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

As some may know, I've been doing a weekly podcast called "Sheep Stuff You Should Know" with my friend and fellow sheep producer, Ryan Mahoney. We started the project as an excuse to talk regularly about livestock during the initial COVID-19 shelter-at-home order, but it's turned into a great opportunity to explore topics that interest both of us. Since we started, we've talked about economic benchmarks, livestock guardian dogs, genetic selection, and our favorite lamb dishes. We've interviewed Ryan's grandfather, legendary sheepman Dick Emigh - and Dr. Fred Groverman, the dean of Shropshire sheep breeders in the U.S. But our conversation about value-added marketing several weeks ago has really stayed with me. We were talking about how each of us evaluate new marketing opportunities, and about the importance of budgeting and economic analysis. Ryan said, "It's easy to project your revenue on paper - we all like to think that all of our lambs [or calves, for that matter] will be top quality. But no matter what size operation you have, you'll always have tail enders - those lambs that simply don't grow. To be realistic, our budgets need to acknowledge this fact."

Since this conversation several weeks ago, I've been thinking about our tail enders. There are always a handful of lambs that simply don't perform - maybe they were challenged with health issues as lambs, perhaps they were more susceptible to internal parasites like barberpole worms or coccidia. In talking with cow-calf producers, this seems to be a common issue. We all have animals that simply fail to thrive for one reason or another.

For me, this suggests I need to examine my management and my genetic selection. I need to keep better records - do my tail enders come from the same ewes every year? From the same rams? This year, I'll go back through my lambing records and note the dams of these tail end lambs. I'll also take a look at our weaning procedures - are there things we can do when we separate lambs from ewes that will reduce stress and maintain productivity.

In the meantime, I need to sell these lambs. We market most of our lambs shortly after weaning (typically at a premium), but I always hang on to these poorer performing lambs in the hopes that maybe I can turn them around. That means that I've got a handful of poor doers now that I've spent money and time on - perhaps not the best investment I could have made. Maybe I need to rethink my market timing. Maybe these tail end lambs - and our cull ewes - should go to the sale at weaning.

I'm curious - how do you deal with your tail enders? Do you have any? If you do, what is YOUR marketing strategy? I hope you'll share your thoughts in the comments!

And if you're interested in our Sheep Stuff podcast, here's the link!

Over the last three days, we've had a stark reminder about our vulnerability to wildfire and public safety power shutoffs here in the Sierra foothills. On Saturday morning, as I was getting ready to participate in the California Wool Growers Association virtual convention, I received word that the power was out in the community where our ewes are grazing. This meant we'd likely have to haul water to the sheep (rather than filling troughs from a pump-fed hose bib) - doable, but time consuming. Fortunately, power was restored quickly, and we were able to fill the troughs - a relief since Saturday was one of the hottest days of the summer so far!

Last night, I awoke to the sound of one of our border collies opening the screen door and trotting into the kitchen (where he could hide beneath the desk). Mo hates thunder, and I realized that thunder had chased him inside. I went outside to watch the lightning dance around the hills to our west and north. These storms were dry, and so we awoke this morning to news of a number of small (and at least one not-so-small) fires just to our north in Nevada County. I can smell smoke outside my office as I write this.

These events remind us that we're approaching peak fire season here in the northern foothills. The continuing heat wave (we're supposed to be over 100F for the fourth consecutive day) is drying the fuel to critical levels. As we head towards autumn, we'll likely see stronger and more erratic winds - and, according to the flyer I received from Pacific Gas & Electric last week, more public safety power shutoffs.

Last year's shutoffs were chaotic, to say the least. Here in north Auburn, we lost power three or four times (I think; so much has happened since last fall, my memory is a bit hazy). I do recall that the warning calls and texts from PG&E were frequent and rarely accurate. We had difficulty finding ice for our ice chests, and folks seemed to have forgotten how to go through intersections without working traffic lights. I grew up with lengthy power outages from winter weather, so the loss of electricity was more of an inconvenience for us - thankfully we had a small generator handy, so we could keep the meat in our freezers cold. 

