and, and so young people are, are typically looking for something, looking for a career where they feel like they can be useful and enjoy the work, and I have thoroughly enjoyed, you know, working directly with, with ranchers all over the west, but especially in Washington State, and helping people, you know, be able to weather both the financial and, and meteorological storm, so to speak, is, is pretty important work, and it can be the thing that makes or breaks a ranch, and we definitely need to hang on to the ones we've got.

>> Absolutely. You know, and, and industry as a whole, you can see the amount of just exposure to risk increasing year after year. It costs so much to be in the ranching industry, but there are these products that are available now to help protect you. You know, in my mind, your two biggest, your two biggest risks are going to be the weather, and it's going to be, you know, guaranteeing your price. So between the, the pasture, rangeland, and forage, which helps offset the weather losses, and the LRPs, where you can insure against the CME Final Index, there are options where a rancher just doesn't have to be out there, kind of out in the wind, not having any type of a safety net. And there's other products that are, that are coming up, that we're excited about, that I think will also be beneficial to the ranching industry as a whole.

>> Great. Well, I look forward to visiting about that. Matt, thank you for what you do, and thank you for your time, and we'll be, we'll be putting some information on how folks can get a hold of somebody who can help them think through how this might work for them. Thanks again.

>> Tip, I appreciate the opportunity, and it was good to visit with you today.

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Transcript coming soon . . .

 

>> Welcome to the Art of Range, a podcast focused on rangelands 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. Welcome back to the Art of Range. We're going to talk some more about livestock risk protection insurance with Jack Field. Jack is a rep with CKP Insurance and a licensed dealer for the LRP products. And I'm also joined again today by Clay Worden who was a financial adviser to ag producers working nationwide. My job here is to ask the dumb questions. And I've asked Clay to ask some smart questions. Jack and Clay, welcome back.

>> Thank you for having us, Tip.

>> Appreciate it, Tip. Look forward to being part of it.

>> While we're stillin this series on ranch financial health and in the role of some of these insurance products as a risk management measure then in fact, the LRP insurance which has been around for a while is offered through the USDA Risk Management Agency. And on their information, they call it single peril insurance, which I take to mean it's meant to do one thing which is providing protection against a price crash, in this case in feeder cattle. And I realized that we've talked about LRP a few times on here. And so, this won't be new for many people but there are an awful lot of people who are just becoming aware of LRP maybe because their neighbor had an endorsement on, you know, whatever, 100 head and it worked for them. And it's always -- anytime is a good time to review fundamentals. So, we're going to jump in and just kind of cover some of the -- I'd like to review some of the history of LRP and then we're going to spend most of our time discussing how it works. Jack, it was actually Lindell Hobbs [assumed spelling] a couple of days ago who was visiting with me and this was a revelation to him that there was a product like this. I think he knew somebody here in the valley who had used LRP and it worked and it got his attention. So, that's a pretty significant thing if Lindell is paying attention.

>> Yes, sir. The beauty of the Livestock Risk Protection program, Tip, is that it provides producers of all sizes the same access to high-quality risk protection. And when we talk about risk protection, the single peril that a producer, i.e. the insured would be insuring against is a reduction in price. So, we are purchasing and basically placing a price floor under your feeder calves. To back up a little bit, the Livestock Risk Protection program offers similar protection as to what a producer might see using a put or an option. Only, we don't have to deal with any of the issues like margin calls when we start to dabble in the CME. The Livestock Risk Protection program, each day, USDA will send out a variety of different offerings. And each offering, the shortest endorsement that a producer can purchase when you take out coverage, you are purchasing a specific coverage endorsement, an SCE. I guess to backup first, the very first step any producer would want to do if he or she is interested or an entity is interested in covering and protecting their cattle, they would need to meet with a licensed crop insurance agent and an individual that's licensed to sell livestock policies and fill out an application. Filling out an application does not obligate the individual or the entity to purchase anything. It simply gets them set up and established within the carrier in USDA system. It generally takes one to two days from the time an application is filled out. And it's then keyed in and submitted to the USDA for the tax identification numbers to be validated and cleared. Once that happens, the producer is then eligible to purchase coverage. When we -- so we get through step one and we'll use you as the example, Tip. If you and I will work, you would come to me and said, "Jack, I'm interested in LRP. What do we need to do?" You'd fill out that application. And once I get word back from the carrier that you are cleared and good to go, I'd let you know, "OK, Tip, anytime from now forward, if you see offerings that you're interested in, we can move forward and get you some coverage. Each day --

>> Now, I told you, I'm going to ask some dumb questions.

>> Absolutely.

>> Is the carrier RMA? Or is the carrier your CKP Insurance?

>> The CKP Insurance is an agency. We work -- Hudson Crop is the carrier that we work with. They underwrite Livestock Risk Protection, dairy margin, livestock gross margin products. So, we work with an approved vendor, Hudson Crop Insurance. And there are many other entities out there that are approved from USDA to underwrite these products.CKP Insurance and myself as an agent, we're essentially just working, offering the product to you, the producer on behalf of the carrier.

>> OK.

>> Then the carriers are approved through the USDA Risk Management Agency. So, that's kind of how that works. This is part of the Federal Crop Insurance Program. And as a result, there is a premium subsidy. So, basically what that means, there is up to, depending upon the coverage level that a producer selects, a 35% premium subsidy, i.e. rebate that comes out of the Farm Bill.So, depending upon the coverage level that a producer would select, you may realize up to a 35% reduction in the total premium cost based on that Farm Bill match.

>> Got it. So in big picture terms, the government has determined that reducing risk and protecting agricultural finances is a public good that the federal government's willing to spend money on. And so there's -- that's what's providing the subsidy.

>> You are correct, if this is part of the Federal Crop Insurance Program.

>> OK, got it.

>> So --

>> Hey, Jack, maybe I ask you as you step back a little bit on this program. You know, producers have a lot of control over their cost. They have control over, you know, what type of cattle they're going to raise. But what we don't have a lot of cost or a lot of control over is that price. And so at the end of the day, we take this commodity price for whatever it raised. We don't get to take our cost plus a margin and get paid that. So, maybe explain how this kind of protects the farmer in that downside risk.

>> Excellent question, Clay. So, for example, with LRP, the shortest endorsement that a producer can purchase is 13 weeks. They then increase in four week increments. As we look right now that the important thing when I talk with a producer, we want to figure out in time when they would be marketing their product. So, when you're going to be winging or chipping calves off the cow selling yearlings, whenever you're going to be subject to the market and i.e., entering in selling those cattle, we then want to time your endorsement to end as close to that sale date as possible. So, what -- the Livestock Risk Protection program gives you the opportunity.Based off of the Chicago Mercantile future, or excuse me, based off of the CME and the futures offerings that come, you then have the ability to buy insurance on an estimated expected value as to what your cattle will be worth at that date in the future when you're going to market them. So, depending upon what -- as I'm looking right now, for example, you might have some fall covers and you're going to be looking at marketing a 550-pound calf in early to late March. An individual in that case, we would look at a 13-week endorsement. It's set to end on the 16th of March. The expected end value is $2.0306. Then there is a sliding scale of coverage levels. The lowest coverage level that a producer could purchase would be 89.88% which would give a coverage price the insured floor of 182.51. On the other side of the spectrum, the highest coverage a producer could take out would be 99.63%. And that would cover them at 202.31. So, depending upon where a producer felt most comfortable in their insurance, they then have the ability to select a coverage price, i.e. a strike price. So, for example, if you selected that highest coverage of 202.31, what the program works off of, we use the futures to base that expected value. And it is then settled back against the actual cash market through the CME's feeder index. The feeder index is a seven-day rolling average where they take the value of 7 to 900-pound steers, number ones and number twos, at approximately I think there's close to 30 markets that report into the index over the course of the week to come up with a current rolling cash value on what we would consider a yearling steer. The most current feeder index as of the 14th of December and it's -- the index generally will lag one to two days behind the current day just because you've got to get that data gathered in. The most current index on file is 179.50. So, based upon all of the action and the cash transactions occurring through the center portion of the country kind of in in the heart of cattle country, you come up with a seven-day rolling index value of 179.50. So --

>> Per hundred weight.

>> Per hundredweight. Yes, sir.

>> I told you, I'm asking dumb questions.

>> There is no such thing as a dumb question. So, the important part now when we start to talk about LRP, so that feeder index value of 179.50 is that is the basis for settlement. Now, when we talk about LRP, well, you --

>> For the endorsement that ended today.

>> Yes, sir. Yes, sir. So, that would actually be your settlement if you had an ending value on the 14th of December. So, if you had one that ended today on the 16th, we likely won't see that until the 19th or the 20th. Just because of the lag, we're Friday today, got a weekend, it generally takes a day or two for those to pop in.

>> Got it. So, you'd use the reported value for that day when it eventually gets reported.

>> Yes, sir. Correct.

>> OK.

>> So Jack --

>> Yes, Clay?

>> -- I know we're talking about different periods but compare that 179.50 to the 202.31. So,I bought a program --

>> I was just about to do that.

>> OK, excellent.

>> OK. So, what -- and what Clay's asking about is let's tie together where I was talking about we've got two different weight classes of cattle. That LRP on the feeder side of things functions with. We've got weight class one which is up to a 599-pound animal, either a steer or a heifer. And you as the insured would get to select your target weight in 100 weights. So, if you wean or market a 550-pound steer, we would insure 5.5 hundredweight. If you have a-- if you wanted to have the biggest calf, if you weaned a 600-pound calf, you could insure a 599 pound or 5.99 hundredweight. The CME feeder index today, that 179.50 would actually be increased to 197.45 to get the value of the lighter calves. And that adjustment, we multiplied the feeder index by 110% to get the value of -- the increased value of the lighter calves. So, weight class one steers, that's up to a 599-pound calf, you take the daily Chicago Mercantile feeder index and multiply that by 1.1 to get your actual value.Now, when we get into weight class two, that 600 to 1000 pounds, you know, most people are going to consider those yearlings and granted those might be a little bit bigger in the actual weight range there.But so your traditional yearling cattle would just be the straight index on steers. On heifer calves, weight class one heifers use the straight feeder index as their settlement value. So, a heifer calf would have a value -- a 550-pound heifer calf would be valued at 179.50. Now, if we were to look at say an 850-pound heifer, we would then take 10% off of the CME feeder index. So, there's a 10% reduction to address the generally reduced value of heifers versus steers. So, an 800-pound heifer based on that 179.50 feeder index would have an end value of 161.55. So, there's a little difference back and forth between weight class one steers, heifers and then weight class two steers and heifers. But USDA and the RMA have done that to try to best mirror what the marketplace and what we as producers encounter when we market these cattle. It's not perfect. And I work with a lot of -- 99% of the customers that I work with are here in the Pacific Northwest. And I hear from many people, "Well, how does this -- you know, that index is not accurate because they, you know, they're $10 or $15 ahead of us in the marketplace, how is this an accurate tool?" What I try to explain to people is even though their market may be different than ours, this is a constant. So, we're not using a West Coast value and a Midwest value on this.The program is set up where we have uniform coverage offerings and the settlement is based off of that CME cash index value. So, we're trying to use established constants and well-known market futures and features to be able to base the expected value and then have that cash settlement tool. The biggest question that I run into and it took me a little while to be able to really wrap my mind around it is we -- for example, if you had an endorsement that ended with a $2 expected value. And the producer sells their calves at their local market or to a feedlot or however and they ended up selling those cattle for 190. Many times, they think, "Well, heck, I had a $10 loss." But if the CME feeder index comes in and for example, this situation where we had the 179.50, the adjustment if it's a weight class one steer would be a 197.45. So, we're only talking about $2.55 worth of loss, not $10. And being able to explain to producers because in many cases, a $2.55 cent loss might not fully cover the premium. As we look right now at the highest premium level, that 99.63% today, that's $3.51 per hundredweight. So, there are situations, I've had it happen on my own endorsements where there is a loss but the loss may not exceed the total insured value. So essentially, what that's telling us and it's generally reflective in the market is that we're seeing that rising tide from cash is going to also be recognized by the individual when they sell their cattle. So, in the event -- and this is one of the tough things because oftentimes when I talk to customers, they feel like unless they get a check back from LRP it didn't work which that isn't always necessary. But everybody I guess, it's nice when you purchase something and it pays back. But if LRP is paying you, that means we've had some -- in a lot of cases, a fairly significant market correction from where you were insured to where it's settled. And that we can see those market swings happen at the drop of a hat. One of the challenges and at times, I have seen this a little bit where there might -- we might not even have anything in the market but it just depends upon when an endorsement might end.An endorsement that ends very close to the holidays in some cases might have -- we might see a dip in the index. There's opportunities in times where it may not be perfect I guess is what I'm trying to explain that we might have some natural pullback or slowdown in the market that does not fully work its way through. Meaning if we have a reduction or the market slows due to a holiday, if you then have an endorsement end on or very nearby a holiday, you might miss some of those changes in the market, if that makes sense. Are you tracking me, Tip?

>> So, Jack, if we --

>> Yeah.

>> Yeah.If we back up to the, you know, the process that a rancher needs to think about on this insurance. So, I delivered cattle on the 15th yesterday.

>>OK.

>> When should have I put insurance on if I wanted to get in this program?

>> Well, the shortest window would have been 13 weeks ago. So, if you're thinking -- and what I recommend to all of my customers is that if you're a cow-calf producer, once you start calving, I've got a lot of people that will then they're starting to get cattle that hit the ground and then they really start to look. If you're going to be buying stockers and putting them together, you have to have -- you have to own the cattle in order to insure them. So, we can't go out and speculate on this. At the end of every endorsement, if there is a loss, the RMA requires proof of livestock. They've updated the claim forms to where it used to be.You'd get a claim form.You sign your name. And you would submit a bill of sales at times or a brand inspection.They process the receipt back to your payment and no questions were asked. Now, RMA has stepped things up a little bit. And they've got -- at the end of the claim, there'll be three boxes that the producer will need to look at.One that you sold all of your livestock or that you sold part of the livestock and retain some and you have to list the number that you retained. Or that all of your livestock were of a marketable weight but you did not sell any.You then have to provide proof of livestock that can be done through the easiest thing is a bill of sale or the brand inspection if you're in a brand state. It might be a herd inventory. If you utilize a herd inventory, it would have to be signed off by a third party like a veterinarian or a nutritionist. They just want to make sure that the cattle that are being insured, number one, exist and that you have ownership of them. Because again LRP is not a speculatory tool, it's a tool for producers just like you and me, Clay, that have cattle and are trying to protect ourselves from that downside risk in the market.

>> So, if 13 weeks is the shortest period, what would be the longest period?

>> So, the longest period, a lot of times we'll see it go out 47 weeks. I've seen them go close to a year.The longest -- the amount of length depends on the amount of market volatility and the volume. So, I would say the 13, 17, 21, 26 weeks, for the most part, those are just about there every time. I have seen in the last couple years, there will be times when there -- if there is extreme volatility in the market where there may be no offerings or there might be only just a very scant amount. So, if we're in a fairly stable market with pretty good volume, I would say that for the most part, you could probably plan on seeing something go out 43 weeks and maybe 47. So, it does give a producer quite a bit of time to look out -- right now, you could be looking out as far as November 9th on weight class one steers and both steers and heifers and weight class one and two. And the nice thing as we look at that, just to look out on weight class one, if we went out 47 weeks and you wanted to insure an animal at its highest value, you would have a coverage price of 224.27. That would have a total cost of $71 per head.That 35% premium subsidy comes in. And $25 would come off in the form of Farm Bill premium subsidies leaving your total per head premium of $46. That works out to $7.68 per hundredweight. So, as you start to look at that, that's -- you are talking about, you know, a fairly substantial premium. However, if you do a little bit of math and you're thinking about how that works back in your budget, you're effectively talking about a CME index value of 216.59 or less and you are going to be netting proceeds back to you. 216.59 would be your breakeven if you're per hundredweightto back that $7.68 off of your 224.27 coverage price.

>> So, let's just talk about that a minute just kind of in the layman's terms.

>> Yes.

>> So, I've decided I want to do this program.Just like you said, I'm basically locking in or guaranteeing myself 224.27.

>> Yes.

>> And in order to receive that full amount and cover my premium, the actual CME, not the sales price that I have for my cattle but the actual CME in that --

>> Index.

>> -- is going to be November.Index. If it was at or below 216.59, I would in essence have gotten 224 for those calves sold?

>> Yes, sir. Yes, sir. So, to back up, any index value less than -- so, if you're locked in at 224.27, ifyou have an index value of 224.26, there would be a one penny indemnity per hundredweight. So, any index value less than your coverage price, you begin to receive payment.But it would take an index value of 216.59 to fully cover that $7.68 cent per hundredweight premium.

>> Sure. So, let's follow this example for a little bit. And so, from rancher's economic results, let's say he actually sells his cattle for 220.

>> Yup.

>> But the CME at that time, let's just say it's 219. So, you'd have a $5, you know, shortfall from what your contract was. So, if I'm understanding you right, you would get back a portion of that $46 you paid in.

>> Yes, sir, you are correct. So, if we're 227 or 224.27 and the index value ended up at a flat 219, you would see a $5.27 cent loss. Now, we would need to then take a look at your total premium. And at that highest level, your premium was $7.68. So, you would still have and if we're talking about a 599-pound calf, you would still have a premium due of $14.44per head.

>> OK. So, if we at the marketplace got 220 is what we were just estimating. So, it'd be less than $14. It would be the same as selling those calves for 206 in that example.

>> Let's see. So you -- yes, correct.

>> Excellent. So, as you can tell I'm a bean counter and the math is kind of hard to follow.

>> It is.

>> So, how do we helpthese ranchers look at these programs and make an educated decision on whether or not it's the right time to enter in, the right amount of head to enter in? And I think I would say this program's been a little bit underused and I think that's because it's misunderstood or under-understood.

>> I think you are absolutely correct. WhatI have tried to do to better -- to try to help better tie things together, every day I'll send out a blanket email to everyone that has expressed interest in LRP to me over the years. I put together an offering of what a 599-pound steer and heifer would have, an 800-pound heifer. And then I've had I think a 750 and a 925-pound steer. I also provide the most current CMA feeder index. I've talked to everybody. I feel like they understand and know the settlement mechanism. So, if they've got the index value and they see the offerings, they're able to do a little bit of cowboy math and say, "Well, boy, if I have one that ended today," or, "This is where we are, this is where we're expected to be." And a lot of times, I think peopleare somewhat apprehensive because they're looking at something that they've only heard terrible things about what happens to people when they get upside down on margin calls and challenges associated with the futures. The nice thing about this is we get the best of both worlds.We have the benefit of the futures markets and all of those outside fund dollars that are helping to increase the value of those contracts as our estimate for a settlement as to what those values will be in the future. And then we're using the true cash, the people that are actually sitting in the bleachers, buying those cattle, we have the actual cash real dollars for the settlement. So, we've given producers the ability to use what might be a slightly elevated tool for establishing the value. And we're using the real greenback dollars that are spent on those cattle to settle them. As long as producers will look and understand that we have the futures as our tool for establishing an end value and the index is the settlement. Once they understand that even though I'm selling my cattle, though it's not directly related to this, but the argument definitely could be made. I'm looking at the index on the 14th of December. If you had a producer that sold cattle in Billings, Montana that also had an LRP endorsement, those billings, billings was one of the markets that reported. So, there are some markets that are somewhat close to us on the West Coast. But I think it's important that producers think about what's -- you know, if you see an offering and you're looking out thinking about the future that you're going to market your cattle in October or November for example. If $2 and I'm looking here in October $2.24 -- 223.96 sounds appealing, you might dabble a little bit. The nice thing about it is you can do a single head endorsement. I've purchased endorsements on my own calves as small as five head. You can -- we can go up to 6000 head on a single endorsement. So, this is -- with the rules and the opportunities, this is a tool that can fit the smallest and the largest producer and provide them an equal amount of coverage and protection.

>> And when you talk about the end date sales date, let's assume we have a weather event in two weeks or let's say I'm a month late in delivering, again which would be an exaggerated example. But does that create a problem for this program?

>> No. So, there is no requirement that the producer sell their livestock by the end date of their endorsement. USDA has recently made a change, it wasn't this year, it was last year where you could market your cattle up to 60 days before the end of the endorsement and still retain your coverage. And that was done to try to help and address a weather-related issue, whether it's drought or fire or flood. But to help producers that might have something covered, if you have some type of, you name it, phenomenon that comes through that all of a sudden we've had to sell the cattle because we're up against any one of these issues, you would still be able to retain your coverage.You wouldn't be able to have settlement until the end of your endorsement but if something happened and you needed to market cattle before the end of it, you still could. And you'd want to kind of count and make sure you don't do it 61 days because if you sold 61 days, you would void your policy and have to pay your premium. But as long as you're within 60 days of the end date, you can market those cattle or you could retain them. And at the end of the endorsement, if there is a loss, you would check that third box that you've retained all cattle that they were of marketable weight. And you would need to provide some type of proof of livestock. If you were a cow-calf producer that might be moving back and forth to pastures, if you had a brand inspection slip, if you had some type of inventory sheet. I've worked with some producers, we used -- we're able to use some Redbooks. I have other producers that work with consulting veterinarians and their vets ran a herd inventory. I had another producer that we took the Redbooks and then his vet signed off on it. She had just been out doing some palpation work.They're very flexible. But we just need to make sure that we can validate that in the event that you don't market the cattle which there's nothing wrong with that, but in the event that you don't market the cattle, we need to validate that you have the cattle.

>> So, as I'm thinking about this from an economic standpoint, this really looks like it's a program that mitigates the significant downside. So, let's say you do have a flood or a drought. And we saw a lot of that this year. And you have to liquidate or sell.Likely the price is depressed because of that situation. And you could in fact get an indemnity on this program. Conversely, it's not limiting the upside. If within 60 days of the contract date, the price spikes or goes through the roof, I could still sell and capture that upside if I so chose.

