Over the last several months, I've had several conversations with ranchers about capital expenditures – purchases of durable, relatively expensive assets. I suppose many of us in agriculture think about equipment – trucks, trailers, tractors, ATVs (at least that seems to be what those of us in the livestock business consider). We might also consider handling equipment – corrals and chutes, for example – or breeding animals. And most of us (myself included) have a limited amount of capital with which to work. How do we figure out our priorities?

First, I think it's helpful to define a capital purchase. Unlike an operating expense (feed, for example), a capital purchase exchanges one asset (cash, generally) for another. Capital purchases are included on our balance sheet; operating expenses show up on our profit and loss statement. Obviously, there are costs to owning an asset. If we borrow money to purchase a truck, the interest payment is an expense. So is the annual depreciation. But the truck (or the breeding cows, or handling equipment) are assets of our business.

As business owners, why would we make a capital purchase? From my perspective, a capital purchase plan must be tied back to the specific needs of the business. What are the weak links in terms of business profitability? A capital purchase should address these weak links. For example, if we know we need to reduce our overhead costs (and as a reminder, overheads are land-related and labor-related in a livestock business), then equipment that makes our labor more efficient may be justified. If we know our gross margins (revenue minus direct expenses) are positive, then perhaps we need to think about expanding our productive capacity (e.g., buying more breeding animals). Or said another way, if we know we need to expand our business, and we have a limited amount of capital to invest, will reducing our overhead address the key challenge, or should we buy more livestock? These are critical questions!

We should also think about the source of funds for the purchase. Are we going to use the profits from our business? Our personal savings? Are we going to borrow money? If we use our personal savings, we should formalize a plan to pay back this investment – after all, the business is borrowing money from outside the business (even if that money is ours). If we are going to formally borrow money from a bank or other source, what are terms? Is collateral required? What is the interest rate?

If you're like me, you probably like shiny paint and new equipment. When I visit larger operations, I find myself envious of their sheep handling equipment. I would love to have a portable commercially-built sheep handling system, for example. But if I think about the function of a handling system (rather than the object – or the brand name), I can come up with alternatives to this large expenditure. For example, our current handling system is comprised of a home-built wooden alley and Bud Box set-up, with t-posts and wire panels for holding pens. For us, this system does everything a factory-built set-up will do, at a fraction of the cost. The function of a set of corrals is to facilitate easy sorting and handling. Building our own system has allowed us to invest our capital elsewhere.

Examining the function of a specific piece of equipment is also related to the bottlenecks in our operations. For example, when we started in the sheep business, we had a small, bumper-pull stock trailer. I could hall 12-15 mature ewes at a time (depending on whether they were newly shorn or in full fleece). As our flock grew, we began to realize that we were spending much more time hauling livestock from ranch to ranch. In this case, we ultimately made two investments: a larger stock trailer (that more than doubled our capacity) and a border collie (which allowed us to safely herd our sheep to some of the places we'd been hauling them previously).

Sometimes, one purchase requires another. For example, when we installed our K-Line irrigation system, we also had to buy an ATV to move water. In other words, the $9,000 we spent on irrigation improvements required an additional $3,500 purchase of a used ATV. We've considered buying a double-deck stock trailer, which would require also buying a loading ramp and always loading from facilities that we can reach with a truck and trailer. Like our border collies, the ATV has multiple benefits. At the moment, we can't justify adding a double-deck trailer.

Once we've decided what our capital purchase priorities are, there are several ways we can evaluate the financial implications of these investments. For new businesses (1-3 years), I think a simple payback period is an important analysis. To use this tool, we divide the total cost of the purchase by the annual positive change in profit (either through increased revenue, decreased expense, or a combination of the two). Here's an example:

Used ATV

• Purchase Price = $4,000
• Operating Costs (fuel, maintenance, depreciation) = $400/yr
• Labor Savings (irrigation, fencing, etc.) = $1,400/yr
• Net Income Change = +$1,000/yr
• Payback Period = $4,000 ÷ $1,000 = 4 years

All of this is a rather long-winded way of saying that capital purchases require a plan – just like every other aspect of our ranch businesses. We need to have a clear understanding of where the economic weak links in our business may be (e.g., overhead expenses vs. productive capacity vs. improving gross margins). We need to think about the function that we need accomplish rather than the object we think we need. We need to think about the entire investment required. And finally, we need to think about the financial and cash flow implications of making the purchase.