Heading into this fall, though, we should all be thinking about how we can manage through these power shutoffs and prepare for wildfire. Here's a start:

Public Safety Power Shutoff Preparation

• Can we get water to our livestock if the power goes off? How much water will our livestock need per day? If I can't pump water to them, do I have enough tank capacity and water access to haul water to them until power is restored?
• Do I have back-up power for our freezers and refrigerators? What is at risk in these appliances? We no longer sell meat at farmers markets; if we did, I'd be sure to have enough backup power generation on hand. What about vaccines and other pharmaceuticals? We keep our animal drugs in a refrigerator in our shop - can we keep them cold if we have no electricity?
• Do we have enough gasoline to run our generator for several days?
• Do we have enough ice for our ice chests to get us through a day or two without power? We've started filling empty milk cartons with water and freezing them for future use.
• Do all of our flashlights and battery-powered lanterns have good batteries?
• Can we charge our phones and computers in our vehicles? My laptop has an adapter, and we all have car chargers for our smart phones.
• Have we signed up for alerts from PG&E and other emergency services? As unorganized as the PG&E alert system was last year, it was helpful to feel connected and to be getting updates. And since these shutoffs coincide with periods of high fire danger, access to our phones is critical.

Wildfire Preparation

Since large-scale fires often coincide with loss of power, most of the preparations listed above apply here, too. But there are additional questions we think about when it comes to fire:

• Can we get to our sheep in the event of fire? Currently we have livestock on two leased properties at some distance from our home. In the event of a fire at these locations, we would contact law enforcement and animal control if we needed to gain access.
• Do we have contact information for landlords and neighboring landowners where our livestock our grazing, just in case we can't get access?
• Who would we call if we needed to haul our livestock out of the path of an oncoming fire? We can't get all of our sheep in one load, so we'd need to call for help.
• Alternatively, are there safe zones where we could place our livestock if we didn't have time to evacuate? Irrigated pastures or dry lots devoid of flammable vegetation may give us some emergency protection in a fast moving fire.
• Do we have a texting tree or a calling tree to check in with other ranchers in our community? I have found that county and CalFire emergency notification services typically don't provide timely information about small, local fires. But my ranching friends are always on top of things - often, the first word I get about a fire in our part of Placer County is a text from a fellow rancher.
• Are our buildings and other infrastructure protected? Since we have livestock in multiple locations, I think about this beyond our home place. Are there fire breaks protecting fences and forage? Have we removed brush around buildings and corrals?
• Do we have fire tools available to us? I keep a fire rake and a 5-gallon backpack pump in my truck during the summer - I've never had to use them, but I feel better having them with me.

You can sign up for PG&E alerts at at https://www.pge.com/mywildfirealerts (if you're a PG&E customer) or https://pge.com/pspszipcodealerts (if you're not a PG&E customer). You can also access PG&E's weather forecasting center at https://pge.com/weather.

Finally, I want to hear from you! What are you doing to prepare for fires and power outages? Share your ideas in the comments below, or on the UCCE Sustainable Foothill Ranching Facebook page at https://www.facebook.com/FoothillSustainableRanching/.

Stay safe!

Like everything and everyone else in 2020, our local fairs are adapting to the changes necessitated by the COVID-19 pandemic. As I write this, the Nevada County Fair Junior Livestock Auction is underway – virtually! Youth exhibitors who've spent months (and in some cases, a full year) raising their livestock projects are excitedly anticipating the rewards for their hard work.

Livestock are judged during the fair on a variety of attributes – their structural correctness, the amount and shape of muscling, the degree of finish (or fat) they possess. This evaluation is designed to predict the quality of the end product – the meat that our junior livestock auction buyers will put in their freezers, and ultimately on their tables. But just as we know we can't judge a book (entirely) by its cover, there's more to predicting meat quality than a judge's subjective opinion. And that's why our local fairs and livestock associations (including the Tahoe Cattlemen's Association) also sponsor contests to evaluate meat quality after the fair.

Meat quality is a combination of the amount of meat an animal produces and the appropriate amount of fat (which we refer to as marbling). This marbling makes for an enjoyable eating experience - a juicy, tender steak! Choice or prime grades in lamb or beef are the target!

So how do our Nevada County youth beef exhibitors measure up against these industry standards? Last year, 91% of the beef from the fair graded USDA Choice or better! Twelve exhibitors received a Carcass of Merit award from the Tahoe Cattlemen's Association; another two received the Gold Seal Award. This doesn't happen on its own! The quality of the product these exhibitors produce is a testament to their hard work, the quality of their care, and the support provided by 4-H leaders, Future Farmers of America advisors, families and friends.

The bottom line: when you're supporting the Junior Livestock Auction, you're supporting a great kid – and you're putting a great steak (or lamb chop, or pork chop, or goat chop) on your plate!

To participate in the Nevada County Fair Junior Livestock Auction, go to https://auction.showorks.cloud/fair/ncfair.