>> You're absolutely correct. Where I really saw this and my eyes were blasted wide open was the middle of March this spring. So, if we roll back nine months, almost nine months close to the day, I had a customer that had endorsements on weight class two steers and heifers that were set to in right around the 14th or 15th of March. And leading up to that, we had been talking fairly regularly. And looking in February, the market had been just ticking right up there. And we were -- the conversations we had, it looked like they were going to need to pay their premium meaning the index values had exceeded their coverage price. So, they were prepared,OK, we're going to need to write a premium. And I think the premiums were probably close to $8 or $9,000 between the two endorsements. We get to the end date and Vladimir Putin had invaded Ukraine. The markets went into absolute chaos. And we saw an absolute implosion on those index values, enormous losses on steers and heifers. That individual, they ended up receiving indemnity payments on both steers and heifers. The program works.It's one that I assure you, you can sleep at night with this. You know exactly what it's going to cost you.You can plug this into your budget. You know for a fact I want to have a set dollar of insurance. You can tie that right in there.You can sit down at the kitchen table with the family or with the banker and say, "Here's our operating budget.We've got this much for feed, fuel, pasture labor, rent, expenses.We've got our risk mitigation, you know, our insurance expenses." And however, you know, you break that out, you've got the -- your health insurance, the ranch policies, the auto, the etcetera.You've got your price protection nailed down.You know you can look right down to the dollar how you have it. You've got the flexibility.You producers are not required to purchase the highest level of coverage. There is a lot of flexibility. I've worked with some stocker operators where we might look at this. And for example if we look out in November or October, you pick a date, I've worked with producers where they don't necessarily have to look at that highest level of coverage on a yearling. They might say, "Well, my breakeven is somewhere$7 or $8 behind this."They can generate -- you might save $10 to $14 per head by simply stepping your coverage level back just to protect a breakeven. The important thing to remember when moving back in coverage, yes, it gets cheaper but you also have to see that much more of a market reduction before you would see an indemnity payment. And for a lot of producers, the way they determine if LRP works is if they get a check. And that's one of the challenges that I think we all have is trying to explain that getting a check on LRP doesn't necessarily -- that's not necessarily a good thing. I mean, I'm glad that people have it, that they have the coverage and they receive an indemnity. But even if they have to pay a premium, they're going to -- the rising tide was catch and the market will hopefully offset the premium that they pay.It's really not different I think.

>> And I know it's not a one for one but -- go ahead, Clay.

>> Tip, the important part that I heard that Jack just said was really understanding your cost. You know, as we've talked about in some of those previous podcasts that if a producer really understands their cost structure, this really does give them a tool to potentially use to mitigate some downside, some significant downside risks as we have seen in recent years.

>> So, Clay, for example, what -- the cattle that you just marketed, what weight class were those?

>>550.

>>So, you're in weight class one. So, for example and since you know costs very well, what we need to do, we need to look back here. If we were having this conversation back in July, on the 19th of July for example, the 21-week endorsement would have ended on the 13th of December. And if at that time, Clay, a few would have said, "I'm interested.Let's lock in coverage." At the highest coverage level, you would have been able to cover yourself at 204.46. That would have had a total cost of $53 per head minus a $19 premium subsidy would give you a total cost on a 550-pound steer of $34. That's a $6.18 cent per hundredweight premium. So now, we've got tool 204.46. We were 12/13/22. I'm going to pull up the CME feeder index. And we'll just run a quick scenario of what would have happened if we would have paid premium or not. The CME feeder index on the 13th of December was 179.46. So again, that is for a weight class one, or excuse me, the weight class two steer so we take 179.46. We multiply it by 1.1. We would get an index value of 197.41. We just said that we could have covered those steers at 204.46. We're going to minus our index ending value of 197.41.You would have had a $7.05 cent loss. We have that premium of $6.18 per hundredweight which gives you an 87 cent net loss. So, $4.79 per head to you in your pocket times the number of head that you marketed or insured.

>> Yeah. So, in that case, we would have got a check. Instead of paying a premium, we would have got 4.79 per head.

>> Yes, sir. And you would have had, on your expense side of things, you would have had a total premium expenditure that you get to expense on your -- and depending upon how you and your accountant do it but you would have a $34 per head insurance expense. You're going to be taxed on the $4.79 net payment per head. That's federal crop insurance so you'd get a 10.99 at the end of the year times the number of head.But in that situation, you would havemade money. However, as we're looking at this, Clay, you might have looked at that and said, "I know my cost of production and $34 is a little more than what I want to spend."The 21-week, you could go at the top level of 204.46. The lowest coverage was 184.66. So, 202.26, $2, 197.86, 195.66, 193.46 or 191.26. So any of those, you could have selected coverage. And at the 197 -- so basically from -- the top four offerings, you would have still ended up with a loss that would have--

>> Resulted in indemnity --

>> -- just about covered. Yes.

>> -- to cover your limit.

>>Yeah. And the piece that we want listeners to understand, it really didn't matter what I sold those cattle for.

>> Correct.

>> That's really a moot point in that.

>> Yes.

>>But it does come in to their profit-loss statement because they would have, you know, gross proceeds plus that $4.79. So, I think running through that example was at least helpful for me. I know that was more relevant to me but hopefully, listeners are understanding that by getting together with somebody that understands this program, they can run some what-if scenarios that can help them make a decision.

>>And it's -- the biggest thing that I run into and people ask me is, "Well, when should I do this?" And that's the one where I don't have a crystal ball but in my mind, I look at and watch those index values. And once you see an index value that is at a high enough point where you say, "Well, boy, that would -- I wouldn't mind -- I would take that if I was going to sell my cattle." That's essentially how and where a lot of people, when they finally decide to pull the trigger and take out an endorsement, they look at those expected end values and are basically saying, "Would I sell my cattle for that amount?"

>> Yeah, that's excellent.

>> And when you get to the point in time where if we're looking at December and you said, "Well, yes, I just sold my cattle for 204," then you would want to take out an endorsement.You might look at it and say, "That's $34 a head.The budget is tight." I'd sell them for $2. You could take out coverage for $2.06. You'd have a premium of $26 a head versus $34 a head. So basically, when a producer wants to determine, "Is this the right tool for me," I tried to have them basically look at the coverage price and ask yourself, "Would you sell your cattle for that amount?" And if you're willing to sell your cattle for that amount, then we'll look over to see what that total premium expenditure is. If that number is something that you're comfortable with, then this is the right tool. If those numbers aren't matching, then we can wait. We wait another day and see what the market does. The nice thing is, is once you fill out the application -- I have several customers that have had applications on file for multiple years that have never taken out an endorsement. There's nothing wrong with that at all. There's no obligation to buy anything. Once you get an application approved, it just gives you the ability to do so if you feel like that's the right move for you and your business.

>> So, is it a fair way to make that decision?Using that example, you just had a 204.46. And you indicated that it was about $6.18 premium for each animal.

>> Yup.

>> So, that would tell me that as long as I'm happy selling those calves for 198.28, then this is a no-brainer for me.

>> Correct.

>> But I think it's been very helpful to kind of run through some examples, talk about this program. And, you know, Tip and I have talked off and on, on these programs that are available to the ranching community but just not maybe well understood. And I think you've done a good job of really helping us understand this program.

>>And I've got a-- if people are interested, I use Hudson Crop.They can go to eharvest.hudsoncrop.com /policyext/ lrpestimator. And it willpop up the LRP estimator tool, the same one that I jump into every day to put offerings together for my clients. And you can run any variety of scenarios. You select an effective date. You can look at the most current date or you can go back in time as far back -- it will take you back to the beginning of the reinsurance year which is on the livestock policies, July 1st in 2023. If you wanted to look back to see what it would look like in April or May, you'd want to then look into the 2022 reinsurance year. But producers can go back as far as they would like, select the effective date meaning the date that they would want to see what those values were.They then would select their state.Their commodity would be feeder cattle and then the type meaning if it's going to be a steer calf weighing up to 599 pounds or a heifer calf up to 599, those are going to be weight class one. If it's going to be more of what we might consider a yearling, a 600 to 1,000-pound steer or heifer, they would look at weight class two steers or heifers. And we offer the same product for producers that would like to retain ownership and feed their cattle out with fed cattle.They can protect up to a 1,600-pound animal.That product is settled against the five-area weekly average. So, we've got the same level of coverage and offerings for producers regardless of someone that might have 10 head or 2,500 head. We all have the same --there isn't any benefit to size or scale. Every producer has the exact same coverage and opportunities afforded to all of them regardless of the state they're operating in or their, you know, their operational size. Any of the things that we often when we talk about marketing and our business and some of those different dynamics where we feel like we get somewhat siloed because I'm over here or I do this, I calve in. A lot of that has been leveled. And we've got a very -- LRP has done a good job of creating a level tool and a level field for all producers.

>> Yeah,that's excellent. I think wintertime seems like it'd be a good time when people have these things fresh in their minds to go back and review some of these hypotheticals looking at previous date points to see how it would have worked.

>> Yes.

>> And that was a pretty good starting point for figuring out whether or not you're going to want to use it in the coming year. Because so many of these things are -- yeah, if you -- I pulled up the CME feeder index history over the past year and it definitely moves quite a bit.

>> Yes, yes.There's a lot of movement in the index. And this does the -- this is the best -- I think this is the best tool we have to give producers like Clay and myself or bigger and smaller producers an even field, even access to price to downward price risk in the marketplace. And if -- and there are situations where LRP may not be a value to a producer.Meaning if you have an agreement, if you've already -- if you've contracted your calves already for next year, you don't need to worry about LRP because you don't have any price risk. I've talked to other people that might be in the process of trying to put a contract together that don't know if they are or aren't. I mean, it can work but there very well could be situations where it might not work meaning the other thing is, is if a producer is going to market their cattle less than 13 weeks, you know, within 60 days, they may be marketing their cattle sooner than we would be able to cover them. Meaning if you're not going to hold those cattle up to 60 days within the end of an endorsement, there isn't any benefit. I couldn't honestly say this would be a good tool for you.For example, Clay, if you're going to ship your cattle January 15th, I couldn't honestly tell you, "Well, let's sell you a policy that ends or gives you coverage through the middle of March." That just doesn't work for you.

>> Well, I think that was a really good summary. I'm saying that because I almost understand now that we've talked about this three or four times on the podcast, Jack. So, that might be a good place to leave listeners.

>> I think that's great. And the biggest thing and I think you hit the nail on the head, Tip, is now is a really good time for people to do -- to play what-if, you know.Get the check stub from settlement when you sold your cattle and then jump onto the Hudson Crop estimator and go back, you know, 13, 21, 36 weeks, go back to when you either were buying and putting those yearlings together, go back to calving time and start to run some what-if scenarios. The other really nice thing about this is that you've got such flexibility in head counts that we don't have to do it all today. You could -- you might think, "Well, boy, this looks good but this market, it feels like all the fundamentals and what John's going to talk about as we look to the future, where things are."You know, you look at cattle on feed. We can read all the reports and summaries out there.Now might be a good time to ensure, it might not. That's where everybody's going to have to look at their own numbers and see where they are. But this is a tool that I hope more people will find a way to use or at least be interested in looking into because it can definitely help take out some of the high points and the low points.

>>Excellent. And we will put that estimator link in the show notes. And we'll be doing an episode with John Dlivkum [assumed spelling], market analyst anda little bit later, a testimonial from somebody who's been using LRP and has found it to be a useful risk management tool for them and kind of go through the ins and outs of that. Jack, thank you for your time again today.And, Clay,thanks for asking some smart questions.

>> You got it.

>>Thank you both.

>> Thank you for listening to the Art of Range podcast.You can subscribe to and review the show through iTunes or your favorite podcasting app so you never miss an episode. Just search for Art of Range. If you have questions or comments for us to address in a future episode, send an email to show@artofrange.com. For articles and links to resources mentioned in the podcast, please see the show notes at artofrange.com. Listener feedback is important to the success of our mission, empowering range-line managers. Please take a moment to fill out a brief survey at artofrange.com. This podcast is produced by CAHNRS Communications in the College of Agricultural, Human and Natural Resource Sciences at Washington State University. The project is supported by the University of Arizona and funded by the Western Center for Risk Management Education through the USDA National Institute of Food and Agriculture.

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>> Welcome to the Art of Range, a podcast focused on rangelands 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. Welcome back to the Art of Range. We're going to talk some more about livestock risk protection insurance with Jack Field. Jack is a rep with CKP Insurance and a licensed dealer for the LRP products. And I'm also joined again today by Clay Worden who was a financial adviser to ag producers working nationwide. My job here is to ask the dumb questions. And I've asked Clay to ask some smart questions. Jack and Clay, welcome back.

>> Thank you for having us, Tip.

>> Appreciate it, Tip. Look forward to being part of it.

>> While we're stillin this series on ranch financial health and in the role of some of these insurance products as a risk management measure then in fact, the LRP insurance which has been around for a while is offered through the USDA Risk Management Agency. And on their information, they call it single peril insurance, which I take to mean it's meant to do one thing which is providing protection against a price crash, in this case in feeder cattle. And I realized that we've talked about LRP a few times on here. And so, this won't be new for many people but there are an awful lot of people who are just becoming aware of LRP maybe because their neighbor had an endorsement on, you know, whatever, 100 head and it worked for them. And it's always -- anytime is a good time to review fundamentals. So, we're going to jump in and just kind of cover some of the -- I'd like to review some of the history of LRP and then we're going to spend most of our time discussing how it works. Jack, it was actually Lindell Hobbs [assumed spelling] a couple of days ago who was visiting with me and this was a revelation to him that there was a product like this. I think he knew somebody here in the valley who had used LRP and it worked and it got his attention. So, that's a pretty significant thing if Lindell is paying attention.

>> Yes, sir. The beauty of the Livestock Risk Protection program, Tip, is that it provides producers of all sizes the same access to high-quality risk protection. And when we talk about risk protection, the single peril that a producer, i.e. the insured would be insuring against is a reduction in price. So, we are purchasing and basically placing a price floor under your feeder calves. To back up a little bit, the Livestock Risk Protection program offers similar protection as to what a producer might see using a put or an option. Only, we don't have to deal with any of the issues like margin calls when we start to dabble in the CME. The Livestock Risk Protection program, each day, USDA will send out a variety of different offerings. And each offering, the shortest endorsement that a producer can purchase when you take out coverage, you are purchasing a specific coverage endorsement, an SCE. I guess to backup first, the very first step any producer would want to do if he or she is interested or an entity is interested in covering and protecting their cattle, they would need to meet with a licensed crop insurance agent and an individual that's licensed to sell livestock policies and fill out an application. Filling out an application does not obligate the individual or the entity to purchase anything. It simply gets them set up and established within the carrier in USDA system. It generally takes one to two days from the time an application is filled out. And it's then keyed in and submitted to the USDA for the tax identification numbers to be validated and cleared. Once that happens, the producer is then eligible to purchase coverage. When we -- so we get through step one and we'll use you as the example, Tip. If you and I will work, you would come to me and said, "Jack, I'm interested in LRP. What do we need to do?" You'd fill out that application. And once I get word back from the carrier that you are cleared and good to go, I'd let you know, "OK, Tip, anytime from now forward, if you see offerings that you're interested in, we can move forward and get you some coverage. Each day --

>> Now, I told you, I'm going to ask some dumb questions.

>> Absolutely.

>> Is the carrier RMA? Or is the carrier your CKP Insurance?

>> The CKP Insurance is an agency. We work -- Hudson Crop is the carrier that we work with. They underwrite Livestock Risk Protection, dairy margin, livestock gross margin products. So, we work with an approved vendor, Hudson Crop Insurance. And there are many other entities out there that are approved from USDA to underwrite these products.CKP Insurance and myself as an agent, we're essentially just working, offering the product to you, the producer on behalf of the carrier.

>> OK.

>> Then the carriers are approved through the USDA Risk Management Agency. So, that's kind of how that works. This is part of the Federal Crop Insurance Program. And as a result, there is a premium subsidy. So, basically what that means, there is up to, depending upon the coverage level that a producer selects, a 35% premium subsidy, i.e. rebate that comes out of the Farm Bill.So, depending upon the coverage level that a producer would select, you may realize up to a 35% reduction in the total premium cost based on that Farm Bill match.

>> Got it. So in big picture terms, the government has determined that reducing risk and protecting agricultural finances is a public good that the federal government's willing to spend money on. And so there's -- that's what's providing the subsidy.

>> You are correct, if this is part of the Federal Crop Insurance Program.

>> OK, got it.

>> So --

>> Hey, Jack, maybe I ask you as you step back a little bit on this program. You know, producers have a lot of control over their cost. They have control over, you know, what type of cattle they're going to raise. But what we don't have a lot of cost or a lot of control over is that price. And so at the end of the day, we take this commodity price for whatever it raised. We don't get to take our cost plus a margin and get paid that. So, maybe explain how this kind of protects the farmer in that downside risk.

>> Excellent question, Clay. So, for example, with LRP, the shortest endorsement that a producer can purchase is 13 weeks. They then increase in four week increments. As we look right now that the important thing when I talk with a producer, we want to figure out in time when they would be marketing their product. So, when you're going to be winging or chipping calves off the cow selling yearlings, whenever you're going to be subject to the market and i.e., entering in selling those cattle, we then want to time your endorsement to end as close to that sale date as possible. So, what -- the Livestock Risk Protection program gives you the opportunity.Based off of the Chicago Mercantile future, or excuse me, based off of the CME and the futures offerings that come, you then have the ability to buy insurance on an estimated expected value as to what your cattle will be worth at that date in the future when you're going to market them. So, depending upon what -- as I'm looking right now, for example, you might have some fall covers and you're going to be looking at marketing a 550-pound calf in early to late March. An individual in that case, we would look at a 13-week endorsement. It's set to end on the 16th of March. The expected end value is $2.0306. Then there is a sliding scale of coverage levels. The lowest coverage level that a producer could purchase would be 89.88% which would give a coverage price the insured floor of 182.51. On the other side of the spectrum, the highest coverage a producer could take out would be 99.63%. And that would cover them at 202.31. So, depending upon where a producer felt most comfortable in their insurance, they then have the ability to select a coverage price, i.e. a strike price. So, for example, if you selected that highest coverage of 202.31, what the program works off of, we use the futures to base that expected value. And it is then settled back against the actual cash market through the CME's feeder index. The feeder index is a seven-day rolling average where they take the value of 7 to 900-pound steers, number ones and number twos, at approximately I think there's close to 30 markets that report into the index over the course of the week to come up with a current rolling cash value on what we would consider a yearling steer. The most current feeder index as of the 14th of December and it's -- the index generally will lag one to two days behind the current day just because you've got to get that data gathered in. The most current index on file is 179.50. So, based upon all of the action and the cash transactions occurring through the center portion of the country kind of in in the heart of cattle country, you come up with a seven-day rolling index value of 179.50. So --

>> Per hundred weight.

>> Per hundredweight. Yes, sir.

>> I told you, I'm asking dumb questions.

>> There is no such thing as a dumb question. So, the important part now when we start to talk about LRP, so that feeder index value of 179.50 is that is the basis for settlement. Now, when we talk about LRP, well, you --

>> For the endorsement that ended today.

>> Yes, sir. Yes, sir. So, that would actually be your settlement if you had an ending value on the 14th of December. So, if you had one that ended today on the 16th, we likely won't see that until the 19th or the 20th. Just because of the lag, we're Friday today, got a weekend, it generally takes a day or two for those to pop in.

>> Got it. So, you'd use the reported value for that day when it eventually gets reported.

>> Yes, sir. Correct.

>> OK.

>> So Jack --

>> Yes, Clay?

>> -- I know we're talking about different periods but compare that 179.50 to the 202.31. So,I bought a program --

>> I was just about to do that.

>> OK, excellent.

>> OK. So, what -- and what Clay's asking about is let's tie together where I was talking about we've got two different weight classes of cattle. That LRP on the feeder side of things functions with. We've got weight class one which is up to a 599-pound animal, either a steer or a heifer. And you as the insured would get to select your target weight in 100 weights. So, if you wean or market a 550-pound steer, we would insure 5.5 hundredweight. If you have a-- if you wanted to have the biggest calf, if you weaned a 600-pound calf, you could insure a 599 pound or 5.99 hundredweight. The CME feeder index today, that 179.50 would actually be increased to 197.45 to get the value of the lighter calves. And that adjustment, we multiplied the feeder index by 110% to get the value of -- the increased value of the lighter calves. So, weight class one steers, that's up to a 599-pound calf, you take the daily Chicago Mercantile feeder index and multiply that by 1.1 to get your actual value.Now, when we get into weight class two, that 600 to 1000 pounds, you know, most people are going to consider those yearlings and granted those might be a little bit bigger in the actual weight range there.But so your traditional yearling cattle would just be the straight index on steers. On heifer calves, weight class one heifers use the straight feeder index as their settlement value. So, a heifer calf would have a value -- a 550-pound heifer calf would be valued at 179.50. Now, if we were to look at say an 850-pound heifer, we would then take 10% off of the CME feeder index. So, there's a 10% reduction to address the generally reduced value of heifers versus steers. So, an 800-pound heifer based on that 179.50 feeder index would have an end value of 161.55. So, there's a little difference back and forth between weight class one steers, heifers and then weight class two steers and heifers. But USDA and the RMA have done that to try to best mirror what the marketplace and what we as producers encounter when we market these cattle. It's not perfect. And I work with a lot of -- 99% of the customers that I work with are here in the Pacific Northwest. And I hear from many people, "Well, how does this -- you know, that index is not accurate because they, you know, they're $10 or $15 ahead of us in the marketplace, how is this an accurate tool?" What I try to explain to people is even though their market may be different than ours, this is a constant. So, we're not using a West Coast value and a Midwest value on this.The program is set up where we have uniform coverage offerings and the settlement is based off of that CME cash index value. So, we're trying to use established constants and well-known market futures and features to be able to base the expected value and then have that cash settlement tool. The biggest question that I run into and it took me a little while to be able to really wrap my mind around it is we -- for example, if you had an endorsement that ended with a $2 expected value. And the producer sells their calves at their local market or to a feedlot or however and they ended up selling those cattle for 190. Many times, they think, "Well, heck, I had a $10 loss." But if the CME feeder index comes in and for example, this situation where we had the 179.50, the adjustment if it's a weight class one steer would be a 197.45. So, we're only talking about $2.55 worth of loss, not $10. And being able to explain to producers because in many cases, a $2.55 cent loss might not fully cover the premium. As we look right now at the highest premium level, that 99.63% today, that's $3.51 per hundredweight. So, there are situations, I've had it happen on my own endorsements where there is a loss but the loss may not exceed the total insured value. So essentially, what that's telling us and it's generally reflective in the market is that we're seeing that rising tide from cash is going to also be recognized by the individual when they sell their cattle. So, in the event -- and this is one of the tough things because oftentimes when I talk to customers, they feel like unless they get a check back from LRP it didn't work which that isn't always necessary. But everybody I guess, it's nice when you purchase something and it pays back. But if LRP is paying you, that means we've had some -- in a lot of cases, a fairly significant market correction from where you were insured to where it's settled. And that we can see those market swings happen at the drop of a hat. One of the challenges and at times, I have seen this a little bit where there might -- we might not even have anything in the market but it just depends upon when an endorsement might end.An endorsement that ends very close to the holidays in some cases might have -- we might see a dip in the index. There's opportunities in times where it may not be perfect I guess is what I'm trying to explain that we might have some natural pullback or slowdown in the market that does not fully work its way through. Meaning if we have a reduction or the market slows due to a holiday, if you then have an endorsement end on or very nearby a holiday, you might miss some of those changes in the market, if that makes sense. Are you tracking me, Tip?

>> So, Jack, if we --

>> Yeah.