Photo credit: Roger Ingram

Can any of us remember a summer like this?! The work of ranching continues - irrigating pasture, checking livestock, preparing for calving or breeding season. And yet the COVID-19 pandemic casts a pall over everything we're doing. Market disruptions - including increasing demand for direct-to-consumer meat products - add to the uncertainty we're all grappling with. I'm wearing a mask when I go to the feed store and limiting my trips to town. And, as I write, this, my youngest daughter is starting her last year of high school - from home.

Given the continued rise in COVID cases here in Placer County, our UC Cooperative Extension staff continues to work from home. But while we're not in the office, we are still out and about serving our communities. Our 4-H staff is working with our volunteer leaders and 4-H members to start the new 4-H year. Our nutrition staff continues to work with schools throughout the community to provide school gardens and nutrition/healthy lifestyles information for kids and adults. Our Master Gardeners have developed some incredibly innovative online educational opportunities. Check out our website at http://ceplacer.ucanr.edu/ for more details!

Our agricultural programs are also ongoing! I am working with colleagues at Davis and elsewhere to put on a bi-weekly webinar on a variety of grazing and livestock production topics. Our Working Rangelands Wednesdays series has covered topics like drought, targeted grazing, water quality, and fuel load reduction. You can register to participate in these webinars here.

I've also been collaborating with Ryan Mahoney of Emigh Livestock on a weekly podcast called Sheep Stuff Ewe Should Know (available on Spotify and Apple Podcasts). While our focus has largely been on sheep industry topics, I think you'll find that many of our episodes are broadly applicable to all livestock production. If there's a topic you'd like us to take on, please send me an email at dmacon@ucanr.edu.

Research projects aren't standing still, either - we are wrapping up our early weaning project at the Sierra Foothill Research and Extension Center this fall. I'm continuing to collect data on predators and livestock guardian dog behavior on the Tahoe National Forest this summer. Our northern California irrigated pasture research continues, and we're about to start a collaborative forage variety trial with specialists from UC Davis and farm advisors from throughout the state. I find that I especially enjoy the days I get to spend in the field!

We are planning a number of virtual workshops this fall, including our "So You Want to Start a Farm or Ranch" workshop and our Beginning Farming Academy - stay tuned for details. And I'm working with the Tahoe Cattlemen's Association to organize a beef production workshop or webinar in late September. Watch my website for more information!

If you're on  Instagram, you might check out my IGTV channels - covering a variety of topics from forage production and management to livestock guardian dogs. You can follow me on Instagram at @flyingmule.

Finally, I am available by phone, email, and in person! If you have a pasture, livestock, or range management question, call me at (530) 889-7385 or email me at dmacon@ucanr.edu. I'm always glad to get out in the field, so don't hesitate to contact me!

These are strange times, to say the least. Stay safe, and stay positive. I hope to hear from you!

For many ranchers in the Sierra foothills and Sacramento Valley, irrigated pasture is a critical component of our annual forage calendar. In many ways, irrigated pasture has replaced the historic practice of "following the green" - of taking sheep and cattle to mountain pastures during the summer months. Green summertime forage in the foothills and valley requires irrigation in our Mediterranean climate - and so many of us spend at least part of every day from April through October spreading water across our pastures.

Here in the foothills, these pastures do more than feed livestock. Large blocks of green vegetation provide landscape-scale firebreaks that protect rural residential communities. These pastures support a great deal of wildlife, as well - I consistently see wild turkeys, blacktail deer, song birds, and hawks (just to name a few species) on our pastures near Auburn. At least to me, a well managed irrigated pasture is a cool, green jewel amidst the summer-time brown of our foothill landscapes.

Truly productive irrigated pastures don't simply appear once we start applying water, though. No matter how much I water the annual grasses that grow on our rangelands, these plants have to die each year - that's what makes them annuals! Establishing irrigated pasture is similar to planting an other permanent crop - it requires soil preparation, infrastructure development, fertilizer application, and seeding of perennial forage species (like orchard grass, fescue, and clover).

Once planted, irrigated pasture requires careful management, as well. Our irrigation system is designed to put enough water in 24 hours onto the pasture to meet plant needs for ten days (in other words, our irrigation "sets" are for 24 hours, and our "rotation" brings us back to the same location in the pasture every ten days). We also manage our grazing carefully - matching our rest periods with the growth rate of our forage. When the grass is growing rapidly in the springtime, we can graze the same paddock every 25 days; in the heat of the summer when grass growth slows, our rest periods are longer to allow the plants to re-grow before we graze them again. And to protect water quality, we try not to irrigated underneath the livestock.