>> Yeah.If we back up to the, you know, the process that a rancher needs to think about on this insurance. So, I delivered cattle on the 15th yesterday.

>>OK.

>> When should have I put insurance on if I wanted to get in this program?

>> Well, the shortest window would have been 13 weeks ago. So, if you're thinking -- and what I recommend to all of my customers is that if you're a cow-calf producer, once you start calving, I've got a lot of people that will then they're starting to get cattle that hit the ground and then they really start to look. If you're going to be buying stockers and putting them together, you have to have -- you have to own the cattle in order to insure them. So, we can't go out and speculate on this. At the end of every endorsement, if there is a loss, the RMA requires proof of livestock. They've updated the claim forms to where it used to be.You'd get a claim form.You sign your name. And you would submit a bill of sales at times or a brand inspection.They process the receipt back to your payment and no questions were asked. Now, RMA has stepped things up a little bit. And they've got -- at the end of the claim, there'll be three boxes that the producer will need to look at.One that you sold all of your livestock or that you sold part of the livestock and retain some and you have to list the number that you retained. Or that all of your livestock were of a marketable weight but you did not sell any.You then have to provide proof of livestock that can be done through the easiest thing is a bill of sale or the brand inspection if you're in a brand state. It might be a herd inventory. If you utilize a herd inventory, it would have to be signed off by a third party like a veterinarian or a nutritionist. They just want to make sure that the cattle that are being insured, number one, exist and that you have ownership of them. Because again LRP is not a speculatory tool, it's a tool for producers just like you and me, Clay, that have cattle and are trying to protect ourselves from that downside risk in the market.

>> So, if 13 weeks is the shortest period, what would be the longest period?

>> So, the longest period, a lot of times we'll see it go out 47 weeks. I've seen them go close to a year.The longest -- the amount of length depends on the amount of market volatility and the volume. So, I would say the 13, 17, 21, 26 weeks, for the most part, those are just about there every time. I have seen in the last couple years, there will be times when there -- if there is extreme volatility in the market where there may be no offerings or there might be only just a very scant amount. So, if we're in a fairly stable market with pretty good volume, I would say that for the most part, you could probably plan on seeing something go out 43 weeks and maybe 47. So, it does give a producer quite a bit of time to look out -- right now, you could be looking out as far as November 9th on weight class one steers and both steers and heifers and weight class one and two. And the nice thing as we look at that, just to look out on weight class one, if we went out 47 weeks and you wanted to insure an animal at its highest value, you would have a coverage price of 224.27. That would have a total cost of $71 per head.That 35% premium subsidy comes in. And $25 would come off in the form of Farm Bill premium subsidies leaving your total per head premium of $46. That works out to $7.68 per hundredweight. So, as you start to look at that, that's -- you are talking about, you know, a fairly substantial premium. However, if you do a little bit of math and you're thinking about how that works back in your budget, you're effectively talking about a CME index value of 216.59 or less and you are going to be netting proceeds back to you. 216.59 would be your breakeven if you're per hundredweightto back that $7.68 off of your 224.27 coverage price.

>> So, let's just talk about that a minute just kind of in the layman's terms.

>> Yes.

>> So, I've decided I want to do this program.Just like you said, I'm basically locking in or guaranteeing myself 224.27.

>> Yes.

>> And in order to receive that full amount and cover my premium, the actual CME, not the sales price that I have for my cattle but the actual CME in that --

>> Index.

>> -- is going to be November.Index. If it was at or below 216.59, I would in essence have gotten 224 for those calves sold?

>> Yes, sir. Yes, sir. So, to back up, any index value less than -- so, if you're locked in at 224.27, ifyou have an index value of 224.26, there would be a one penny indemnity per hundredweight. So, any index value less than your coverage price, you begin to receive payment.But it would take an index value of 216.59 to fully cover that $7.68 cent per hundredweight premium.

>> Sure. So, let's follow this example for a little bit. And so, from rancher's economic results, let's say he actually sells his cattle for 220.

>> Yup.

>> But the CME at that time, let's just say it's 219. So, you'd have a $5, you know, shortfall from what your contract was. So, if I'm understanding you right, you would get back a portion of that $46 you paid in.

>> Yes, sir, you are correct. So, if we're 227 or 224.27 and the index value ended up at a flat 219, you would see a $5.27 cent loss. Now, we would need to then take a look at your total premium. And at that highest level, your premium was $7.68. So, you would still have and if we're talking about a 599-pound calf, you would still have a premium due of $14.44per head.

>> OK. So, if we at the marketplace got 220 is what we were just estimating. So, it'd be less than $14. It would be the same as selling those calves for 206 in that example.

>> Let's see. So you -- yes, correct.

>> Excellent. So, as you can tell I'm a bean counter and the math is kind of hard to follow.

>> It is.

>> So, how do we helpthese ranchers look at these programs and make an educated decision on whether or not it's the right time to enter in, the right amount of head to enter in? And I think I would say this program's been a little bit underused and I think that's because it's misunderstood or under-understood.

>> I think you are absolutely correct. WhatI have tried to do to better -- to try to help better tie things together, every day I'll send out a blanket email to everyone that has expressed interest in LRP to me over the years. I put together an offering of what a 599-pound steer and heifer would have, an 800-pound heifer. And then I've had I think a 750 and a 925-pound steer. I also provide the most current CMA feeder index. I've talked to everybody. I feel like they understand and know the settlement mechanism. So, if they've got the index value and they see the offerings, they're able to do a little bit of cowboy math and say, "Well, boy, if I have one that ended today," or, "This is where we are, this is where we're expected to be." And a lot of times, I think peopleare somewhat apprehensive because they're looking at something that they've only heard terrible things about what happens to people when they get upside down on margin calls and challenges associated with the futures. The nice thing about this is we get the best of both worlds.We have the benefit of the futures markets and all of those outside fund dollars that are helping to increase the value of those contracts as our estimate for a settlement as to what those values will be in the future. And then we're using the true cash, the people that are actually sitting in the bleachers, buying those cattle, we have the actual cash real dollars for the settlement. So, we've given producers the ability to use what might be a slightly elevated tool for establishing the value. And we're using the real greenback dollars that are spent on those cattle to settle them. As long as producers will look and understand that we have the futures as our tool for establishing an end value and the index is the settlement. Once they understand that even though I'm selling my cattle, though it's not directly related to this, but the argument definitely could be made. I'm looking at the index on the 14th of December. If you had a producer that sold cattle in Billings, Montana that also had an LRP endorsement, those billings, billings was one of the markets that reported. So, there are some markets that are somewhat close to us on the West Coast. But I think it's important that producers think about what's -- you know, if you see an offering and you're looking out thinking about the future that you're going to market your cattle in October or November for example. If $2 and I'm looking here in October $2.24 -- 223.96 sounds appealing, you might dabble a little bit. The nice thing about it is you can do a single head endorsement. I've purchased endorsements on my own calves as small as five head. You can -- we can go up to 6000 head on a single endorsement. So, this is -- with the rules and the opportunities, this is a tool that can fit the smallest and the largest producer and provide them an equal amount of coverage and protection.

>> And when you talk about the end date sales date, let's assume we have a weather event in two weeks or let's say I'm a month late in delivering, again which would be an exaggerated example. But does that create a problem for this program?

>> No. So, there is no requirement that the producer sell their livestock by the end date of their endorsement. USDA has recently made a change, it wasn't this year, it was last year where you could market your cattle up to 60 days before the end of the endorsement and still retain your coverage. And that was done to try to help and address a weather-related issue, whether it's drought or fire or flood. But to help producers that might have something covered, if you have some type of, you name it, phenomenon that comes through that all of a sudden we've had to sell the cattle because we're up against any one of these issues, you would still be able to retain your coverage.You wouldn't be able to have settlement until the end of your endorsement but if something happened and you needed to market cattle before the end of it, you still could. And you'd want to kind of count and make sure you don't do it 61 days because if you sold 61 days, you would void your policy and have to pay your premium. But as long as you're within 60 days of the end date, you can market those cattle or you could retain them. And at the end of the endorsement, if there is a loss, you would check that third box that you've retained all cattle that they were of marketable weight. And you would need to provide some type of proof of livestock. If you were a cow-calf producer that might be moving back and forth to pastures, if you had a brand inspection slip, if you had some type of inventory sheet. I've worked with some producers, we used -- we're able to use some Redbooks. I have other producers that work with consulting veterinarians and their vets ran a herd inventory. I had another producer that we took the Redbooks and then his vet signed off on it. She had just been out doing some palpation work.They're very flexible. But we just need to make sure that we can validate that in the event that you don't market the cattle which there's nothing wrong with that, but in the event that you don't market the cattle, we need to validate that you have the cattle.

>> So, as I'm thinking about this from an economic standpoint, this really looks like it's a program that mitigates the significant downside. So, let's say you do have a flood or a drought. And we saw a lot of that this year. And you have to liquidate or sell.Likely the price is depressed because of that situation. And you could in fact get an indemnity on this program. Conversely, it's not limiting the upside. If within 60 days of the contract date, the price spikes or goes through the roof, I could still sell and capture that upside if I so chose.

>> You're absolutely correct. Where I really saw this and my eyes were blasted wide open was the middle of March this spring. So, if we roll back nine months, almost nine months close to the day, I had a customer that had endorsements on weight class two steers and heifers that were set to in right around the 14th or 15th of March. And leading up to that, we had been talking fairly regularly. And looking in February, the market had been just ticking right up there. And we were -- the conversations we had, it looked like they were going to need to pay their premium meaning the index values had exceeded their coverage price. So, they were prepared,OK, we're going to need to write a premium. And I think the premiums were probably close to $8 or $9,000 between the two endorsements. We get to the end date and Vladimir Putin had invaded Ukraine. The markets went into absolute chaos. And we saw an absolute implosion on those index values, enormous losses on steers and heifers. That individual, they ended up receiving indemnity payments on both steers and heifers. The program works.It's one that I assure you, you can sleep at night with this. You know exactly what it's going to cost you.You can plug this into your budget. You know for a fact I want to have a set dollar of insurance. You can tie that right in there.You can sit down at the kitchen table with the family or with the banker and say, "Here's our operating budget.We've got this much for feed, fuel, pasture labor, rent, expenses.We've got our risk mitigation, you know, our insurance expenses." And however, you know, you break that out, you've got the -- your health insurance, the ranch policies, the auto, the etcetera.You've got your price protection nailed down.You know you can look right down to the dollar how you have it. You've got the flexibility.You producers are not required to purchase the highest level of coverage. There is a lot of flexibility. I've worked with some stocker operators where we might look at this. And for example if we look out in November or October, you pick a date, I've worked with producers where they don't necessarily have to look at that highest level of coverage on a yearling. They might say, "Well, my breakeven is somewhere$7 or $8 behind this."They can generate -- you might save $10 to $14 per head by simply stepping your coverage level back just to protect a breakeven. The important thing to remember when moving back in coverage, yes, it gets cheaper but you also have to see that much more of a market reduction before you would see an indemnity payment. And for a lot of producers, the way they determine if LRP works is if they get a check. And that's one of the challenges that I think we all have is trying to explain that getting a check on LRP doesn't necessarily -- that's not necessarily a good thing. I mean, I'm glad that people have it, that they have the coverage and they receive an indemnity. But even if they have to pay a premium, they're going to -- the rising tide was catch and the market will hopefully offset the premium that they pay.It's really not different I think.

>> And I know it's not a one for one but -- go ahead, Clay.

>> Tip, the important part that I heard that Jack just said was really understanding your cost. You know, as we've talked about in some of those previous podcasts that if a producer really understands their cost structure, this really does give them a tool to potentially use to mitigate some downside, some significant downside risks as we have seen in recent years.

>> So, Clay, for example, what -- the cattle that you just marketed, what weight class were those?

>>550.

>>So, you're in weight class one. So, for example and since you know costs very well, what we need to do, we need to look back here. If we were having this conversation back in July, on the 19th of July for example, the 21-week endorsement would have ended on the 13th of December. And if at that time, Clay, a few would have said, "I'm interested.Let's lock in coverage." At the highest coverage level, you would have been able to cover yourself at 204.46. That would have had a total cost of $53 per head minus a $19 premium subsidy would give you a total cost on a 550-pound steer of $34. That's a $6.18 cent per hundredweight premium. So now, we've got tool 204.46. We were 12/13/22. I'm going to pull up the CME feeder index. And we'll just run a quick scenario of what would have happened if we would have paid premium or not. The CME feeder index on the 13th of December was 179.46. So again, that is for a weight class one, or excuse me, the weight class two steer so we take 179.46. We multiply it by 1.1. We would get an index value of 197.41. We just said that we could have covered those steers at 204.46. We're going to minus our index ending value of 197.41.You would have had a $7.05 cent loss. We have that premium of $6.18 per hundredweight which gives you an 87 cent net loss. So, $4.79 per head to you in your pocket times the number of head that you marketed or insured.

>> Yeah. So, in that case, we would have got a check. Instead of paying a premium, we would have got 4.79 per head.

>> Yes, sir. And you would have had, on your expense side of things, you would have had a total premium expenditure that you get to expense on your -- and depending upon how you and your accountant do it but you would have a $34 per head insurance expense. You're going to be taxed on the $4.79 net payment per head. That's federal crop insurance so you'd get a 10.99 at the end of the year times the number of head.But in that situation, you would havemade money. However, as we're looking at this, Clay, you might have looked at that and said, "I know my cost of production and $34 is a little more than what I want to spend."The 21-week, you could go at the top level of 204.46. The lowest coverage was 184.66. So, 202.26, $2, 197.86, 195.66, 193.46 or 191.26. So any of those, you could have selected coverage. And at the 197 -- so basically from -- the top four offerings, you would have still ended up with a loss that would have--

>> Resulted in indemnity --

>> -- just about covered. Yes.

>> -- to cover your limit.

>>Yeah. And the piece that we want listeners to understand, it really didn't matter what I sold those cattle for.

>> Correct.

>> That's really a moot point in that.

>> Yes.

>>But it does come in to their profit-loss statement because they would have, you know, gross proceeds plus that $4.79. So, I think running through that example was at least helpful for me. I know that was more relevant to me but hopefully, listeners are understanding that by getting together with somebody that understands this program, they can run some what-if scenarios that can help them make a decision.

>>And it's -- the biggest thing that I run into and people ask me is, "Well, when should I do this?" And that's the one where I don't have a crystal ball but in my mind, I look at and watch those index values. And once you see an index value that is at a high enough point where you say, "Well, boy, that would -- I wouldn't mind -- I would take that if I was going to sell my cattle." That's essentially how and where a lot of people, when they finally decide to pull the trigger and take out an endorsement, they look at those expected end values and are basically saying, "Would I sell my cattle for that amount?"

>> Yeah, that's excellent.

>> And when you get to the point in time where if we're looking at December and you said, "Well, yes, I just sold my cattle for 204," then you would want to take out an endorsement.You might look at it and say, "That's $34 a head.The budget is tight." I'd sell them for $2. You could take out coverage for $2.06. You'd have a premium of $26 a head versus $34 a head. So basically, when a producer wants to determine, "Is this the right tool for me," I tried to have them basically look at the coverage price and ask yourself, "Would you sell your cattle for that amount?" And if you're willing to sell your cattle for that amount, then we'll look over to see what that total premium expenditure is. If that number is something that you're comfortable with, then this is the right tool. If those numbers aren't matching, then we can wait. We wait another day and see what the market does. The nice thing is, is once you fill out the application -- I have several customers that have had applications on file for multiple years that have never taken out an endorsement. There's nothing wrong with that at all. There's no obligation to buy anything. Once you get an application approved, it just gives you the ability to do so if you feel like that's the right move for you and your business.

>> So, is it a fair way to make that decision?Using that example, you just had a 204.46. And you indicated that it was about $6.18 premium for each animal.

>> Yup.

>> So, that would tell me that as long as I'm happy selling those calves for 198.28, then this is a no-brainer for me.

>> Correct.

>> But I think it's been very helpful to kind of run through some examples, talk about this program. And, you know, Tip and I have talked off and on, on these programs that are available to the ranching community but just not maybe well understood. And I think you've done a good job of really helping us understand this program.

>>And I've got a-- if people are interested, I use Hudson Crop.They can go to eharvest.hudsoncrop.com /policyext/ lrpestimator. And it willpop up the LRP estimator tool, the same one that I jump into every day to put offerings together for my clients. And you can run any variety of scenarios. You select an effective date. You can look at the most current date or you can go back in time as far back -- it will take you back to the beginning of the reinsurance year which is on the livestock policies, July 1st in 2023. If you wanted to look back to see what it would look like in April or May, you'd want to then look into the 2022 reinsurance year. But producers can go back as far as they would like, select the effective date meaning the date that they would want to see what those values were.They then would select their state.Their commodity would be feeder cattle and then the type meaning if it's going to be a steer calf weighing up to 599 pounds or a heifer calf up to 599, those are going to be weight class one. If it's going to be more of what we might consider a yearling, a 600 to 1,000-pound steer or heifer, they would look at weight class two steers or heifers. And we offer the same product for producers that would like to retain ownership and feed their cattle out with fed cattle.They can protect up to a 1,600-pound animal.That product is settled against the five-area weekly average. So, we've got the same level of coverage and offerings for producers regardless of someone that might have 10 head or 2,500 head. We all have the same --there isn't any benefit to size or scale. Every producer has the exact same coverage and opportunities afforded to all of them regardless of the state they're operating in or their, you know, their operational size. Any of the things that we often when we talk about marketing and our business and some of those different dynamics where we feel like we get somewhat siloed because I'm over here or I do this, I calve in. A lot of that has been leveled. And we've got a very -- LRP has done a good job of creating a level tool and a level field for all producers.

>> Yeah,that's excellent. I think wintertime seems like it'd be a good time when people have these things fresh in their minds to go back and review some of these hypotheticals looking at previous date points to see how it would have worked.

>> Yes.

>> And that was a pretty good starting point for figuring out whether or not you're going to want to use it in the coming year. Because so many of these things are -- yeah, if you -- I pulled up the CME feeder index history over the past year and it definitely moves quite a bit.

>> Yes, yes.There's a lot of movement in the index. And this does the -- this is the best -- I think this is the best tool we have to give producers like Clay and myself or bigger and smaller producers an even field, even access to price to downward price risk in the marketplace. And if -- and there are situations where LRP may not be a value to a producer.Meaning if you have an agreement, if you've already -- if you've contracted your calves already for next year, you don't need to worry about LRP because you don't have any price risk. I've talked to other people that might be in the process of trying to put a contract together that don't know if they are or aren't. I mean, it can work but there very well could be situations where it might not work meaning the other thing is, is if a producer is going to market their cattle less than 13 weeks, you know, within 60 days, they may be marketing their cattle sooner than we would be able to cover them. Meaning if you're not going to hold those cattle up to 60 days within the end of an endorsement, there isn't any benefit. I couldn't honestly say this would be a good tool for you.For example, Clay, if you're going to ship your cattle January 15th, I couldn't honestly tell you, "Well, let's sell you a policy that ends or gives you coverage through the middle of March." That just doesn't work for you.

>> Well, I think that was a really good summary. I'm saying that because I almost understand now that we've talked about this three or four times on the podcast, Jack. So, that might be a good place to leave listeners.

>> I think that's great. And the biggest thing and I think you hit the nail on the head, Tip, is now is a really good time for people to do -- to play what-if, you know.Get the check stub from settlement when you sold your cattle and then jump onto the Hudson Crop estimator and go back, you know, 13, 21, 36 weeks, go back to when you either were buying and putting those yearlings together, go back to calving time and start to run some what-if scenarios. The other really nice thing about this is that you've got such flexibility in head counts that we don't have to do it all today. You could -- you might think, "Well, boy, this looks good but this market, it feels like all the fundamentals and what John's going to talk about as we look to the future, where things are."You know, you look at cattle on feed. We can read all the reports and summaries out there.Now might be a good time to ensure, it might not. That's where everybody's going to have to look at their own numbers and see where they are. But this is a tool that I hope more people will find a way to use or at least be interested in looking into because it can definitely help take out some of the high points and the low points.

>>Excellent. And we will put that estimator link in the show notes. And we'll be doing an episode with John Dlivkum [assumed spelling], market analyst anda little bit later, a testimonial from somebody who's been using LRP and has found it to be a useful risk management tool for them and kind of go through the ins and outs of that. Jack, thank you for your time again today.And, Clay,thanks for asking some smart questions.

>> You got it.

>>Thank you both.

>> Thank you for listening to the Art of Range podcast.You can subscribe to and review the show through iTunes or your favorite podcasting app so you never miss an episode. Just search for Art of Range. If you have questions or comments for us to address in a future episode, send an email to show@artofrange.com. For articles and links to resources mentioned in the podcast, please see the show notes at artofrange.com. Listener feedback is important to the success of our mission, empowering range-line managers. Please take a moment to fill out a brief survey at artofrange.com. This podcast is produced by CAHNRS Communications in the College of Agricultural, Human and Natural Resource Sciences at Washington State University. The project is supported by the University of Arizona and funded by the Western Center for Risk Management Education through the USDA National Institute of Food and Agriculture.

>> The views thoughts and opinions expressed by guests of this podcast are their own and does not imply Washington State University's endorsement.

 

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>> Welcome to the Art of Range, a podcast focused on rangelands 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. We're continuing our series on ranch financial resiliency. And I have back on today a couple of repeat guests. Dr. Shannon Neibergs is with the Western Center for Risk Management. And Jack Field with CKP Insurance. Shannon and Jack, welcome back.

>> Great. Thanks for having us.

>> Thank you for having me, Tip.

>> Shannon, you recently spoke at the Washington Cattlemen's Association Convention about current market forces and the challenges that the current situation presents to livestock producers. Your title was risk management implications for Washington cattle producers in a year of unprecedented volatility. As you know, we've been doing a series of episodes on how ranchers can increase ranch financial health, including some lesser known risk tools, like price insurance, that had been I think underutilized in the past. We've talked some about branch records, managerial accounting, various ways to measure performance indicators. And Jack has talked here before about insurance. But step number one, either, whether we're considering insurance or just analyzing sort of internally an operations financial health, that is knowing what various financial risks are. And it feels like today there's a lot more factors at play than just, you know, cattle on feed and the fact that there's drought somewhere that's resulting in destocking. You know, at one point, there was a fairly predictable, roughly decadal cattle cycle that people could sort of work, you know, work countercyclically to maybe make better money than they would otherwise. But that, that decadal cattle marker really hasn't been in place for about 20 years. So, there's a lot more factors going on in the global food market than I think what we used to have to worry about. I think it would be worthwhile to have you talk about some of that again today.

>> Yeah, great, Tip. And thanks for summarizing that. And I think on the cattle cycle, one thing that's accelerated it is the extended droughts that we've, that have occurred in 2012, and more recently across the west, that's accelerated some of those stock, e stocking decisions, and how these dynamics have positively impacted the prices in the United States. But also, as we look at risk, one of the things that we need to really keep in mind is that we are facing a lot of risks that are out of our control. And those risks include international risks that we've seen impact agriculture markets, starting with the Ukrainian War, with Russia, and the dramatic impacts it's had on energy markets, fertilizer markets, and also wheat, as it's impacted the wheat price as well. So, the combination of several of those international factors, as well as domestic factors, has lots of both positive opportunities, and also risk concerns that we should keep in mind as we try to manage through 2023 and beyond.

>> Those mostly look like risks to me. And not a lot of opportunity. And I realize we'll get around to that. But, yeah, talk about what some of the  why is that more volatile than what has been the case in, you know, already fairly volatile cattle markets?

>> Yeah, some things that have really impacted the cattle markets is the domestic markets in our inflation, stemming from the COVID recovery, and also policies of spending, and the impacts that it's had on interest rates, the direct relationship between inflation rates and the use of interest rates to increase, to decrease inflation, but the interest rates increase, that increases our interest rate risk. We've talked, you talked a little bit about that on previous podcasts, the exposure to interest rate risk. But also what's important to consider is as interest rates go up, it has a direct correlation on exchange rates. And those exchange rates impact up to almost a quarter of our market as we supply those international markets. And that exchange rate increase on the record high of the Japanese yen, you've probably heard were close to at par or better than par with the EU. And those prices have dramatic impact on those international markets. And we've been lucky in 2022 where we've seen some decreases in major markets to Mexico and Canada that have been off set by increases in China. And so we're on pace to set record export levels in 2022, despite these shipping factors and price factors that as we look into 2023 and we are anticipating improved prices, we have to remain cognizant that changes in those export markets, shocks in those export markets, can have dramatic effect on our prices. And so while we're optimistic for improved prices through 2023, that doesn't reduce the need for risk management on price and other conservative efforts as you look forward to responding to opportunities in 2023.

>> Yeah, we may have a number of people listening to the podcast that are not very familiar with what, what the export of beef looks like. What are the primary beef export markets? And how have those changed say over the past decade?

>> Well, Japan has always been a strong export market. And it's improved. When you talk about the history of export markets, and the impacts of disease, namely BSE, and the shutdown of those export markets, and the great recovery of those export markets, that's been important. And so Japan's a leading market, Mexico, and Canada are leading markets, as well as South Korea. China is very interesting is that up until a couple years ago, we had very little exports of beef into China. But due to the trade war that occurred, then beef, some non tariff constraints on beef concerning age requirements, concerning traceability requirements, concerning health requirements, and recognizing of those processes, that opened up the market into China, and China remains a very hopeful market, given their vast population growth, their economic growth, although there are some clouds on the horizon in China on that growth due to their stringent COVID policies, and there are still ongoing lockdowns due to COVID.

>> How do you see those risk factors affecting the possible price of both fed cattle and feeder calves now and next year?

>> Well, I think that stems back to really looking at, we've been declining in cow numbers, so the supply is going to be reduced both in terms of number of cows and the number of calves starting the production process into 2023, as well as decreased beef production expected in 2023. And so all those factors of the drought this year in 2022 across much of the southwest, and into the northern west as well, had cattle placed on feed early. So, those dynamics of supply will be developed through 2023. But also due to the drought and ongoing cow calling, due to the destocking, those factors are very critical. The cow calling last year is recorded to be as high as it was since 1996. And so those calling dynamics due to drought are very important as we look at prices in those price dynamics across the next year. Now, if you remember back, I think part of the importance is to pull the drought impacts that the United States has in the 2012, 2013 year of those drought impacts, over the Midwest, which greatly impacted the cow herd, which then led to record high prices in 2015. And then in 2015, the market turned down, and then took a further turn down in 2016. So, three or four years after that dramatic drought was the price cycle, and then the period of time where prices were elevated, directly attributed to that drought. And so if we look at 2022 and the outlook for 2023, given the winter outlook of the La Nina weather pattern, we see that drought impacts to have effect over the next couple years. And those drought effects really leaded, as I mentioned, lead to those record high prices. And the importance of, and the importance here is to look at what kind of price risk protection to put in place that's important in managing your ranches. You talked quite a bit over the past, well, recent podcasts on key performance indicators, profitability, cost of production, and those factors are clearly critical in looking at what that price management is going to so that you can maintain those profitability factors that are needed to maintain and manage your ranch.

>> Well, I repeatedly offer the disclaimer that I'm not an economist. But it seems like having supply going down in demand remaining stable or going up should translate into, you know, decent prospects for cattle prices in the near future.

>> Yes, that's, that is correct, that all the outlook reports, all the trade articles are talking about this combination of destocking. Also important, the high quality of beef that's being produced through the expanding proportion of choice, or choice graded beef. And that high quality is really critical. And it's really supported the markets, both domestically and internationally. What's interesting is that U.S. beef commands the highest price internationally. It's not an equal price for all sources of beef supplying the international market. And U.S. beef demands the highest price because of its quality parameters. And that's a strength that's not going to, that's not of much risk, because I think those trends are well established, and will maintain. It's more the demand risk was mentioned a little bit earlier that is really critical, because that demand risk can shift on a negative news article, it could shift on a geopolitical event, it can shift on some other disease or other biosecurity aspect, food securities mainly.

>> Now, I guess turning away from some of the risk factors that we, that an individual producer does not have any control over, what are some of the more internal sources of risk that people should be thinking about and attempting to manage for? And then we'll go from that to talking about how to protect risk more broadly. But what are, I guess what are some internal risks? And what are traditional methods to mitigate for internal price risk?

>> Yeah, the internal risks really clearly stem have knowing those key performance indicators, and cost of production measures, internal to your ranch. And so I think that's really important to stress that knowing that, knowing that information is clearly an important factor on establishing your risk management plan. Because if you don't have your, if you don't know your cost of production per unit of animal, it's going to, in turn, lead to just trying to strategize on crop insurance or the livestock risk protection, or the PRF insurance levels that you seek to purchase, to protect those risks. But clearly the internal risks stem from better knowledge of your internal accounting and those key performance indicators.

>> It does seem like there is, I don't know about disagreement, but definitely a couple different schools of thought in terms of trying to manage cost of production, or manage profitability, I should say. Some would say that the primary focus should be on enhancing revenue and being willing to spend money in order to get revenue. We heard Stan Beaver say that, though, that you may not be able to afford having, you know, a 95% calf crop. It may cost too much to achieve that. And so you have this other school of thought that says you've got to really aggressively drive down your cost of production and look for ways to be a low input producer. I think, sometimes in these, I won't call them arguments, but disagreements about which way to focus, people are sort of talking past each other. And there's quite a bit of a sense in which most sides are right. Do you have any thoughts on, you know, where and how to chase this down?

>> Yeah, I think that first you need to, in my opinion, Stan, as you mentioned, Stan did a great job on those previous podcasts talking about those key performance indicators, which started with the number of bred females. Knowing that so that you can correctly and accurately analyze your production, reproduction efficiency, your calving efficiency, and getting ahold of that inventory level, what you produce, that, you don't need an accountant to help you. You don't need an extension economist to help you put those inventory numbers together. And so if you start with those inventory numbers, that's a key important factor to analyze. And then your replacement heifers and your efficiency of raising those replacement heifers, is also critical. And that fits into those production parameters as well that all ranchers could clearly evaluate on their own. And then on the cost side, that's a, that's a harder question to evaluate, because I don't think most ranches are out there overspending now. So, the cuts on spending are hard, because you've been driven to efficiency to survive up until this point, particularly over the past couple years, because those, since 2016, those prices have not been as high as most people would like to see, so it forces, if there's been a history of looking at costs in order to make ends meet. And so as you mentioned, as the challenge on revenue and drought revenues, you went through quite a bit of discussion on reducing and analyzing your fixed costs. And the fixed costs are more generally defined to include the labor, to include all the machinery and equipment costs. And so you're going to have to, if you're looking to evaluate the cost side, you're going to have to use your accounting and your management records to evaluate those costs and see if there's opportunity to be more efficient in that cost structure.

>> Right. Or if cutting a cost also has a corresponding loss in revenue from declining quality or whatever.

>> Correct.

>> Well, my impression, and from some data that we gathered on some of these price risk tools, like LRP, it looks to me as if these tools are underutilized. Is that your assessment of it as well?

>> Yeah. We can look at LRP usage relative to the number of potential calves in the state. And quite a bit of difference across the country on which states are very heavily enrolled in LRP. But we've grown, but we still have well below 20% usage, potential usage of that LRP program, in the Pacific Northwest. And so it's increasing, it's gaining popularity, the PRF tool is gaining popularity as well. And when you measure its use over time. But there's still a lot of opportunity. There's still lots of ranches that may not see the advantage of using these tools and the opportunities of using these tools. And 2022 was a relatively good price year. Our price, the cattle prices went, trended upwards. And there were some dynamics. And it was interesting to me that even in 2022, there was opportunities to use LRP in a very efficient manner to cover your premium costs, and put that, put the price floor under, under your risk in those calf markets.

>> Thanks, Shannon. We're going to do a whole episode soon covering the livestock risk protection program in more depth. And in there, we'll walk through some examples. But for now, Jack, can you offer a brief overview of LRP, and address some of the common misunderstandings you see on how the mechanism for establishing payment works?

>> The single biggest point of I guess misunderstanding or confusion that I encounter is having, ensuring that producers clearly understand the function and place that the cash marketplace, meaning the Chicago mercantile feeder index, and the fact that their settlement on a policy, or excuse me, on an endorsement, is not directly tied to the market sale of their livestock. But in sitting and listening earlier to the comments that Shannon was making, he talked about Ukraine and drought, and both, and you as well, Tip, had pointed out that even in a year like this where we've seen a dramatic uptick in prices, we've had a number of producers that have been able to successfully implement price protection in their operations to where it has benefited them. I've been able to successfully use LRP on some cattle of my own. And as we were on the, as I was in the waiting room to come into this podcast, I had another customer that we worked with in July, it would have been July 13th, we took out specific coverage endorsement on 50 steers. That individual, based on the market, July 13th, they were able to put a price floor under their, a 599 pound steer calf at 204.37. That cost the producer $5.81 per hundred. They just ended up with the feeder index coming through, and the final adjustments. Their settlement price was 193.06. That ended up being an $11.31 gross loss. The producer, after premium, netted $5.50. So, on that 599 pound steer, that's an additional $32.95 per head. For example, if they, if those cattle were marketed somewhere in that 185, 100 weight range, that's going to bring the total value of about $1,108 per head. That's another 30, close to $33 that they would add on to it. Over that 50 head endorsement, that ended up a net benefit a little over 1,600 and, just shy of $1,650. So, they were able to successfully protect themselves and effectively gain one additional calf in additional proceeds to their operation by successfully using the livestock risk protection program. The nice thing about that is the producer knew on the 13th of July exactly what their maximum exposure was. They could build that into their budget. They knew what it was going to cost them. And they did not have to worry about a run up or a run down, something happening in the market. They knew at the end of the day they were going to have to pay $5.81 per hundred weight. The way this worked for them, they actually will not have to write the check. The policy is going to pay for itself. The loss exceeds the premium. They provide the proof of ownership documentation to satisfy the rules of the livestock risk protection program. And they should receive proceeds in a very short time, depending upon their ability to return the claim form back to the carrier. I've had a number of producers that have had a very wide amount of success, meaning that the 10, I've seen quite a few that were 10 to $12 a hundred weight losses. And when you talk to people, they didn't think for a million years that they would end up receiving an indemnity payment with the strength that the market has had. But there have been enough hiccups along the way that have caused that index to back up or come off a little, whether it be, like Shannon had talked about, the inflationary impacts, global grain prices, supply and demand projections, et cetera. But LRP has been a very, very popular tool, and one that with the recent additions made by USDA by expanding those head count limits, it's opened it up to a much broader audience of producers that will hopefully benefit their operations as well.

>> Yeah, that's a great hook. I often make the mistake of trying to lead into something with information that maybe isn't so interesting. But that's a compelling example. Why don't we go backwards from there and describe a bit what is the original purpose of the LRP? And who is eligible? Because you just mentioned that there are people eligible now that weren't before because of some real changes. What was the original purpose? And who, who, who's eligible?

>> So, right now, any, any individual, whether it be an individual or a company that owns and either feeder cattle and/or fed cattle, has the ability to purchase coverage. And when we say coverage, you're basically, like Shannon had alluded, you're putting a price floor. You're buying a policy against a reduction in the market. And they have, they being the United States Department of Agriculture Risk Management Agency, USDA RMA, have expanded the size of operations effectively by increasing the head counts. Several years ago, there was a 6,000 head per year maximum threshold. It is now 25,000 head. And they have also increased the premium subsidy. There is a 35% premium subsidy that comes out of the farm bill. So, and the third, and I think maybe the most important component, is the premium is due at the end of the endorsement. Four or five years ago, when I policy was, was written, and an endorsement was taken out, the individual, the producer had to write a check that day for the coverage. Now, and obviously depending upon what these might be, you could be looking at a couple hundred dollars to several thousand dollars' worth of premium, just depending upon the size of operation, and the level of coverage. That can cause a real pinch in people's operating budgets, because what we're talking about is protecting the price of the commodity that we have not yet marketed. So, in many operations, we're focusing on that one paycheck. Or if we're fortunate enough to market two calf crops, we're focusing on the sale date of those calf or yearling crops to bankroll the operation. So, by moving the premium due date until the end of the endorsement, that basically means at the end of the endorsement, which we try to time that as close to when the cattle would be sold as possible, that gives the producer the ability to know, yes, this is, we've got the market, we've got the calf sold, and is there a loss or no loss. If there isn't a loss, they know they need to write the check. They'd have the proceeds from their sale of the calves to be able to help cover it. If there was a loss, they would know that that's coming, and they could get the paperwork filled out, and that would help shore them up from where they thought they would have been in the market.

>> Yeah, and you mentioned that the market is based on the CME feeder index.

>> Yes, sir. The CME feeder index is the USDA's seven day rolling average where we've got, and Shannon, you know better than me, is that 30 markets over the course of the week that are reporting in the seven day rolling average of an 800 pound feeder steer, to truly, truly capture and show the value of the cash market. They utilize the CME feeder contracts in terms of the feeder months to be able to establish the expected end value. And it is then settled off of that index, which is the cash market. So, giving, giving the producers the best of both worlds, the opportunity to have that expected value set, and hopefully influenced in a positive manner through some of those outside dollars that might be investors in the market, and the true settlement tool is done by the CME feeder index. And that's the actual receipts off of those cattle. And that index is published every day. For example, the CME feeder index from November 11th was 175.23. So, as we, as we think about that, that's what the, that is the entire foundation of the LRP program. They use that index value to establish the value of a weight class two steer, which is 600 to 1,000 pounds. They adjust it up by 10%, for the value of a weight class one steer, which is up to 599 pounds. They use that index value as the value of a weight class one heifer, which is up to 599 pounds. They then take a 10% reduction to capture the value of a weight class two heifer. And then they utilize the five area weighted average on fed cattle for the fed cattle settlement.

>> And a couple questions that maybe are obvious to anybody else who's listening, but to understand that an individual producer can enroll regardless of the size of their operation.

>> You are correct. You can  I've sold five head policies on up to 500. So, and excuse me, endorsements. So, the policy, a producer would take a policy out with whichever respective approved insurance provider he or she chooses. Taking a policy out does not obligate them to purchase anything. It simply gets them set up and established in both the carrier and USDA system to make sure that the name, Social Security number, and the fact that they are conservation compliant, and have an AD1026, that's the conservation compliance document, that the Farm Service Agency has on file, once a producer fills out his or her or a company application, they are then ready to go. So, I just sent out an e mail a couple minutes ago that would have the offerings for today. For example, right now as we look out, and Shannon had talked about some of the optimism in the market due to the supply and demand functions, and some of the things that we've seen with the reduction of mama cows with a calling. The insurance actuarials would echo Shannon's excitement as we look to the future. Looking out today, 43 weeks into the future, a producer could take out a policy. It would have an end date for September 11th of 2023 on a 599 pound steer. They could put a floor of 219.06. And that would only cost them $7.51 a hundred weight. So, $45. I remember myself last year buying coverage in that 17 to 21 week window somewhere between 150, 160 and 170, and it was 45 to $50. So, there's a lot of opportunity for a fairly lengthy endorsement, where producers could really lock in some positive market position. And at the end of the day, if a producer ends up paying their premium, that means that the CME feeder index was at least par with their coverage price. So, if we get to the 11th of September, and the CME feeder index, the adjusted index for a wait class one steer is that 219.06, I would imagine we're going to be having a fairly positive conversation because that means you would have been able to protect a 925 pound steer at 199.14. That would, that would run a producer $6.81 a hundred or $63. So, there's some real opportunities for producers of all sizes, of all types, to be able to build a very conservative, and a very easy risk management system that they understand completely, that's going to protect them if we see something like a Ukrainian invasion, something that causes unknown or unexpected impacts on our markets. People can sleep a little better at night.

>> Yeah, and you can [inaudible] a number of animals?

>> Correct.

>> Like say I've got 500 head, I can enroll 100 of them.

>> Correct. And out of that 100, we could do that on 1, 2, 3, 10. You could, you could stagger it out. I was just speaking with a producer about that. He says, well, I've got 400 steers that we market each year. I might want to look at this and maybe do 25% of them. And then over that, out of that 100 head, they could, they could split that up however they wish. You don't have to do it all at once. I didn't mean to cut you off, Shannon.

>> Sorry. I just was going to add that it is important to recognize that this is a proactive tool. You don't want to wait until the market turns and then try to get in. Because at that point, if time, the market is turned against you because of some event, and it might be a case where they're not going to be able to sell any endorsements for a few days as the market adjusts, and so clearly keep in mind that a proactive approach to this planning is needed.

>> I would agree wholeheartedly. What I've recommended to the producers that I work with is as they start calving, or as they start to purchase yearlings, if they're going to be put in grass cattle together, that they really start to focus and watch. That generally gives them the opportunity to think and look at maybe a little shorter endorsement, which should hopefully have a lower premium, if we're talking about a shorter time frame. But like Shannon said, you always want to be looking. You never know when the next hiccup could come, or bump in the road. So, having the ability to protect yourself, be it at once, or incrementally, is absolutely essential. And it's another one of those where if producers could just know when that market was going to turn, Shannon, they might not need LRP, but it's one where I've had customers that have, have still had some positive results, even after the market has turned, they just may not have been as large. But the important thing is once they're able to put a floor under it, they know what their maximum exposure is. And the biggest thing is we're starting to look at and see producers that are having 25 to $40 net returns back. That's, that's real dollars. That adds up to, like I said earlier, the effect, effectively putting 1, 1 1/2, or 2 more head on the load. In which you didn't have to pay the pasture. You didn't have to feed them. You didn't have any of the potential desk risk, or excuse me, death loss. It's been, it's been a very positive component. And even, even to those that have had to pay their premiums, the piece of mind that it's given them has been a real key. When I spoke with the yearling producer that was looking at locking in some coverage on a couple sets of 900 pound steers that he had done, and at the end of the day, he had to write his premium. He says, well, I was able to sleep at night, because I knew if this thing went sideways, I was covered.

>> Yeah, I've got a couple questions related to sleeping at night. And either one of you can not answer, and we'll just cut this out, but, in general, I would say the livestock producers are more skeptical of government subsidized programs than folks in other sectors of agriculture. Do you think that that's been a barrier to adoption? In my own thinking, I guess I would feel like of all the things the federal government could spend money, subsidizing some useful insurance that helps stabilize American agriculture is a decent place to invest what ends up being not that much money in the grand scheme of things. Have you seen a change in attitudes toward government subsidized price tools like this?

>> I think the biggest reason for producers not participating is not the government subsidy. I think it's just been a lack of understanding what the program was, how it worked. And, again, that previous requirement of having to front the premium day one versus the current process where that premium is due at the end of the endorsement, just a basic function of cash flow, I think. And this, just by moving that premium to the back end, I think was the single best thing that USDA did in terms of making this a more robust and a more user friendly tool, because it's been able to allow producers to keep cash flow back in their budgets to do the day to day things they need to rather than paying an insurance premium.

>> Right. Shannon, any thoughts on that?

>> I would echo what Jack said about the changes in the program that have improved the use in terms of a reduced cost, the premium paying at the end. And so I think it's a matter of understanding the program. I wouldn't portray it as a government program. I would say it's a government  the underwriting standards are backed up by the government. But the program design, the program purpose is to be fair and effective to the producers to provide that price floor and that risk management so that they can withstain price shocks and remain focused on their business and their community and future just through not having to endure the full brunt of a negative market impact.

>> Yeah, I think that's a critical distinction, to separate out a premium subsidy that's supported by the federal government versus a payout program like the conservation reserve program that has had declining popularity. They're very different things.

>> Yeah, it is definitely a management tool that the ranches need to invest in as part of their portfolio of all the risks that they face. And this is just one tool.

>> Well, I think we will pause this there, because we will have some additional episodes with a little bit more focus on the mechanics and walk through some examples of how, of how LRP can work. And also visit with some folks that have used it to their advantage. So, we're going to go ahead and stop here. And we'll look forward to some additional content on this topic. Thanks, Shannon, and thanks, Jack, for getting on today.

>> Thank you, Tip.

>> Yep, thank you.

>> Thank you for listening to the Art of Range podcast. You can subscribe to and review the show through iTunes or your favorite podcasting app so you never miss an episode. Just search for Art of Range. If you have questions or comments for us to address in a future episode, send an e mail to show@artofrange.com. For articles and links to resources mentioned in the podcast, please see the show notes at artofrange.com. Listener feedback is important to the success of our mission, empowering rangeland managers. Please take a moment to fill out a brief survey at artofrange.com. This podcast is produced by Connors Communications in the College of Agricultural, Human, and Natural Resource Sciences at Washington State University. The project is supported by the University of Arizona, and funded by the Western Center for Risk Management Education through the USDA National Institute of Food and Agriculture.

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>> Welcome to the Art of Range, a podcast focused on rangelands 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. Welcome back to The Art of Range. We're continuing a conversation today about managerial accounting and managing finances on the ranch with Stan beavers and James Rogers. And we're joined today by Jack Fields with CKP insurance. And we're going to spend a little bit more time talking about some of the performance indicators that we just began to get into in the previous episode. Jack, Stan and James, welcome back.

>> Thank you.

>> Stan, you mentioned in your article about key performance indicators that one of the only ways that you can ensure that you're individually profitable -- because people tend to not be very good at measuring those things -- is to measure some indicators that are the drivers of profitability. And it's important to measure something that is a reliable indicator. In the world of rangeland monitoring, you want to -- if you're trying to determine whether or not livestock grazing is affecting rangeland condition, you have to measure something about rangeland condition that's responsive to livestock grazing and not something that is entirely climate related or has nothing to do with grazing impacts. And although I know very little about the world of ranch finance, I understand the same thing is true there. Just for those who haven't heard the previous episode, can you describe briefly what you mean by key performance indicators and maybe what they're not? And then we'll jump into some specific ones.