Obviously, the decision to establish irrigated pasture - or to incorporate it into our production systems - must include economics! Establishing pasture - even one that will last for 20-plus years - requires significant investment. Once established, we have to pay for water, depreciate our equipment, pay for labor, PAY OURSELVES!

This spring, I collaborated with Don Stewart at the Ag Issues Center at UC Davis to update two cost studies specifically analyzing foothill irrigated pasture. Click on the links below to access them:

Sample Costs to Establish or Re-establish and Produce Irrigated Pasture - Sierra Foothills

Sample Costs to Produce Irrigated Pasture - Sierra Foothills

On a related note, I'm also collaborating with Dr. Leslie Roche, Cooperative Extension Specialist in Rangeland Management at UC Davis, along with a number of other farm advisors throughout Northern California, on a research project examining a variety of irrigated pasture management strategies. We're looking at grazing management, water management, forage production, soil health, and a variety of other parameters - stay tuned for more information on this project as well!

Now I need to go out and move water....

Note: A version of this article originally appeared in the July 2020 edition of my New Foothill Rancher newsletter.

When my family started raising sheep commercially, we assumed that selling meat directly to consumers would be more profitable (especially at our small scale) than selling live animals. As we went through the logistics of getting animals to our processor, deciding what cuts we thought we could sell, determining our product pricing structure, picking up meat, getting it stored, and then getting it sold, we realized that meat marketing was far more complicated that hauling a load of lambs to the auction. We also got a crash course in the difference between gross profit and net profit.

Value-added marketing is a buzzword in local food system conversations – after all, who wouldn't want to add value to the crops or livestock they produce. Since the disruptions to our food system from COVID-19 have become obvious, producers and consumers alike have a renewed interest in selling (and buying) locally-produced meat. But as a producer, how do we know if we're actually adding value if we're selling meat rather than live animals? From an economic analysis perspective, we have to look at the meat business separately from the livestock production business. In other words, the meat business has to “buy” the live animal from the livestock business. How do we go about this kind of analysis?

In our own business, I started by using the market price for finished lambs (as published in weekly market reports from the closest livestock auctions) as the “purchase” price of lambs for the meat business. If a 100-pound lamb was worth $1.80 per pound at Escalon, my meat business would need to pay my livestock business $180 to buy that lamb, less what I would have paid in commission, yardage, and transportation. Let's value that 100-pound lamb at $160.

In economic analysis terms, the purchase of the lamb was a variable (or direct) expense for the meat business. Other direct expenses included harvest and cut-and-wrap fees (which are typically charged by the head or by the pound). Overhead costs – those expenses that are incurred regardless of the number of animals being processed, included transportation to and from the processor, storage, marketing expenses, and labor.

On the revenue side, I needed to know how much retail product I'd get from that 100-pound lamb. This is different than hot carcass (or hanging) weight – this is how much product actually goes into a package. We found that we typically got a 30-33 percent retail yield – in other words, the 100-pound lamb gave us 30-33 pounds of meat we could sell to our customers. We also needed to know the relative yield by cut – after all, folks will pay more for a rack of lamb than they will for stew meat. From this, we could calculate an average retail price per pound – for us, this came out to about $11 per pound of retail product. At 33 pounds of salable product, that lamb was now worth $363.

Let's look a bit closer at that $160 lamb:

Yikes – “adding” value to a single lamb would create a loss of $415! Maybe we should look at scaling up (so we can spread our overhead expenses over more units). I can take 20 finished lambs in my trailer – let's look at the numbers for 20!

This time, we made a profit! All of that extra work added a whopping $26.85 per head to the value of our lambs! And this doesn't account for the time value of money – when I sell at the auction, I have a check within a week. When I sell meat, the cash flows in as I'm able to sell product – it may take a month or more.

Obviously, these numbers are sensitive to the current market price, the distance to your processor, and processing fees. In a depressed live market (like we're currently facing), marketing meat may add more value. And it's a complicated question - I found selling meat to my community to be rewarding in non-monetary ways. But non-monetary income didn't pay the bills, unfortunately. The key takeaway here is that it's important to do the analysis.

If you'd like to walk through a more thorough analysis of your own business, contact me at (530) 889-7385 or dmacon@ucanr.edu.