>> Yeah, sure. So what I've done in the past -- in past lives of extension and all that was come up with about 12 or 13 KPIs. And just as we visited on the last podcast, there's several things about KPIs before you kind of really start measuring them. First off is to make sure they're being calculated the same way over time. And as we mentioned last time, you get the garbage in garbage out acronym, that if I don't have good inventory data, if I don't have good managerial accounting information and combine those into KPIs, my KPIs are going to be somewhat suspect. So it's always good to start with good information, as we know, to have and end up with good results. So to make sure that I can look at those KPIs and they're calculated the same every year -- and again, not only from trying to identify how the ranch did in one particular year, but one of the goals of using KPIs is to be able to trend those KPIs over time, the same number and look at it over time and just see how -- as an example, we were visiting earlier about the cost of hay production. If I'm in a ranch operation, and I'm producing hay to feed to my cows, and that's the primary purpose that I'm raising hay obviously, a KPI would be very important to me. It would be the hay production cost. So again, trying to identify that I calculate that the same every time. And if, in fact, that KPI is kind of -- that hay production KPI is somewhat in the neighborhood of what I expect, am I, in fact, fulfilling the goals of my ownership? And that's the whole key of a KPI or a set of KPIs is to know that if I'm achieving the KPI numbers that I'm trying to work towards, by achieving those numbers, I'm fulfilling the goals of ownership. And to me, that's the whole point of trying to do this. So you're tracking them over time. It's important to calculate them correctly if you're going to try to benchmark them with somebody else because, again, we always want to be able to compare apples to apples and not apples to oranges. Few other things. You balance the use of KPIs. To use one KPI at the expense of another doesn't fulfill goals of ownership. It doesn't move the ranch forward. As an example -- and we'll get into the specific KPIs here in just a minute -- but if I've got a -- if I've got a low feed cost KPI purchase feed or raise feed costs per cow, and my productivity from the cows are high or low by adjusting cow, the feed cost numbers one way or the other, am I in fact making a positive impact on cow productivity? So you can actually start to correlate these things and say, okay, if I do this to improve the feed KPI, am I, in fact, improving the productivity KPI? So again, you start making these correlations. So it's pretty important to look at them in that respect as well. To focus on one at the expense of others isn't moving the ranch forward. And the perfect example of that is for the last 50 years, it seems like all the outside industry of cows has been, well, I'll increase your weaning weights for you, or I'll increase the weights of your calves. That's all fine and good. And certainly, we want to have as good of weaning weights as possible. But that's got to be balanced in respect to what my feed costs are, what my bowl costs are, my cow costs are. To sit there and focus on weaning weights alone at the detriment of feed costs doesn't move my ranch forward positively. So again, you've got a correlation there. So again, there's about 13 or so of them that I believe from a ranching and a cow calf, specifically ranching situation, that we look at. But anybody and everybody will have their own set of KPIs. Not all the ranches that I work with produce hay. But certainly, brush control costs and things like that, from a range standpoint, is very important. So that's just some opening thoughts, guys, to think about.

>> Yeah, one quick question before we started talking about some of the individual ones. You mentioned that the individual -- the specific values for each of the various KPIs, you have identified through kind of some long-term analysis of looking at herd data from lots of different parts of the country. But we were also talking just in the conversation before we started recording that there are certain places in the country where the physical circumstances are just different. And you may not have access to year-round grazing. And hay cost is going to be a larger percentage of somebody's input, total input costs in some other part of the country. To what extent are the values for these individual KPIs sort of universal? And to what extent should they be adjusted a bit by region?

>> Well, that's a great question because if you think about the KPI numbers that we'll talk about specifically here in just a minute, I start at the overall ranch level. And predominantly, one of the one of my look at is what is my rate of return on assets? And that number in and of itself is applicable, clear across the country and for that matter across industries within a country because, again, if everybody is calculating it the same, what's my net income divided by all my asset values, then that number is very applicable across all ranches. And again, I'll just -- if that number is one to one and a half percent, that's going to be about what a ranch will do. I don't care whether it's in Florida or Montana or even in Hawaii. Again, it's going to be somewhere in there. So to some degree, it is an industry wide number. But as we mentioned last time, we talked about the dark side of benchmarking and benchmarking with these KPIs. There are numbers that you just cannot apply from Texas to Montana because, again, down here in the western side of Texas, we just don't produce a lot of hay for our cows. I mean, our grasses are strong enough. We tend to stay moderately stocked that we don't have to feed hay through the winter. Some level of supplementation, protein supplement, typically gets us through the winter months, where in Montana, somebody is going to put up an average of one to two tons of hay per female to get them through the wintertime, through the entire year. So obviously, when you look at feed cost, you can't compare those two. So there's always that dark side. Somebody will take one of these numbers and say, well, gosh, Stan is saying it's 83% calf crop -- weaning percentage for calf crop. I'm doing 90. Well, that's all fine and good. But --, and if that's the KPI you're focusing on, that's fine. But let's look at not only that number, but let's also look at the cost per female number or the cost per weaned calf number, because you can have a 95% calf crop if you choose to. But I can assure you it is too expensive. When it comes to what it actually costs you to wean those calves, you're putting in way too much feed. You're probably putting in too many bulls per cow. There are several things. Now I'm not saying that somebody can't achieve a 90% calf crop. And in fact, they do. But you've got to be able to measure it against also what it costs me to do that as well. So again, that's kind of the dark side. So the question, yeah, some of them are relative across the entire industry and across the country, some of them just absolutely not. And I am always in favor of first, compare yourself to yourself over time. Be your worst critic. If I'm at $900 per cow per year, how do I make that 880 next year? So I want to be accountable to myself over time. I can let somebody else say, well, you know, you're at 950, and you should be at 890 because that's what the industry is. Well, you don't know what my situation is. I mean, one of the -- one of the other things that really comes into play is ranches that have debt. So what's the interest cost on one operation versus another? Some of these ranches out here in West Texas operate without any debt. So if you don't have an interest cost, that can be huge. Now if you've got some debt, you're trying to buy some more -- mortgage some land or something, even buy some cows at this point, you're going to have an interest cost that's going to really influence that total cost per weaned calf or total cost per cow.

>> Sure. And going back to your previous comment about the marginal cost of increasing, say, a calf crop by a percentage point. If you're trying to operate where marginal revenue equals marginal cost to optimize profit, if one ranch's marginal cost of increasing that by a percentage point is going to be different than another ranches marginal cost to get the additional marginal revenue. And a person can only evaluate that specific to their own operation. Well, I don't know whether you have these KPIs listed in order of importance. So I'll let you decide which ones to jump on first. But we have talked about calf crop a bit, and that seems to be one of the ones that people are somewhat familiar with. So that might be a good place to start.

>> Okay. Well, let me kind of start at the top of a list that I have. And there's two that aren't even KPIs as such. But they are massively important. One is -- so if you think about trying to put this in perspective for ranchers out here and those that are wanting to analyze ranches. What's a set of data that that you really need and what's the KPIs that you really need to do a good job of analyzing not only am I profitable today, but how do I move to profitability? So number one, and I always list it at the top anytime I analyze a ranch, is what's the number of breeding females? And that sounds so simple. But I want to know how many females you had that could have, would have, should have weaned a calf that particular year and put that number as of the start of the fiscal year. Now as we visited last time, most ranchers use a calendar year basis, So January 1. So as of January 1, start tracking and make it an effort that on January 1 or somewhere real close to that, I'm going to know the number of females that I have that could have, would have, should have weaned a calf in those next 12 months. Okay.

>> So that should be everything as a first calf heifer and older

>> There you go. Absolutely. Yep. Yep. And why that is so important -- and as we move down through these KPIs, one that people -- they don't like to focus on it because it's hard to deal with, and that's the fixed cost of the operation. We briefly talked about them last time. But we'll get to it in more detail here in a little bit. Well, what's the fixed cost of my operation? Once I determine what my fixed cost is, the easiest way to reduce my fixed cost on a unit basis is to increase the number of females that I apply against it. If I've got $10,000 in property taxes, which would be a fixed cost, I'm going to have property taxes whether I run a cow on it or not. If I had $10,000 in property taxes and I only have 100 cows versus $10,000 in property taxes and I have 10,000 cows, that changes that fixed cost structure. So what's the balance between what the fixed cost of the operation is relative to what I'm generating -- what I'm using to generate as a tool to generate revenue? And that's the cow number. So that's the number one really pertinent number. Now the number two number that necessarily isn't -- that isn't necessarily a KPI, but that's rainfall or deviation from normal rainfall. I'm in a 26-inch annual rainfall area. And right now it looks like I'm going to end up with about 12 inches this year, unless it starts raining pretty quick. I've come through my heaviest rainfall months, and right now I've only got less than 10 inches of rainfall. So now, obviously, the deviation from rainfall impacts my decisions on number one, breeding females. Correct? So now if I'm sitting here and knowing that I'm in a drought, then I'm also probably making the decision to destock my number one, which is breeding females. And in my previous life as an extension economist, I did an unlimited number of drought meetings. And I'll bash myself, like I should, because we would get in here and we'd start telling these folks, well, you know, we're in a drought, you need to be destocking. And that's probably true. Well, it is true. But we never gave them the second verse to that song. And if I'm going to destock -- again, the greatest influencer of the breeding number is against the fixed cost. If I have the second verse of that, if I'm going to destock to 50% of my normal capacity, guess what, I also needed to cut 50% of my fixed cost, which meant sale pickups, sale trailers, quick build and fence, all those other things. If I don't, my fixed costs on a unit basis explodes.

>> Right. You've got all the same infrastructure and half of the production to back it up.

>> There you go. Exactly. So I've seen Board of Directors just hammer GMs because all of a sudden, their cost production or cost per female just exploded. And the next number I always went to, well, what's the deviation in rainfall? And well, I only had 50% of normal rainfall. Because of that, I destocked. And because of that, my cost exploded. And a board of directors doesn't -- well, I heard it was dry, but I didn't know how -- I didn't know what you were doing to react to that. Well, I reacted by destocking, you know, 50%, 70%, whatever. Well, we should already know that, oh, my gosh, my fixed costs are going to explode as well. So those two numbers right there, more times than not, one of them we control, one of them we don't. We control the stocking rate number, but we don't control the rainfall. But those two numbers in and of itself will determine any one year whether a ranch is making money or not. I mean, I know people talk about, well, it's calf crop percentage. It's pregnant percent. No, it's not. It's the relativity between stocking rate and fixed cost and the rainfall. Those are the big influencers. But again, we don't know -- we don't control the rainfall. So that --

>> Quick question before we move on.

>> Absolutely.

>> Would you include replacement heifers and the breeding female number? Because they're -- they may not be producing right now, but they're contributing to overhead costs.

>> I do not. Developing replacement heifers, I do not . Again, I don't have a problem if somebody does that. But you just hit on a major issue with KPIs and how you calculate, and that's consistency. If you're going to put them in, leave them in every year. My recommendation is back to, just because it's easy to remember, is the could have, would have, should have. All those females that could have, would have, should have weaned that calf that year. But developing replacement --

>> So [inaudible] exposed and they would produce next year?

>> Actually, it would be your yearling heifers from the previous year that are being developed and being bred but won't win a calf until the following year. Two-year-old across three calendar years. Right?

>> So Stan, this is James. So are you capitalizing those replacement heifers, then, and then using -- you're picking up that value in depreciation?

>> Okay. And that's back to the managerial accounting question. And yes, I would recommend -- yeah, I would recommend ranches to do that. Now, again, I know that changes their accounting system, but hey, that's what it's about, again, pushing the tax accounting back to the backburner and moving accounting -- managerial accounting to the front burner. And I would isolate those costs of replacement heifers beginning with what it cost me to wean any calf on the ranch. Let's say it costs me 800 to wean a calf on a particular ranch. I start adding to those, to that expense, until the point where she weans a calf, which is two years later across three calendar years. And at that point -- and again, some -- that finishing point, sometimes, some people do it one way and some people -- I do it another way. The question becomes, at what point do you stop accumulating expenses? And put that total number on a depreciation schedule. Some people will use when she's bred positive. I've believed that she has not proven herself to be a mother yet until she weans that calf. Any female can get bred. But not every female can wean a calf. So again, I take it clear to the point where she weans her first calf. So then she -- yes, then she -- that value then gets added to the depreciation schedule. And I start depreciating her over her useful life. Great question.

>> Stan, this is Jack. Could you talk a little bit about on the vein of females, the concept or how you get over the idea that on the ranch, we have to raise all of our own females versus being able to go out and purchase them and have a basis in them?

>> Gosh, see, and that's the whole key of changing the accounting. You do have a basis in that female. If we would take the managerial accounting approach and start isolating expenses, kind of like what we talked last time -- we've got cost centers, support centers and profit centers. Well, those replacement heifers, let's say a 20 -- this is 2022. So a 2021 female that I tagged to be a replacement female, all of a sudden, I take the value of what it's cost me to wean all those calves from 2021. And that value then gets added to the balance sheet as an investment in growing breeding stock. It's a current asset as opposed to a fixed asset. I am building now my basis number by doing that. And as through 2022, as I add expense to her, I bring the bulls in, I try to get her bred, in the fall of 22, I preg check and see which ones are open, which ones are bred, I'll sell the opens which goes against. It becomes an expense reducer, those coals, coal replacements, they become an expense reducer. She has a calf next year in 2023. She finally weans the calf in the fall of '23. And therein, all of a sudden, I have a basis number which, again, from a trackable standpoint, I can say, okay, well, this is what it cost me to develop my own replacement heifers on my ranch, which, again, if I'm a commercial operation or -- commercial or seedstock, for that matter, one of the KPIs that you should be looking at is what it costs you to develop your own replacement heifers relative to what I could go out there and buy those heifers for. Now, again, there's a lot of -- there's a lot of devil in the details in there because, again, if I've got 100 cow total, and I only need 15 replacement heifers, well, I can probably go find 15 replacement heifers that are comparable to what my cows look like and fit my system. Now if I'm 2,000 cows or even possibly 10,000 cows, can I find them in the quantity that I need in a consistent manner? So in some cases, we're probably forced to develop a replacement heifer just like if I'm going to run cows in Montana, I'm forced to hay produce. Again, that's a cost of doing business. But that means that KPI is so much more important because that's something I have to do. It's a loss leader, if you want to think about Walmart and all that. That's a loss leader. I have to do that in order to maintain sustainability in my operation. So great question. Lots of stuff there. So if we go back kind of to the 30,000-foot view, as I mentioned -- so we've got the number one and number two, just the number of females that I'm carrying plus deviation from rainfall. Now I want to look at the 30,000-foot view of my operation. I don't care what all profit centers I have, what all call centers I have. But I'm looking at rate of return on assets. I'm looking at what my fixed cost structure is through what I call the Support Center ratio. And those two things -- and then depending on how much debt I'm carrying, and if I'm carrying debt, obviously, an equity, the asset or a debt to asset ratio is paramount. Again, knowing what those numbers are and tracking them over time, if I'm carrying debt and I'm trying to reduce that debt over time, what is my debt to asset or what is my equity to asset, either one? Again, it's yours -- it's whoever gets and wants to pick them. But I want to know over a two-year period, a three-year period, that that debt to equity -- debt to asset ratio was going down over time. Again, that tells me I'm fulfilling the goals of my ownership of why I'm actually owning the land in the first place. And I want to stop for just a minute. And there's a couple of things because, again, when you think about KPIs, there's the database or the benchmark average of a particular database. I've got a database of all the ranches that I've worked with over time. And I've got the average, which, again, that's kind of an industry average because, again, those ranches are all over the country. And I'd like to be able to see those and compare. But again, knowing, as we talked earlier, that I can't necessarily compare Florida with Texas on a lot of stuff. But then this next thing is I have a target. And the target should be individualized. This is what I know my KPI number was. This is where the benchmark is. Again, that just -- a benchmark is just telling me I'm in the ballpark. It doesn't, again, tell me what my resources are, what the benchmark average resources are. But I've got my KPI figure. But then I'm going to come out here in the following -- you know, at the end of the year, and I'm going to make a target for that KPI for the following year. And that's based on what I believe my productivity numbers are going to be for my females, how many females I'm going to have. I don't know what rainfall is going to be, obviously. But I have to kind of adjust for normal rainfall. And then based upon -- we talked last time about what a ranch manager or GM should do every year from a financial standpoint. That's two things. One is develop a cash flow budget. So now actually, I have an estimate of what my expenses and what my revenue is going to be. So I can actually go in and project a target KPI. And to me, you've just done a poor job of ranch management. As one ranch owner and ranch -- he's a GM. He has numbers now for about 12 years. And his testament was, Stan, using these numbers has -- I don't know how to operate the ranch if I didn't have these numbers. And honestly, nothing about this management scares me now. Just tell me what the circumstances are going to be that I'm going to have to deal with i.e. a price drop. Price has dropped 20%. Or tell me I'm going to be in a drought. I'm going to have to reduce my stocking rate by 20%. Knowing what my numbers have been for the last 10, 12 years, within about two hours, I can inform the Board of Directors already in March or April for the end of December, this is what the ranch is facing. I can already be preparing them based upon what I projected from the KPI standpoint. So to me, that's a testament of somebody taking this information, having the good accounting, good inventory system, a good range monitoring system, and then being able to project in time, this is what it's going to look like this coming year. So again --

>> I think that is remarkable. One of the reasons for that is I suspect there are a lot of people who don't want to know.

>> And that's -- you're exactly right. Now the question is, that one person that doesn't want to know, who are they accountable to? If I'm just accountable to myself, which ultimately is going to be bad enough, because chances are I've got to be accountable to somebody, even if it's a lender, because at some point, if things aren't going well, I'm going to end up borrowing money against my land. But if I'm being held accountable to a set of board of directors that -- two of them that probably doesn't even know about ranching at all, all they know is financial numbers, I better have my ducks in a row. And because the last thing -- picture yourself, if you're a GM and you've got a board of directors, and two of them are outside family members, and one of them is a venture capitalist that doesn't know the wrong end of a cow. But all of a sudden, at the end of the year, this ranch has lost quarter of a million dollars. What is that venture capitalist going to say? Could you not have told us this? My goodness, why weren't you -- why weren't you stirring the Titanic away from this iceberg that sank us? Well --

>> If you can't see the iceberg.

>> Exactly. If you can't see the iceberg, you can't change. I loved your analogy last time about the dipstick. Well, you can't just change the dipstick. You have to try to change what's going on in the car. So great comment. So those are the 30,000-foot views. Again, the KPIs for support centers, how much is -- my expenses are made up of fixed cost relative to the revenue that is generating and things like that and rate of return on assets, debt to equity, those type of -- those type of KPIs. Froom there, then, you jump to each of the enterprises or centers that make up that operation. What's the cows doing if I've got a yearling operation, if I got a wildlife operation? And most predominantly, this is falling into a cow calf situation. So moving then to cow calf KPIs, we kind of start on the production side. You probably go by -- some of us are familiar with what was called the beef cow calf spa program or SPA, standardized performance analysis. And that was a standard way to calculate productivity figures for cows, one of them being the most predominant production number was pounds produced per exposed female. So how many pounds is one cow -- again, back to the could have, would have, should have number. How many pounds is one female weaning, regardless whether she had a calf or she didn't? She was a part of the herd. And right now that number doesn't change a whole lot because, again, cows can only have one calf a year. That ain't changed in the last 50 years. That's probably not going to change in the next 50 years. Relative then to what the weaning weights are, you multiply those two numbers together and you get pounds weaned per exposed female. And the average right now is about 460 pounds per female. But that -- again, that's an industry wide number. I've got ranches down here that that number is over 600 pounds. But I've also got ranches that it's 300. Again, it's -- that's one of those numbers that you have to really first identify what the goals of the ranch is and ranch ownership and what the resources are. If my operation is selling 400-pound or 350-pound [inaudible], well, I don't need 600-pound weaning weights. I need smaller weaning weights. But again, it's still important that I have the greatest number of calves weaned that I can have. So again, that's trending over time. Again, as I mentioned, you use -- in order to come up with pounds weaned per exposed female, you have to have two other numbers. That's weaning weights and then weaning percentage. We'll come back to the weaning weight here in just a minute. But again, a weaning weight is a KPI.

>> This seems like an example of one where the specific number is sort of specific to the ranch. Maybe I'm missing something, but it seems like the elephant question is, it makes a difference whether you're -- if you calve on May 1 and wean on October 1, that's going to look a lot different than if somebody calves on January 15 and doesn't wait until middle of November.

>> Exactly right. Again, you've hit it on the head. That wean -- and that's why it gets kind of frustrated with the industry that sits here and tells cow calf guys, "We'll increase your weaning weights." You may be driving me right into the ground by making those recommendations because that's not what my system is. My system is, like you say, to wean a six-month-old instead of nine-month-old. Or use black cattle instead of polka dot cattle. That's what my system is. So you can't -- and I'll just tell you or ask the question. We'll talk about it. What's the three greatest influence on weaning weights? And I usually ask that in an audience. And usually, the response is, well, it's the breed or it's feed, how much I'm feeding, it's the quality of the bulls. Well, you've just talked about number three. All inclusive, you just talked about number three, which is management. And everybody will scratch their head. Well, that's not the greatest influence on weaning weight. What's the greatest influence on weaning weights? And the greatest influence for weaning weights is deviation from normal rainfall. If I have the best genetics in the world and I only get 40% of normal rainfall, my weaning weights are going to suffer. Right? So weather or deviation from normal rainfall is number one. We've already said what number three is. That's the management collective of breeds, nutrition, feeding and all that. That's number three. Number two, then -- Tip, you've already mentioned it. Number two is what?

>> Day since birth.

>> It's days of age. Days of age is the second greatest influence on weaning weights. I'm sorry. So one is weather. Two is days of age. Three is me. That's not necessarily something that I can influence to a large degree. Now that's not to say I want -- I don't want to try to maximize them. But I want to maximize them within the resources that I'm willing to put out there. That says a lot out of this horse's mouth. I want to maximize them relative to the resources i.e. the feed that I want to put in them, the amount that I want to spend for bulls, the amount I want to spend for replacement heifers. I want to maximize them within the resources I'm willing to spend. I don't control number one. I somewhat control number two. Now, again, within a two- to three-week period, I don't necessarily influence when the calves are going to hit the ground. But I do influence whether they're six months old or nine months old. So that's the weaning weight issue. The second component of that pounds for female then is weaning percentage. And obviously, weaning percentage starts with pregnancy. How many cows am I getting bred? How many are open? Within classes of cattle, how am I getting them bred? Are my first calf heifers and then, heaven forbid, the second calf heifers, which we all know tend to be the hardest to get rebred? But again, being able to track those over time. So those are the primary cow calf numbers of KPIs that I want to look at. There's others there, just from a stocking rate standpoint. What's my stocking rate look like over time? Cow females per acres or animal units per acres, however anybody wants to calculate it, whether you use just a head number or whether you use an Animal Unit number, whatever. I don't have a problem with that. Some people want to talk about pounds per acre. Mean. Some people want to talk about pounds per cow. As I mentioned earlier, pounds of weaned calf per exposed female. So again, pick what you want, but then track them over time. Make sense? And the funny thing is you can correlate them. And people want to -- they don't necessarily want to talk about this. But from an analyst standpoint, visualize this chart for me that across the bottom, I have percent normal rainfall. Somewhere around where the axis would be in the middle is 100%. So I got 100% of what my normal rainfall is. Up and down the lefthand axis, I have pounds per exposed female. And all of a sudden, you get this chart that says, well, if I'm going to get 90% of normal rainfall, then I'm going to expect my weaning weights to be 20 pounds less. You can actually start doing these -- now you can start doing these correlations. Now do I expect ranch managed to do that? Heck, no. But if I'm a consultant out here or even guys from the insurance business, you can start doing these correlations for people. And it's pretty amazing what it looks like. But again, you got to have the data to do that. So there's several things from a cow calf productivity KPI standpoint that you can take a look at and really start analyzing the operation as a whole.

>> James, did you want to add something there?

>> And I just -- I guess I'm going to point out, and maybe Stan, you can confirm, you obviously have the current year's weaning weight that also is going to be affected because of the cattle not milking as well or whatever. But you're going to have future years because that's when you get -- the breed up is worse because of that dry condition. So there's a lagging effect of this performance that goes on. So we don't see it in one year. We see it in multiple years. Am I correct?

>> Oh, no, absolutely, you're correct. Absolutely. There is a lag. It does affect the current year, but it also affects the coming years as well. And that's something that we don't necessarily always think about in a drought. It's bad enough in 2022.

>> With the current calf crop.

>> Yeah, with the current calf crop. But all of a sudden, I'm out here looking at my females. And I just turned my bulls in. And my females are in a body condition score three and a half and four. Wow, I should immediately know -- but I'm out here. As I turn the bulls out, I'm looking at my calves. And those really good managers will be looking at their calves and their cows and have been looking at their cows, thinking, okay, I'm going to turn the bulls in in 60 days. And these cows are in a 3.5 or 4. I better start doing something today. But that's not -- I'm not going to reap any benefit on that or any detriment if I don't for the next year. But that's what ranch managers need to think about is, okay, I got to also be thinking about the following year because it's going to impact pregnancy rates this fall and weaning percentage next year. So absolutely, that's a great comment.

>> Yeah. And it's a difficult compensation to try to figure out, I guess, because if you -- even if you call heavy and reduce the number of females that you're trying to maintain, if you have poor range condition, you're still going to have difficult breed back even on the smaller number of cows. And so now you've got fewer calves in the future year as well as poor body condition on the cows. It hits you twice.

>> And hopefully, what you haven't done is tried to feed yourself out of it, because all of a sudden, you've not only really hurt the productivity, but you've also increased your cost as well. So again, that's the whole dynamics of a drought situation. So as we then move away from the production and start moving --

>> Stan?

>> Yeah, go ahead.

>> To your point there, what would you say would be the receptivity to producers on a nationwide basis that -- to that last point you made? I mean, you can't feed your way out of a drought. That's something that we've seen in Australia. They understand that very well, very quickly. But it seems that here in the States, at least for quite a while, that that hadn't been as readily adopted. What would you say -- would you say that's something that's well understood now by producers, at least those that you work with?

>> Yeah, and just to follow up on your reasoning there, Jack. People are going to feel like I've done a lot of work to develop a cow herd. If this is a blip on the radar screen, I can take a hit this year financially, and then I'm going to be okay next year. And we'll just ride it out.

>> Yeah. Wow. Those -- that's a great question and great comment. I would like to think that we have learned our lessons. Any drought in Texas seems to be a prolonged drought, it seems like. But other areas are just dry areas. I mean, we're in a 10-year period down here. We're eight years into drying drought and have one to two years of wet within a drought. So we kind of know we can't feed ourselves. So our response to that -- and again, it's a ratcheting effect. Our response to that is we try to stay moderately stocked. Well, that's all fine and good to stay moderately stocked. But we go back to what I said before on what's the stocking rate relative to the fixed cost? You guys know as well as I do what pickups cost and what they did cost even five, six years ago. Well, now instead of paying 40,000, I'm paying 65, 70,000 for a ranch pickup. Well, that's a fixed cost. And I don't know that I can stay moderately stocked anymore. But therein, I raise my risk of what happens to me if I am in a drought. So I would love to -- I would love to think that ranchers are recognizing that they can't beat themselves out of a drought, but I also feel for them because I had cows myself. I mean, I know what it takes to have good cows and a good herd and use the great bulls and really try to fulfill my objectives. But it's a risk there. So I don't really have a good answer for you, except for -- it just -- it comes back and really portrays the importance of monitoring over time, even the rainfall. Back in August, it started looking like we were dry. I mean, August, September, October. And if I had my data right, which, thankfully, I do, I could see that, oh, my gosh, for the last three months of last year, I'm already -- from a growing season standpoint, I'm already 30% behind on moisture. And if I don't get it in March, the coming March -- I know I'm not going to get anything in January and February. I typically don't. But if I get to March and I'm still dry and I'm somewhat below normal, you know, guys, I got to start taking action immediately because the rest of the year, there's just no way I'm going to recover. So again, it comes back to the monitoring of these numbers over time as much as you can to really be proactive instead of reactive. I floundered back and forth. So I didn't answer your question, but I've tried to dodge it as best I could.

>> Would you say that it would be -- you'd have a quicker receptivity to destocking from yearling producer versus a cow calf producer due to the, I guess -- and the only way I can say somewhat semi-emotional attachment to the animal versus the investments and all the other reasons you've just alluded to versus if you were going to your neighbor or a sale yard or a local video to purchase X number of truckloads of steers or heifers. Writing that check makes it a little easier to say, well, instead of buying eight loads, we're only going to buy six.

>> Without a doubt. And again, from -- strictly from a cow calf ranching standpoint, I talked about we try to stay moderately stocked. But now it's difficult to stay that way because of the fixed costs that's associated. But that's -- let's just say some magical number here, whatever it is, I'm at 80% stocked. Am I capable of taking those other 15 to 20% and using that with a yearling operation? Well, now I'm not only a cow calf guy, but I'm also a yearling operator on the other 15%. And I'm going to stay off of the five. That shock absorber is now my yearling. So yes, the emotional attachment to some six weight steer out here that's a non-herd that's jumping fences, I'm not going to have a whole lot of admiration to selling -- to that steer. So I'm just going to sell it if things get dry and hope I -- hope those sales gets me through this drought and I don't have to get into the 80% of my cows. So that happens. But there's always devil in the details, because now as I mentioned earlier, now you're not only a cow calf operation, but now you're a yearling operation as well to a smaller degree. And you guys know as well as I do, it takes a different set of skills to be a yearling operator versus a cow calf operation. I mean, you got to have two different sets of brains here because, again -- but again, you start talking about what's the KPIs on a yearling operation. And the two things in my mind -- and I've looked at these numbers on various operations. From a KPI standpoint, from a yearling's, what's my gross margin? Sale value versus the buy value on a herd basis. And what's my cost of gain? I mean, those two numbers are paramount in a yearling operation. That is not the case in a cow calf operation. So it sounds good. And that's what a lot of us try to do. But it's a balance in there to try to maintain both of them at the same time. Okay. So just kind of moving then to the cow calf operation. I know -- as we all know, we always run out of time more so than we'd like. But from a cow calf standpoint, there's two numbers from a financial side or, really, from an integrated side, production and financial. First off, what does it cost me to run a cow a year? And again, this is one of those that it can vary across the country big time. My data right now says it's about 950 bucks to run a cow a year across all my clients. Now that number is trackable. I can look at that number. The greatest influence or that number two is the fixed cost and the breeding female number, that could have, would have, should have number. Again, I can change my inventory number, and I can affect that number very quickly. I can stop by and fix stuff and affect that number very quickly. The other number that I would have more preference to look at, though, is what does it cost me to wean a calf? And that number takes into account that all my females aren't weaning calves. So again, the could have, would have, should have number divided by total cost -- in this case, total number of calves weaned. And that number right now is about 1125 bucks a calf. Well, you guys know as well as I do, you're not getting that much for a calf right now. Now it's getting closer, and it probably will get there in the next year or two. But it gets pretty rough to try to come up with that number. But again, tracking that number over time. Again, that's an average number. As we talked, I hope everybody is on the bottom side of that average. But we also know it's an average, so which means there's people on top of that number as well. So those two numbers are incredible.

>> Stan?

>> Yes, sir.

>> Could you touch a little bit on in looking through your KPIs, you've got hired labor, depreciation, repairs and maintenance -- can you touch a little bit on the idea of owning all of your equipment to do your work, say, if you're talking about an operation that has a hay component versus custom hiring it? Granted, you're still writing a check. But have you run into a preference of one over the other or a benefit of one over the other? There certainly are differences tax wise. And then I guess take care of that. And I'll hit you with the follow-up, if you have time.

>> Yeah. So a lot of those -- one example specifically, and we mentioned it, too, before we came on the air, was somebody that's got 4,000 cows -- 2,000 cows in Montana. If you're going to run that number of cows in Montana, you're probably going to have a hay enterprise. And you're probably going to do the hay enterprise yourself. And it's not so much from a cost standpoint, albeit it can be, but the problem is the quantity and the quality that you have to have to run that many cows in that state. They're just not going to be that many people from a custom harvest -- from a cost of growing standpoint and harvest standpoint that can supply the tonnage to maintain that herd. Now if I'm 100 cows out here -- and I don't mean to offend anybody. But if I'm 100 cows in East Texas, where you will grow hay, I call that recreational hay. You just like to get out there on that tractor and you like to get that baler behind you, and you just like to cut hay and bale hay for your cows. So that's all fine and good. Wouldn't you be better off if you had somebody come in and do that for you or you go buy your hay? Well, as long as you can find the quantity and the quality that you're looking for, yeah, that's probably a component of your operation that you could actually make some efficiency changes on. You could just cut your tractors out, your balers out. But again, understand that the risk has now shifted to that grower always being able to provide you. And the next thing you know, instead of $110 around bale, it's going to be $160 around bale. Oh, well, gosh, I just can't afford it. Well, I'm sorry. That's what it is. My machinery is going up. Fertilizer is up. Blah, blah, blah, blah. So you're now at that risk instead of the risk of owning your own equipment doing it. So is there a standard, this is what you should do? Absolutely not. If there is, I ain't seen it yet. So it's all what you can handle yourself.

>> In those examples where you have diversified operations and potentially multiple entities i.e. a farming enterprise, livestock enterprise, with your clients, do you recommend staggered fiscal years to give one entity the opportunity to capitalize tax wise on a -- in the year and still pass that off to the next?

>> I think that becomes a bigger -- to try to stagger your fiscal years becomes more of a burden from the person that's actually entering the data. It still comes down to a 12-month period. So instead of using January through December, I'm going to use May through April. It's still a 12-month period. So I don't see -- I don't see the benefit. Now I'm open minded. And if somebody can show me that there is a benefit there, I'll talk to him. But I just don't see the benefit of doing that. Okay?

>> Got you.

>> Stan, this is James. Excuse me. I think the bigger thing that's really impactful here and just my experience being out in the country and I think kind of Jack is even alluding to, a lot of people don't know what their costs are. So they don't know whether it's cheaper to go buy hay or to put up their own hay because they've never actually -- they never really allocated these costs to a hay enterprise. And I think it's really important. And that's what Stan is kind of pointing out. It really comes down to your ranch and your circumstances. But you also have to know what your numbers are so you can make a correct evaluation rather than disguising a bunch of stuff and thinking that you cut that hay cheaper than you can buy hay, when you really don't even know. And I think the point is you should know so you can make that -- a wise decision rather than just a guess.

>> And take that one step farther. And don't lie to yourself. If you tell me you're calculating it and you say, oh, Stan, I calculate that number and I can do it for $45, I'm probably going to throw up the BS flag, because I don't think that's right. You're probably not including your depreciation. You're probably not doing a full cost analysis. Again --

>> And you're probably not paying yourself.

>> Again -- exactly. I mean, again, well, Stan, I'm not worth. Then quit doing it. You know, just get out of the industry if you're just -- if you're not worth it, don't do it. But you got to tell -- you can't tell me that you don't send your spouse to a retail store to buy groceries every once in a while. Well, that kind of -- well, no, no, no, no. If you're going to do it, if you're going to tell me you're tracking it, tell me you're tracking it correctly. And again, it all comes back to doing these numbers accurately and consistently over time. But there's times when you have to throw up the flag and say that's -- I don't believe you one bit. Okay. So you get into the final number that all [inaudible] about on a cow calf standpoint, what's the breakeven cost per weaned calf? And so that's -- at the day's end, I've spent all this money. I've gotten some secondary revenue by selling coal cows, by selling water, by whatever, blah, blah, blah. And I take my total expenses. And I subtract out, as an expense reduce for my secondary revenue, and I take that number and I divide it by the total pounds of weaned calves for that particular year. And I now have what it costs me to produce a pound of weaned calf on my operation. And if that number is $1.50 or if that number is $1.20 or if that dollar is $2, I then compare that with what the market is offering me for my calves. And the difference between those determines whether I'm making money or losing money. And by having that number now and tracking that over time, what you find is that there's a slow march of inflation, that that number is going higher and higher over time. Some years, it goes up a bunch, some years, it just kind of creeps up. And in fact, one or two years, it may actually go down because I had a super weaning percentage or super weaning weights. But the overall trend of that number is probably going up about one and a half to 2% every year. It just so happens there's years where it goes up six. Like this year, if I do a bunch of analysis on ranches this year, I expect their cost production is going to be somewhere between 6 to 8% higher than what it was for last year. And last year was probably higher by about 3 to 4% from the previous year. So the trend over time, though, is this goes up. Now track that, then. And I don't care -- track that against what a market price is. I don't care whether it's the market price of the calves that your -- price that you're getting for your calves or if you just take a Texas average price over time or you take a Montana average price or a Florida average price over time. But just chart them and see what that looks like. And it will scare the devil out of you. Because, again, you now have the three legs of a three-legged stool. One, what's my productivity levels? And again, that comes back to pounds per female. Pounds per exposed female, what's my productivity level? And that's not going higher. I don't care what people say. Weaning weights are not going higher in this country. I mean, I have yet to see a database that tells me that they're going higher over the last 15, 20 years. There was a time when they did , but they're not going up anymore. Relative to what the weather does to us, we have maximized productivity. Now people don't want to hear that we've maximized productivity from a cow standpoint. But we have relative to what the weather allows us to do that year. So now you have maximized productivity relative to increase in cost. Again, if I've got the slow march of inflation, 2 to 3%, sometimes it's 6, sometimes it's negative 1, but the trend is higher. That is a worst-case scenario for cow calf operations and that their productivity is maximized, but your costs are continuing to go higher. At some point, that's a trap. The only thing that saves you, then, is continuing to monitor what my costs are. But again, even there, I can be the most scrupulous cost person. And I can still have higher costs. The third component, then, is what's the market price for the product that I'm producing? In this case, what's the price for my calves? And that better be going higher, or else it's not a sustainable industry. Now --

>> So do you recommend people look for ways to be more creative about how they sell calves in order to get a little bit more money?

>> Without a doubt. And not necessarily just calves. Certainly -- and this is where I go back not necessarily to the calf situation, albeit, yes, sir, try to get as much for the dollars for those calves as I can get. Do as good a job on call marketing as I can. Don't just sit there and take cows to the market. Do something. Call the guys ahead of time. And if they tell you don't bring them this week, don't take them. Stick them in a pan, do something with them. But do a better job of merchandising your calls. Get the best calves that you can -- that the market is going to want. But then also from a ranch standpoint, look for alternative revenue streams, whether it be wildlife, whether it be gravel sells, whether it be bird watching. Again, I know -- and I know what I'm saying here, because all those things come with added risk and probably added expenses.

>> Overhead.

>> But again, from a ranchland standpoint, you got to generate all you can from a revenue standpoint off that land, or else it's going to be difficult. And the kicker is you've got a whole industry that's built on the back of cows. And if the cow number falls -- I mean, we're going to see this in the next two years. I mean, we got packing plants being built or being proposed to be built all across this country at a time when we're decreasing cow numbers. Tell me that's a good situation. I just -- sometimes we get this thing -- more times than not, it seems like this industry gets things backwards instead of forwards. But anyway, that's -- I'll shut up there --

>> That's another webcast or podcast in itself.

>> That's a whole other situation. So anyway -- so I'll stop right there, guys.

>> Yeah, Jack, I've got a follow up question. And then I think we'll see if we can find a way to close this off for the day. To what extent -- as people may be aware, this section of podcast episodes is funded by the USDA grant for producers that are underserved by crop insurance. And we're trying to eventually get around to what is the role of different kinds of livestock and drought insurance as part of a risk management portfolio for ranch finance. So my question is, to what extent is things like drought insurance used to avoid having to do management that's responsive to drought?

>> So are you asking to what extent are producers using crop insurance as a crutch?

>> Yes. What's your perception about that? And then if not, how should it be used?

>> Well, I work with producers around the Tri State area in the Pacific Northwest. And I would say unilaterally, as I have customers that experience, as Stan as talked about, below average precipitation -- and I put myself in this boat. I have a policy on my own range ground. And as Stan has very eloquently pointed out, when precipitation is not there, forage isn't. Either is productivity. I would say the vast majority of producers that I work with, they're putting those payments right back into their operation. If it's to purchase additional feeds, if it's to identify infrastructure that can be enhanced to try to enhance productivity -- I would say to some degree, producers are using crop insurance to help them through those tight spots versus making some tough decisions that might be destock. But on the precipitation side of things, and then as you look to the revenue protection side of the equation, I would say there's been a dramatic increase in producer interest and receptivity to the idea of trying to put a floor and protect themselves from some pretty dramatic market swings that we've seen in recent times.

>> As a safety net rather than as a crutch.

>> Most definitely. And that's -- we saw that most recently this spring. I had a customer that had a livestock revenue protection policy on yearling steers and heifers. It was going to end in March, about the 10th of March. And we'd been in pretty close conversations leading through. And the market had been just appearing to be starting its climb. And then we all know what happened in late February, early March with Russia and their invasion on Ukraine. And we saw the markets go into a free for all fall. Grains went through the roof. That producer was able to certainly protect themselves. They saw -- went from having to pay a substantial premium to receiving a substantial indemnity payment, which basically shored up that loss and market value as to what those yearlings should have brought. I guess, what -- does that answer your question, Tip?

>> It did, yes. Yeah. And we're going to come back and talk a little bit more about that sometime soon here. I just wanted to -- the question about the issue of people trying to ride out a drought instead of potentially making some difficult management decisions to deal with it and to reduce the amount of financial loss. I was just curious, what role has drought insurance been playing in that? I think you answered that question.

>> I know for a fact it certainly helped a number of operations certainly in the Pacific Northwest but also throughout the country through some pretty dry and tough times.

>> Okay. Well, I think we got through a number of KPIs that will be useful for folks to think about. And I would encourage listeners to begin working on some calculations, if they haven't yet. If this hasn't been enough of an impetus to start, at least, wondering what your numbers are, if you don't know already, people should do that. And we will include several links in the show notes to Stan's page and to some other tools that can help you think through how to deal with this. James, you get the last word

>> [inaudible] the last word, but I do want to just make comment to something that's really impactful to me that Stan said today in the discussion. And that is -- he talked a lot about if you're a general manager and you're accountable to a board of directors -- and I had that experience -- growing up on a family ranch, I didn't ever really feel like we were really accountable to anybody. And then I found myself in a role where I was accountable to a board of directors. And it really changed my view on how we were running our business. And it's made me think a lot about that. I think sometimes, this business is getting more complicated all the time. And it can feel overwhelming. And we can tend to kind of put our head in the sand as family ranchers and not really take this as serious as maybe we should. And I think Stan provides us some really good insight into how we can view our businesses a little bit more professionally, because I really believe we are accountable to somebody. And that really is the next generation that we all hope takes our place in this business. And I've really been impressed with the conversation that Stan has brought forward here and just want to encourage producers to really think about the accountability that we have to this next generation and the things -- the actions and responsibility we can take today that maybe we haven't really ever had to before. But I think the day is here where we really need to kind of step up our game. I think Jack is going to speak more to some of these tools and opportunities, which, quite frankly, are kind of a blessing to all of us that there's some tools out there that we can use to run these businesses a little bit more professionally. But we have to be prepared for that with the right information. So we know how to use those tools. So I really appreciate Stan's discussion.

>> Yeah. And I think the consequences of financial failure maybe aren't fully appreciated. The downstream effects when ranches begin to just close up shop because they can't make it are pretty large economically, socially, within a geographic area. And that's -- in the big picture, that's what we're trying to help avoid here. Stan, thanks again for your time.

>> Glad to have been a help. I hope somebody can take some of my comments and try to make some changes or at least -- you know, I always felt like my job, if I'm just an extension person, is to make somebody think about their operation in more detail. Me as a consultant, then, what can I do to identify the strengths and, more importantly, the weaknesses of -- that are there that can -- that's going to prohibit you from moving your ranch forward to fulfilling your own goals? So I appreciate the opportunity.

>> Thank you again and thank you for your work. Thank you for listening to the Art of Range Podcast. You can subscribe to and review the show through iTunes or your favorite podcasting app so you never miss an episode. Just search for Art of Range. If you have questions or comments for us to address in a future episode, send an email to showatartofrange.com. For articles and links to resources mentioned in the podcast, please see the show notes at artofrange.com. Listener feedback is important to the success of our mission, empowering rangeland managers. Please take a moment to fill out a brief survey at artofrange.com. This podcast is produced by Connors Communications in the College of Agricultural, Human and Natural Resource Sciences at Washington State University. The project is supported by the University of Arizona and funded by the Western Center for Risk Management Education through the USDA National Institute of Food and Agriculture.

>> The views, thoughts and opinions expressed by guests of this podcast are their own and does not imply Washington State University's endorsement.

 

[ Music ]

>> Welcome to the Art of Range, a podcast focused on range lens 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.Welcome back to the Art of Range podcast. We're in a series of episodes on ranch financial resiliency and have been talking through how to determine whether ranch enterprises are making or losing money and then how to manage so that they do. My guest today is Stan Bevers. He's a retired economist from Texas A&M and runs cattle himself and is a ranch management consultant that has taught for the King Ranch Institute. And I'm joined again today by James Rogers and Clay Worden, both of whom are repeat guests here. And if you're interested in more details on their background, go back to the first episode in this series. Stan, welcome.

>> Hey, thank you, Tip. I appreciate being here, being a part of it.

>>Tell us a little more about who you are mostly because I think we likely have a number of listeners who have not run in the same circles and may not know you. What was your pathway to doing ranch financial consulting?

>> Yeah. So, I'm a native of Southwest Oklahoma in North Texas. I've went to Texas A&M during graduate school. I got a master's there. I actually live at Vernon, Texas which is in North Central Texas. And if you think about the old ranch grope and drag ranches, the old Four Sixes that is being made popular now, the Wagner Ranch, the Pitchfork Ranch, the Matadors, they're all up here in North Central Texas in what we call the Texas Rolling Plains. So, when I finishedgraduate school, I was offered a position here at A&MCenter that is headquartered here in Vernon to do extension programming in Ag Economics. And obviously, that migrated to the area being so heavily in ranching that all my work started in ranch management with all the ranches around here.That coincided with 1980, or excuse me, 1991, people go back and some people may recall something that was called beef cow/calf SPA, SPA or Standardized Performance Analysis. And there was an effort back in the 1990 range that people were looking to or NCBA and academics and ranchers were looking for a way to come up with a way to standardize calculations for ranchers. I'll be at -- If you were at a coffee shop and you started talking to somebody about, "Well, I ended up with a 90% calf crop," what did that mean? Because if we'd calculate it one way and somebody else would look, "But I had a 98." And, you know, it's pretty easy to have a 98% calf crop after you've sold out all your open cows and all that and you don't calculate this the way that I do. So, you know, there is an effort there that come out from NCBA and ranchers and then the academics. So, that was endorsed, the actual standards, the SPA was actually endorsed by NCBA in 1991. So, that kind of corresponded with my works starting with Texas A&M Extension. And so obviously, you know, we had a lot of ranches that were interested in that at the time. Boy, the peripheral of beef cow/calf SPA was to create databases across the country that once a ranch completed the analysis, we could have this database of results, anonymous database. And we would know kind of well in TexasRolling Plainsweaning for sand age on cow should be roughly 82 to 83%. Well, not all the universities, not all the efforts by various states where, you know, it was very strong but we championed it here in Texas and particularly in the Rolling Plains of Texas. I know I traveled religiously across the state and really also here in the Rolling Plains getting ranchers to complete the analysis. So, we had the largest database here in the Rolling Plains. So, I did that for 27 years with extension. At the same time, I started, you know, having interest in other ranchers from out of states saying, "Well, why don't you come do this for me?" Or other university saying, "Can you come do a workshop for us?" And so, I got to where myself and a gentleman named Dr. Jim McGrath [assumed spelling] traveled the country doing workshops for other universities on how to how to do a SWOT analysis and also to other ranchers across the country doing the analysis for them. I couldn't do it in Texas. And, well, backing up just a moment. So, this ended up being, you know, the opportunity to do a lot of consulting outside of the state of Texas. Obviously, I work for these taxpayers of Texas. They paid my salary as I was working for Texas Extension. So, you know, I couldn't consult inside the state of Texas which was fine. I was happy with that. But as things kind of got bigger, I continued to consult outside the state of Texas which A&M allowed me to do. And then, one thing that kind of started happening later and in 2015 or 2016, I had one of our beef cattle specialist send me a paper on something that was called KPIs. And it was a list. It was put out by dairies. And, you know, if anybody's familiar with the dairies, it seems like they calculate anything and everything. OK.And they had a list of KPIs for dairy cows and dairies operations. So, they sent me the paper and said, "Hey, why can't we do these KPIs for cow/calf or for ranches?" Now, the -- and the movement, the migration from SPA to KPIs was the SPA,in and of itself, only dealt with the cow/calf operation around. And as we all know, even, you know, in the western states where you guys are, there is not a ranch out here in the country that only deals with cows. There's always other enterprises going on whether that'd be stock or cattle, wildlife enterprises, you know, shoot me, even water sales. OK.But from a SPA standpoint, SPA wanted to cut out all that information. So, I had too many ranchers saying, "Well, Stan, this is great. That's nice analysis and all this but if you don't tell me about the operation as a whole," because I've also run in yearlings. You know, I've also got a wild -- so anyway, given the KPI sheet that was sent to me from dairies, I said, "Well, yeah, there's no reason why we can't do this from an operations standpoint." And really look at a full ranch and look at all those enterprises. So, that's where KPIs came in and KPIs is key performance indicators. And a KPI is a number that's trackable over time. It's always calculated the same and it's an important activity that if it's -- if I fulfill my goals of establishing a KPI, then in fact, I'm contributing to the overall profitability of my operation or I'm in fact fulfilling the goals of ownership. OK.So, that's where KPIs kind of got started. I retired because the consulting deal outside the state got so big where I was traveling all over the country and still trying to do an A&M job. And then, I bought my first farm in 2007. So, I was also running my own cattle, still had a little bit to do with the King Ranch Institute, something had to give. So, that's when I decided to -- I've had kind of reached the point where I could retire from A&M. Did that in 2016, went full-time consulting. You know, in 2018, I was on ranches from Florida to Hawaii, from Texas to Montana in 2018. I was on an average of about two to three ranches a month and those visits was anywhere from a day to three or four days. So, things got really big. And that's where Ranch KPI, the company came down.And then again at the same time, I was asked to be a formal faculty member for King Ranch Institute down at Texas A&M Kingsville in 2018. I'd worked for them for a number of years. And that was really twofold. One was just I wanted to be able to really solidify what I was trying to do from not only the KPI standpoint, but also number two was to start having a legacy of people that would come through and kind of know, in my mind, of how to do this correctly. Now, I'll say one more little stuff here and then I'll shut up, Tip, and let you ask a question or whatever. But people kind of missed the boat on beef cow/calf SPA. Again, it was a cow/calf deal. And it was a great program, but where they missed was, and we all know this, good results are always a function of good data. Now, again, it's the old adage garbage in, garbage out. OK. And so, what we write, what we really found from a SPA standpoint is ranchers as a whole. And then again, this was in the early '90s, ranchers as a whole do a really bad job of record keeping, not only from a production side but obviously also from a financial side. And they could tell me, you know, I could ask them. I said, "Well, how many counts did you have say January 1st of this year?" And they would always tell me over the phone, "Well, yeah, I got that number. You know, I've got it right. You know, I ain't find it no problem."When you get there and, well, maybe there was a problem. They didn't keep as good a record as what they thought.OK. I mean, they may know how many total animals they have but when you start breaking it down. OK., how many 2022 replacement heifers have you got on the books right now, you start getting in a little more detail. And the inventory systems wasn't as good as what they thought. And then I don't even have to say a whole lot about how bad the financials was. Now, I'll say this about the financial record keeping. And I, you know, I don't want to upset any accountants at all but -- because again, they're doing what they're told to do. Now, from a financial standpoint, as an industry, the ag industry can continue to do cash record keeping now by the IRS. They are -- the agis the only industry in this country that is allowed to continue to do cash record keeping. As opposed to, you got cash record keeping as opposed to double-entry, full-cost accounting being the alternative or what some people call GAAP accounting, generally accepted accounting principles that every CPA would know, you know, exactly what we're talking about here. Cash accounting is a real issue of -- and does a very poor job of identifying good financial data from a ranch. And, you knowwe've -- but as an industry, we continue to believe that's what we need to be done. And I'm here to tell you I don't believe that at all. You start talking about two accountants and they say, "Well, there's no reason why we shouldn't, you know, why we -- you know, what you're telling us is it makes sense. We need to be doing it this way, not cash record keeping. So again, from the standpoint of what SPA did and what KPIs did was identifiedhow poorly we're doing our job on both production financial record keeping. So, where I spent a good amount of my time in consulting on ranches outside the state was, "Well. OK., Stan, you've told us this, can you help us change?" And so, I spend a lot of time setting up accounting systems and inventory systems for ranches across the country. And then, once you've got a good accounting system, a good inventory system in place, now you can really then calculate good KPI results and then trend them over time, and in fact really start making a difference on your ranch. You can actually use the data now to make management decisions, hence, what we call managerial accounting for ranches. OK. So, I'll shut up right there, Tip, and be glad to answer any questions or comments, man.

>>That's a great introduction. We've mentioned at the beginning of the series that some people's only accounting is keeping enough numbers to file their taxes and maybe even that's pretty sketchy according to what you're saying. When you're distinguishing that tax accounting from accounting them for the purposes of managing the operation, maybe here's a good example of a cow/calf enterprise analysis published by WSU back in the 1990s. Specific to irrigated pasture operations in Central Washington found that the average small to midscale ranch was losing about $75 per mother cow per year. You know, that may not be a big problem for taxation as long as the numbers are accurate, but it's a problem if you're trying to -- if you're running cows for the purpose of making money and not just keeping the grass down. Yeah, how would you define managerial accounting then?We've talked--

>> Yeah.

>> -- around it a bit.

>> Sure. So, here to me is the big difference. OK. So, cash record keeping focuses on cash flow. OK. Now, then -- and let's define cash flow for just a minute. Cash flow is I had this much money in the bank on January 1 or whatever year, you know, whatever day fiscal year you want to start.But January 1, I had this much money in the bank.You know, I bought stuff. I sold stuff. I bought capital assets like a pickup or bulls, you know, fixed assets, things, you know, expenses that I spend and expand on that have a useful life of more than one year.Relative here, you know, talking about a ton of feed versus buying one bull. OK. So, feeds obviously going to be consumed in one year, probably sooner than that. But a bull we hope is going to have a useful life of, you know, four to five to six years. And then, you know, my management style. So, cash flow is I start with this much money, I spend this much money, I've bring in this much money. And at the end of the year, here's my checking account again. And I went from 100,000 to 90,000. OK. Well, did in fact, I lose $10,000 in a cash flow basis. And cash accounting would say, "Yup, you lost 10,000. So now, I can calculate, you know." And tax accountant or IRA or, you know, anybody that's doing tax can say, "OK, I can do your tax accounting now," or, "I can file your taxes. And, you know, and in fact, we can do some tax manipulation and we can actually make 10,000loss look like a $40,000 loss. So, we can really benefit you there.""OK. You know, I'm all about paying less taxes.OK. That's me.I'm just like any red-blooded, you know, independent, capitalistic American. I don't want to pay more tax than I have to. So, I'm all for that." Well, the kicker is when I went from 100,000 to 90,000 it did not recognize the fact that now, part of that money was spent to buy a bull. And again, that bull is still on my place and still has probably an additional four years of life, you know, that my balance sheet should now be reflecting it. And therein lies a big difference between cash accounting. OK.. And what managerial accounting can and should be done where the managerial accounting focuses on wealth.OK. I'm talking wealth here. What's my balance sheet look like? OK. Because I may have spent a lot of that money on fixed assets that I still have those assets. Now, I took one year to -- and, you know, we're going to continue to get deeper and deeper here, Tip. So, you know, and anybody else, Clay, or anybody that has any questions, let's just open it up.

>> I've got my seatbelts on.

>>Mybalance sheet now reflects an increase in wealth,OK, even though my cash flow looked negative.OK. So, I did not calculate from cash flow what my true net profit was, my net income was. I can only do that through making those accrual adjustments or GAAP accounting or double-entry accounting that now shows my balance sheet went from, you know, 100,000-plus x number of dollars in assets to now, well, my checking account only says 90.But my goodness, my fixed assets have gone up, you know, $100,000. So, my wealth increased.OK. My cash flow decreased. So, again, that's the big difference here. And again, you know, IRS still allows you to do, you know, cash type accounting but it will never ever tell you what your true net income was for that particular year.

>>Hey, Stan, how do we help ranchers around this country get started with what you're talking about? So many of them, you know, they have dirt under their fingernails, they're out every dayand sitting behind a computer or a ledger sheet or the checkbook, you know. It's not really -- it doesn't feel a productive tool. How do you help them get started with these accountants?

>> Yeah, that's a great question, you know. And I've struggled with that for the last 20 years. I mean, how do we get this, you know, to be better because I know the people that are buying these ranches today and even the big ranches. OK. As you mentioned -- as we mentioned before we went on the air of, you know, some of these guys are buying these ranches and they're just believing, you know, I can just, you know, invest the big dollars and put, you know, a bunch of bulls out with a whole bunch of more cows and, you know, just sit back and watch the money roll in. And that's just not the case. How do you change this? Well, you have to -- and again, this sounds like a cop out but it's not.OK. Because first and foremost, you got to change the mindset of this industry. And when I say this industry, I'm talking about all the participants including not only the ranchers, self-evident there, the ranchers being a part of this industrybut also then their accountants.OK. And then also not only the accountants but if they're lending money or being, you know, working on borrowed money, then the lenders have to take it all into account. Because again, one thing that I try to teach on this is you need to understand, as a rancher, when you've got your team of people and including, you know, attorneys, accountants, lenders, all these what I term your ranch team, first thing you need to do is ask what's their motivation,OK, to you. And well, I've had a number, a large number of accounts telling me, "Well, Stan, if I did this or I propose this to my ranchers first off, are they going to have the time and the resources, including capital resource, to actually do a good job of accounting?" Second off, they're really just interested in, did I pay any taxes or did I not? The worst thing and I actually had an accountant told me that I would lose clients if on March 15th, I did their taxes and all of a sudden they had to pay 10, 15, $20,000 in taxes. The ranchers themselves as clients would come to the accountants and say, "My God, could you not have told me this and I could have bought something?" Well, I don't have any problem with pre-paying some expenses. But if you're spending $1 to save 20 cents, that just doesn't seem like good business management to me. OK. And so, not only that but then also, you know, let's cast a shadow on the lenders. And again, I'm not saying anything bad about them. It's just that the industry that we're trying to work in and how we change that, the lenders themselves again, you know. OK., well, you know, my banker called and said, "Stan, I need to bring in, you know, my balance sheet." And I scratch my head and say, "OK, well, what's the balance sheet?" Now, what do you want again? And I'll tell you, the default is the lenders are just, "Bring me your Schedule F." And what happens? Well, the banker and their associates, again I'm not saying this is bad, this is just what's happening, then the banker and their staff actually creates a balance sheet for them off their depreciation schedule on their Schedule F. And do you have any other cattle besides these that's showing up on -- because as we all know, you know, again one of the big issues that we couldspend, you know, a whole afternoon talking about is, you know, the replacement.The race replacement heifers were,"Well, yeah, you know, Mr. Banker, you know, I've got 100-headof replacement heifers that I'm keeping." Well, where are they? Well, they're not on your balance sheet. Well, they won't be because I'm doing tax accounting, because I took those, you know, expenses and wrote them off during that year to make sure I didn't have a whole lot of tax liability for the last year. But in fact, if I do a market-based balance sheet and I look out here and which is what the banker is going to want, "Hey, I want all your assets tied up." Again, that's kind of a bad way to put that. But again, I want to -- me as a banker want to collateralize all your assets in order to secure your notes. So, those 100-head of replacement heifers that you're talking about, I need them on a balance sheet but they're not on a cost-based balance sheet.They'd be on a market-based balance sheet. But the banker themselves typically are the ones that are creating the financial statements when in fact,you know, the rancher and his team should really be the ones that have a really good cost-based balance sheet.OK. Then I can take a cost-based balance sheet and create a market-based balance sheet very easily off of that. So, I think it's Clay, so how do you change that mindset,OK, to start moving this industry forward?You know, there was a time and I believe I'm correct in saying this in 1980, there was a movement, there was actually a bill put in for Congress and the beef industry called it the Heifer Tax. And what it was, was the IRS was trying to force agriculture away from cash record keeping and trying to make them do good business accounting like GAAP accounting, double-entry accounting. The industry fought it tooth and nail from what I got. I was, 1980, I was 18 years old so I really wasn't paying that much attention. I was more interested in other things at that point in my life. But what I've been told was the industry fought it tooth and nail and finally got it defeated. Well, that came up about five, six years ago and the industry beat it down again, you know? So, again, how do you change the mindset? And I think to me, that's the first thing to how you deliver this because again, there's going to be people that are very interested in doing this type of accounting to get this good type of record because again, you know, I've worked with ranches, you know, all over the country. And those that now have KPIs results and can trend those over anywhere from I've got ranches that can trend them for 15 to 20 years. And you talk about, you know, what it costs me to run a cow a year on my operation. Even though it's got other enterprises as I isolate the cattle, the cow/calf enterprise as one specific enterprise. And I can trend over time the last 10 years what it cost them to run a cow a year, what it cost them to wean a calf a year. And all that is based on good accounting, accurate accounting, along with a good inventory system, we know exactly how many they raised from a cow/calf standpoint or how many cows they ran. But to be able to get that over time, you know, those --it's kind of like the early adopter mentality. Those guys have got it. They've got good data. And they're continuing to move it forward. Now, how do you get everybody else to do it? Not everybody's going to be interested in. But boy, I tell you what, if you're going to be a commercial operation --and this industry loves to talk the buzzword sustainability. You know, one of the three pillars of sustainability that nobody -- the third one that nobody was talking about is economics. And, you know, if you want to talk about true sustainability at the ranch level, you better talk about profitability and you better -- if you're going to talk about profitability, you better be calculating it correctly. OK.Because I apologize, I get on the soapbox here and get the rambling too much, guys, so I apologize for that. But when you have industry leaders sitting there and talking about, "Well, this is how we calculate net income," or, "This is how we calculate profit."As the good Lord told us in the Bible, there's only one way to do it. OK.There's only one way to Christ. There's only one way to calculate net income and that is total revenue divided -- minus total expenses including all my depreciation and accrual adjustments. OK. So there's only one way to calculate net income. But when you got industry leaders sitting down in presentations to 200, 300 people and say, "Well, yeah, we understand that's the way you all calculate. This way we calculate net income." No, that's not possible. There's noway to do that. There's this is it and that's the only way there is. So, Clay, I don't have a good answer for you. You know, I beat my head against the wall for 20 some years.And there's enough people out there that I stayed extremely busy of, you know, I'm trying to retire but, you know, I have calls about every couple of weeks saying, "Well, we've seen your stuff. We've seen your website, you know.How do we get you involved?" Andso, not every university -- you know, you would think, "OK, well, it's got to be either at the accounting industry, it's got to be at the lending institute's or it's got to be at the universities." And it's kind of like everybody's job is nobody's job. But again, how do you get everybody educated on this? So, again, not everybody wants it. But those that do have it, it takes a long time to kind of get things and when I say a long time, it takes a year, year-and-a-half to kind of get things in place because again, things don't move fast in the cow/calf industry, so.But how do you get them to start moving that direction? Once they have it, they think, "My goodness, I don't know how I managed with that." I've had managers telling me, "Stan, there's no way I can manage without these numbers nowadays," so.

>> Well, I come in, Tip, for, you know, bringing up this topic that we're talking about now is, you know, the profitability side. I like to say if there's no margin, there's no mission. And so, we are certainly mission-based. We're trying to be sustainable. We're trying to do the right thing as fellow ranchers.But the economic side of it is difficult. And, you know, having these difficult discussions is part of the solution I think. Part of your work, Stan, has been, you know, developing some of these KPIs. And you've got several of them that you've published. If there are some key statistics, critical success factors, critical KPIs, why don't you tell me what we ought to have our folks really focused on? If they could only focus on a couple of them, what would that be?

>>Absolutely. Great question. And I will always, always go to the fixed costs of an operation. Now, and all your listeners are probably saying, "OK."Don't turn off the pod yet. OK. Bear with me for just a minute. If we're going to talk fixed costs, I don't want to hear it. No, no, no, bear with me for just a minute. OK. So, KPIs, I calculate-- when I set up an accounting system for somebody, I want to be able to isolate, quote, the fixed cost. OK.Now then, macroeconomic theory, fixed costs is the old DIRTI 5, D-I-R-T-I, depreciation, insurance, repairs, taxes and interest.OK.That's the old DIRTI 5. I throw a sixth one in there being labor. OK. So, you've got -- because again, labor is a very specific issue for ranching. OK.Labor, you know, in a Chevy dealership, you know, this is one thing. Labor in a car factory is a separate issue. But ranching from or labor from a ranching standpoint is a whole different beast. So, I throw in labor as a fixed cost. So now, you got those five things plus labor. And so, when I set up an accounting system, I want to be able to isolate those things. So, I create, you know, little buckets if you want to call it.And again, I'm not trying to sell anybody on QuickBooks but a lot of people use QuickBooks, a lot of ranchers use QuickBooks so I set up their QuickBooks forum such that I can isolate four things.OK. And the four things pretty much constitute all the fixed costs of that operation. Number one, machinery and equipment.OK. So, anytime somebody writes a check for repair cost on a tractor or a pickup, a new set of tires for the vehicles, you know, a new floor in the gooseneck, whatever, all those go into a bucket for machinery and equipment. OK., including fuel.OK. Fuel as well. So now, I have this big old bucket of cost strictly for machinery and equipment. Number two, labor and management. OK. So, anything I'm doing from a labor standpoint, paying salaries, even paying utilities on my GM's house and all my, you know, my campers' houses, my cowboys' houses, all those things, throw it into another bucket called labor and management. The third one that's easy is interest, so all the interest that I pay. Now, some of these ranches, you know, are blessed and don't have to work on borrowed money.That's fine.That means they don't have an interest bucket.OK.But some of us, you know, are borrowing money, working on borrowed capital. So, you have a third bucket called interest.Then you have a fourth bucket.OK. And the fourth bucket is G&A or general and administrative. OK.Most accountants know what G&A is.OK. Now, G&A is two things. So, G&A is all that little stuff,OK, like attorneys' fees, accountants' fees. And what I tell people is when you're entering the data, if you can identify within five seconds where that expense needs to go, whether it be to L&M or labor and management, machineor equipment, interest to the cows, to the yearlings, if you can identify in five seconds, and that's my five-second rule, it goes to G&A. Because I should know that quickly, if I wrote a check, I should be able to identify very quickly that it goes to either one of those enterprises or it goes to one of my four buckets. And I call those support centers. OK. So again, it's the fixed costs. The other thing about G&A is anything associated with buildings and equipment of, you know, I've had GMs tell me was, "Stan, you know, the owner wants, you know, the fences painted. He wanted that rock gate out front." One case in particular,"Stan, it's a quarter of a mile from the highway to my GM's house and the owner's wife wanted 100 pine trees planted there. And we are only in a 14-inch rainfall district." We have to water those pines. Understand, we've got a rule here. And the rule is he who has the gold makes the rules. And there's a rule too that if you ever question whether you need to spend money that you're owner or the owner's spouse is telling you to spend, always refer back to rule number one. OK. If he has the gold, he makes the rule. And if you have the pine, you know, you have the pine tree. And how to make long story short, pine trees died. OK. But anyway, that was what they wanted. OK. So again, buildings and improvement stuff goes in G&A. So now that you have a long way to get around to what the question was, if I combine those four big groups or big buckets, I now have what I call my support center ratio.OK. And the support range center ratio, if I took those four big numbers. OK., added them together and then divided those into revenue, the total revenue coming from the ranch, I don't care whether it comes from calf sales, wildlife, water sales, gravel sales, I don't care. Wherever my revenue came from, I will now have a ratio that says for every dollar in revenue that this operation brings in, and the KPI is about 62 cents, has to go pay fixed cost or those support ratios for those support centers. So, Clay, to answer your question, if there was one thing that I believe ranchers should look at, it is their fixed cost. OK. And in fact, that's how you do that. You isolate those expenses into those four groups. And you take an Eskimo or whoever you take it or where your revenue is and you come up with that ratio of fixed costs to revenue. It'smore -- it's usually are about two thirds. Now, what does that mean? OK. So, for every dollar that I bring in in revenue, if two thirds of it goes to pay my fixed cost, then that means I have one-third left to do what with. And there's two things I can do with that remaining one-third. One-third of that has to go to pay the variable cost. OK., feed, vet, all those things that go directly to an enterprise.OK. And I'm going to -- I'm here to tell you we're all pretty much doing the same thing when we talk about variable cost. I mean, you know, there's a whole feed industry built on what ends up being just the feed cost of an operation. And that tends to be the bulk of what that variable costs is. So, the variable cost has to be paid out of that other third. And oh, heaven forbid, we might want to keep a dollar or two of that revenue as net income, maybe. But anytime you get your fixed cost over 100% of your revenue, obviously, net income is going to be zero. OK. So, that's the first place in my mind any ranch has to start. And I would have -- you know, I've got ranchers that -- or owners that would say, "Hey, can you kind of run -- look at my numbers for me?""Absolutely. Send me your, you know, your P&L.Send me your schedule and whatever you've got."You know, hopefully, they've got some better stuff. But they'll send me stuff. And that's exactly what I'll do. I'll start isolating their expenses into various things, into those four buckets and calculate, you know, divide that by your revenue. And all of a sudden, you find out, "Well, did you realize that 110% of your revenue is going to pay just those four buckets of things?"

>> Yeah. Maybe one question related to that. It feels like it's a common recommendation from somebody who has not been in the middle of this to track individual ranch enterprises separately.But it sounds like what we're talking about, at least on the fixed costs, is keeping that -- most of that together. You know, say I've got a ranch that has a cow/calf enterprise and we run stalkers. And we sell some straight alfalfa hay. I've probably got a lot of overlap in the fixed costs of all those things. How do I keep those separate if I want to analyze each of those enterprises on its own?

>> Right. Yes, that's absolutely. And again, that's -- so you've got two things here. OK. You've got obviously the production and, you know, i.e. the inventory stuff that you have to keep track of.But then you also have the financials. So, starting with the financials, yes, those other buckets.OK. And again in, you know, in QuickBooks, they were called classes or you know what call them -- centers is what I call them. So, you have the support centers which again, that ignores -- well, I bought 1,000 gallons of fuel this week. I ignore that, you know, 10% of that may go to the cows. I also ignore the fact that 50% of that probably is going to the hay production. I don't try to make that on a daily basis, those adjustsor, you know, those allocations because it's just too tedious. I mean, to set -- most ranchers will not take the time or their data entry person which, you know, we can sit here and talk about who the data entry person is and that's pretty darn important.That person is pretty darn important in the operation who actually does a data entry. But now -- so I don't necessarily need them to sit there and say, "OK, well, of this 1,000 gallons or this, you know, this $5,000 worth of expense for fuel." Don't sit there on a daily basis and say, "OK, well, I'm going to allocate so much to hay, so much to cattle, so much to whatever."Throw it in that bucket.OK. And then at the end of the year, we're going to make one allocation. And OK, I ended up with a quarter of a million dollars in expenses for machinery and equipment. Now, take that quarter of a million and allocate it.Just do it one time. OK. So, you've got all those other things. Again, what I found, my experience is that if they try to do that on a daily basis or, you know, however often they enter their checks and, you know, their reconcile their bank account, it just falls down. It falls apart. You got a data entry person that's not being paid enough to sit there and make those calls. Because what happens, it's hard enough when you get, you know, an invoice for 10 tons of feed and a data entry person is sitting there wanting to put this into their accounting package. And, you know, here's a bill, you know, for $10,000 for feed or 100,000 for feed. And, you know, he or she probably doesn't know how much of that should go to the cows as protein and how much of that should go as a grow ration for my, you know, my weaned calves and how much should go for, you know, growing ration for a bunch of yearlings out here. Well, that's hard enough because again, first thing that person has to do is call the GM and say, "OK, split this for me.Where's it need to go? Who has to pay these expenses? And, you know, which enterprises does it go to?" It's hard enough doing the variable cost. But to sit there and try to do that on every set of costs that comes across a rancher's desk and in accountant's desk, it just falls down. OK. So, put it in a bucket and then make the call later. OK. Now, as you can imagine,and this is one of the -isms that I tell people about, obviously, the allocation of those big buckets at the end of the year is huge. In fact, what I tell people is the second most important decision that you're going to make in this managerial accounting type activity is what those allocations of the fixed costs are. With the first most important decision being to even do this in the first place. OK. That I'm going to do this this way. So, those allocations, as I tell people, "When you come up with. OK, you know, I've got cows," let's just make it simple,"I got cows, a wildlife, you know, and one other something, OK, a bed and breakfast or whatever. And I've got a quarter of a million dollars in fuel. Well, am I going to do it 1/3, 1/3, 1/3?" No, I'll make it a little more, you know, educated than that. Well, so much of it needs to go -- you know, 60% of it needs to cattle or the cows and so forth. Once you make those allocations, what I tell people,"Spend some time. Do your due diligence on determining what those allocations are. And leave them alone for three to five years." OK. Leave them alone because you know as well as I do, if you start changing those allocations every year, you're going to start changing the results very quickly and all of a sudden, my cow cost -- you know, if I decide, "Well, you know, fuel costs went higher on the wildlife." And, you know, all of a sudden, I drive my cow cost down because a portion of that field didn't -- that went there a year ago didn't go there this year. OK. So again, leave them alone once you come off the allocations. Leave them alone for three to five -- unless you structurally change your operation. You had dropped the wildlife component all together.OK. Unless you change your business structure totally, leave them alone. Now, if you change your business structure and you eliminated one of them, obviously, you know, I've got to change my allocation. So, that's a huge, huge decision. But it's all part of the implementation of it all.

>> You know, we've talked some about different enterprises. And not all of the enterprises function on the same calendar months. Do you see some folks splitting up those enterprises at interim in periods or does everybody just keep the records on a January 1st to December 31st basis?

>> Everybody that I deal with keeps them on a calendar year or, you know, a one-year basis. Boy -- and it may not be January 1. OK. A matter of fact, I was on a ranch just a week ago that has a June 1 fiscal year. And that's fine. I mean, there's -- a lot of the older ranches continue to have an October 1, you know, fiscal year. But I don't know that I have ever worked with an operation that has different, you know, fiscal years even though their production year may be different.OK. When you're calculating, you know, your results, your KPI analysis of --again, it starts at the operation, you know. And so, rarely do I ever see that.In fact, I can't say that I've ever seen an operation to do that. Whether it's doing good financial accounting is hard enough to -- again, it may be that any accounting package could, you know, just say, "OK, well, instead of January 1, show me, you know, March 1 through February 28." But it's a little more difficult than that. There's yearend adjust -- there's yearend transactions that have to be made as an operation and not an enterprise that makes it pretty difficult. So, you know, I'd be open to -- for anybody to add more to that, you know. Again, in my mind, it goes back almost full circle to what we talked about earlier about a balance sheet for the operation. First and foremost, I want to know is the operation doing well. And that's a, you know, that's a fiscal year, probably January 1 for all enterprises. And if I made, you know -- well, let's just say, you know, I lost $100,000 for the operation, my first question is, "OK, who made money and who didn't?" You know, I've got, you know, five different enterprises here or what I call profit centers along with my call centers and along with my support centers. Which ones are the profit centers actually contributed positively and which one is my dog? OK. Which ones are my dogs because there'll always be some that are [inaudible]. But I start at the top. OK. I want a 35,000-foot view of my operation. And in fact, the KPIs that I do, you know, the first, you know, five of them are at the operational level and not at the enterprise level. OK.

>> Stan, this is James. So, we've talked a little bit of -- and Tip and I've had this conversation, we talked about monitoring, you know, monitoring your ecological conditions on your landscape and how that information can be beneficial to make better management decisions. And you're talking very specifically about economics here. And so, we kind of think about the economics at the end of the year being your monitoring methods. How do you use -- once you get people to start keeping track of this information, how do you use it to make better management decisions? How often do you review it? Because if we only look at it at the end of the year, then the end of the year is over, right? We've already lost our money.But how do you start to advise people to use this information?

>> Yeah, absolutely. So, let's -- I'm going to use a production example to start with. OK. So, you know, and Tip, you can help me out here. So, we're going to monitor my range situation. OK. So, January 1, again, you know, first of the year or first of the [inaudible] season, whatever you want to call it, you know. And again, you guys, you range ecologists probably have all this information. You know, I put a score out here of my range of 100. Now, as you will know, Texas has been in a drought. And right now, my range conditions in August are probably a 10. OK. Now, granted it's probably going to be lower than 100 at any -- you know, always in August because that's when we're hottest and driest, but normally that only falls from a, you know, from 100 to 50. But here we are at a 10 and I'm just throwing out, you know, guess word numbers here. So, but in fact, you know, James, we're monitoring the range basically every time we go drive past it, right? And, again, Tip, now, when do you formally. OK. make those notations and when do you formally make those scores, you know, whether that's on a monthly basis or a weekly basis or whatever that you actually, and when I say formally, I'm talking about. OK. I've written down a number here. OK. So, that's -- now, shift over now to a financial model. OK. How do I do that from the financial standpoint? And we'll -- before we go there, let's talk about the livestock monitoring though. OK. So, from the livestock monitoring, it's going to be. OK. Well, you know, I'm at to the end of my feeding season but I'm at the start of my breeding season, what's my body condition score on my cow? So, I mean, we were looking at that two weeks ago out in West Texas. OK. You got an average body condition score on your cows out here, you know, at a 4.5 and I was a bit concerned to be honest with you. They were about a 4.5 to 5 and he was expecting to turn the bulls in about two weeks, and it's like you don't have any time to recover this to 5 1/2 to 6. So, you know, what's your expectation? My expectation is my conception ratio is going to be down. OK. But, again, the fact is I've monitored at some point and, in fact, across time throughout a year, I've done the monitoring on my livestock just like I have on my range. OK, now, what do we do on the financials? Well, from a financial standpoint, the things that are important in my mind is two things, and then this is what I've -- what I tell GMs that -- and owners. OK. This is what a GM should be supplying to you once a year, and then this is your monitoring tool. A cash flow. OK. Budget. OK. This how much I need from expense standpoint and a -- what I'm going to be generating from a revenue standpoint by month. OK. So, I can, in fact, monitor. Well, my feed cost for January was 10% higher than what I had projected or what I had budgeted it to be. OK. So, I'm, in fact, monitoring it over time. The second thing is, again, you -- once you've got the cash flow budget, the second thing is a capital asset purchase plan. OK. So, in March, I need to buy, you know, 10 new bulls. Well, here's what I think I might have to pay come April 1st or May 1st and I monitor my budget, my cash flow, or excuse me, my capital asset budget. I can actually go say, "Well, I'm out of line here," and I can, in fact, already be telling my board of directors or whoever that, "Look, my budget -- well, my expenses are already 10% higher than what I had budgeted. So, be prepared at the end of the year, you know, my net income estimate may, in fact, you know, be worse off than what I thought it was going to be."So, again, you're monitoring all three of those: the range, the livestock, and the financials. OK. And I know people want talk about, "Well, yes, I want to see this on a monthly basis. I want to see financial statements on a monthly basis." But really from a GM standpoint, the guy that's actually asked her on the table, you know, and behind the desks and trying to take care of the cattle, if he has that monthly cash flow budget along with his capital asset purchased for land, there's really nothing from a financial standpoint that the board of director shouldn't be able to take that and really get a pretty good idea of monitoring throughout the year from a financial standpoint. I hope that answers the question a little bit, James, but I'm open for discussion.

>> Yeah. I think the comparison to rangeland monitoring is a good one. It may be better than you realize. You know, you're -- if you're measuring how much standing for is there, is -- that's more like tracking what's in your gas tank but there are other indicators that are more like what's in your oil pan. Charley Orchard who had the land EKG rangeland monitoring system used to joke about people wanting to get a different dipstick and this goes back to some conversation we were having before we started recording about the dark side of benchmarking. It's only worthwhile if you're using consistent methods to measure it and/or comparing to somebody else.But, you know, he jokes that people want to get a different dipstick if you don't like the results when you check your oil level.

>> There you go. Right.

>> If the dipstick is accurate, there could be some dire consequences if you don't respond, you know, to a low oil level with adding some oil to the system, you know. So, back to measuring rangeland condition, you know, if we had 10 range scientists on the call here, we could come up with about 24 different definitions of rangeland condition. You know, one of them might be yield, how much is out there which I'm likening to what's in your gas tank, you know. But there's also whether or not you have a diverse plant community characterized by more perennials than annuals, for example, and that might be more like the oil where, you know, we would say that the rangeland is still healthy if you've got a lot of perennial grass. It just happens to be ate down right now, but it's going to come back when the rain comes. In terms of rangeland condition, you probably still have good rangeland condition. You just don't have a lot of standing forage right now. And, you know, you could see a million different ways that that would apply to finances as well, and then maybe you can say a couple things before we quit about the -- this dark side of benchmarking and the importance of measuring things consistently. And it goes back to a question that I think I still have about whether there's a difference between tracking KPIs and what's commonly called benchmarking. And maybe you've answered this and I just didn't quite catch it, but my, you know, my own -- from what I think I'm reading about the KPIs is that that's helping you track yourself overtime and that benchmarking could be both. But may also refer to comparing, you know, your specific values for the individual key performance indicator to what other people are getting for similar enterprises. Can you maybe define that a little bit more?

>> Yeah. Absolutely. Let me start by saying when -- you know, I've been doing this 5, 6, 7 years and I was presenting it to, you know, the Texas Southwestern Cattle Raisers and I had one of the old ranchers come up to me. And basically, he put me on the spot and said, "Stan [assumed spelling]," he said, "I hear what you're saying but, you know, you've --" and at that time, I'm really -- were just kind of showing, you know, what the benchmarks were becoming. OK. And when I say benchmarks, you know, that's kind of the average for a group. OK. So, this is --

>> Yeah.

>> -- where a benchmark is. OK. And he said, "Stan, I need you to tell me why I should be involved in this," because I hadn't convinced him. All I did was show a bunch of benchmarks, you know, and I quickly realized that that was my own problem, my fault. And I told the gentleman, I said, "Tom [assumed spelling]," I said, "I'm going to tell you right now, if I'm only doing this so I can add your data to the averages, I'm wasting your time and I should not be doing that. But if I do this analysis with you, OK, and you start comparing yourself overtime, then I have done a service for you."So, basically, the first thing was if this isn't important to you, don't waste my time and I won't waste yours. OK. Because, again, first and foremost, it has to be a benefit to the rancher himself. OK..So, in effect, what I'm saying is exactly what you just said, Tip, and that take these numbers, do it overtime, and compare yourself to yourself overtime. But I'm going to tell you, that scares us to death. OK. Because, again, now, I'm holding myself accountable to myself. And if I only end up with a 79% calf crop and I am the GM, that's on me, you know, again, with all the other things that's going on, weather and blah, blah, blah, the only thing in that equation though is weather. And I don't control that but everything else I control as a GM. How much I've fed them, what the body condition score was, how many bulls I've got per cow, blah, blah, blah. OK. Now, I'm holding myself accountable. So, first and foremost, in my mind, if I'm going to benchmark, it needs to be against myself. Now, that's not what we or other industry participants want because, again, I can ask you who is the most common frequent calls that I get for my KPIs summary and it's not ranchers. It tends to be the lenders. OK. They want to know what the benchmarks are. OK..Well -- and, again, in my mind, benchmark is just the average of a group. OK. Now, again, there's a difference between a benchmark and what I would term a target. OK. A benchmark is just what an industry average or a group average is. In most cases, it's an industry average. OK, 82% calf crop costs around a cow a year 950 bucks. OK. Whatever. But that does mean no good as an individual. I mean, if I'm at -- you know, if I'm at even 750 to run a cow or if I'm at 1050 run a cow, in order for me to be sustainable and move my operation forward, I need to know what my number is and what my number is next year. And then what the number was the next year and trend that thing over time. And, in fact, I am starting to move my operation. If I believe my goals or profitability, I am starting to move my operation towards profitability. OK. So, again, that's the dark side of benchmarking and that everybody wants to talk about benchmarking but the first question is. OK. What group are we talking about? Are we talking about the industry average? Are we talking about the Pacific Northwest? Are we talking about the Rolling Plains of Texas? Who are we talking about here from a benchmark standpoint? Because you guys, as resources out there, are totally different than ours.

>> Sure. And the market is doing great on the curve.

>> Exactly.

>> You know, so if I'm better than the guys around me but I'm still got a 72% calf crop, I'm probably not making money even though --

>> Exactly.

>> -- maybe my loss is less than the average from my area that doesn't help.

>> Yup. So, I've -- I identified -- you know, the bottom line from the KPI standpoint is to identify, first, my strengths but more importantly what my weaknesses are. Where am I aligned? Where can I actually make those adjustments? Benchmark is only going to tell you that you're in the ballpark or not, that is the only thing that's going to tell you. It will not tell you an action plan, it will not tell you how the other people that make up that benchmark are operating, didn't tell you what their resources are. In and of yourself, you have to know yourself. OK. What I have available, you know, then I create an action plan based upon my weaknesses. I mean, it may be fixed costs. I mean. OK. Who else -- how do you solve fix -- the high fixed costs? Well, number one is you keep the assets longer or, number two, you just quit buying stuff. You know, quit buying that new pickup. You know, that cost us so much now. So, again, you create the -- again, the ultimate goal of KPIs, you know, is to identify those weaknesses that are prohibiting me from reaching my goals and creating the action plan of how to change those numbers.

>> Yeah, that's good. I feel like we're going to have a difficult time figuring out where to close this off though we're probably about there. And I also really don't like the [inaudible] podcast closing where the host says, "Well, Stan, this has been a great conversation."

>> Yeah. Right. Right.

>> "Where can people go to learn more about your work?" But I do have a serious question.

>> Yeah.

>> If I've only been using a CPA to file my taxes and I want to get some help starting with managerial accounting, where would you recommend that I start?

>> You know, I know it's -- not everybody wants to travel south to -- the King Ranch Institute always does -- every year does a workshop called managing the cow calf business. And we touch on that quite a bit how to do managerial accounting, how do you start it, how do you -- you know. And with the ultimate goal and again, it's kind of like back to Stephen Covey's, you know, start with the end in mind. OK. So, if I know I want these KPIs, I feel like these are the ones that are important, and from an industry standpoint they are, how do I set up my managerial accounting system to match that and to progress and move to where I get to the KPIs? We do those. I mean, there's university extension services that, you know, again -- yeah, that's the best places that I can send you guys. I mean, you can check Two Degrees. Some of the websites, Two Degrees, my website has some of it, you know, but there's a few people out here that are really --you know, few of my people that I've trained over time that would be more than willing to help people get everything set up. I was on the phone yesterday with a young lady that, you know, she wants to be a consultant, she's a graduate of the institute, and she wants to do this. So, there's people out there that can help. But again, I understand it's not free. OK. I mean, your accountant, you know, at times believes his motivation to you as a customer is to reduce your liability and I hope not every accountant is like that because I think you're doing -- I think they're doing their customers a disservice by just focusing on reducing the tax liability. That does not drive profitability. So, you know, visit with your account and chances are they probably could, you know, start it but there's material out there that can help a person get started on. OK.

>>James, you and Clay have a business called Northway Ranch Services which can put ranchers in touch with what you call remote administrative assistance to help accomplish managerial accounting if their local CPA can't do that. And there's probably some others like that. Can you describe the impetus behind that service and what you see as being a potential useful first step for somebody who says, "I need to get there"?

>> Yeah,Tip. I appreciate it. And just for clarity, actually, Marissa Taylor and I are the ones that are the owners of Northway Ranch Services. Clay has been a big part of some -- kind of acting in an advisory role behind the scenes. As we've just ventured out, we've seen the need for ranchers to get their books in order and I think more than just their books, it's kind of their entire operations in order. And just -- I just have a lot of empathy with where ranchers are and the amount of work that they put in on a daily basis and, you know, working with mother nature or against mother nature and there's just so many challenges are there, the markets are there. And so, we've just seen the need to help ranchers get more organized with their information, and I think Stan is doing some great work. There's people like Stan that are out there that I would just recommend people get in touch with them and understand some of these principles, some of these accounting principles, and even get some help, getting -- learning and educating yourself on these things. And then, you know, one of the things that we've done is just try to gear our business around coming alongside ranchers and supporting them. We don't -- you know, we don't kind of tout ourselves as being the experts. I think there's people like Stan or Ranching for Profit or even Clay Worden that I would say are probably some of the accounting experts that are out there. But we've just seen a real value to come alongside and support ranchers to stay organized on an ongoing basis because one thing that we find is that ranchers getting -- they get neglectful about keeping their books in order along the way, whether it's their inventories or whether it's their budgets and their profit loss statements or their -- even their balance sheets. And so, having a good system in place and then having a back office to help support that to keep it current so that you can make management decisions along the way is a niche that we're trying to fill with our company. And we take a lot of pride in that just because we want to see ranchers be successful and it's a challenging world out there. But the better data you have and the more current that data is and that information, the better management decisions you'll make. And so, that's kind of where we see all these things fitting together.

>> Yeah, I appreciate that. And in thinking through, you know, where people can get help, I feel like there's two buckets of help. You know, one is training on understanding how this works, how accounting should be handled for ranch, and -- but then, there's the actual help from a real person who's essentially providing one-on-one assistance, you know, for your ranch. Those are two pretty different things and we'll put some links in the show notes for the King Ranch Institute classes as well as some of these outfits that can provide one-on-one assistance. Well, again, Stan, James and Clay, I really appreciate your time. This is a topic we could talk about for days rather than a few more minutes. But I think we'll probably come back here in a little while and do another interview, and talk through some of the specific key performance indicators and what the numbers mean. And how to measure them in order to give people a starting point for thinking through what kind of records do I need to have in order to even do that analysis so that I can have some idea whether or not I'm on the right track or not. So, thank you again for your time and I look forward to doing this again.

>> Thanks, Tip.

>> Thank you.

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