When we finally received a more than two inches of rain in mid-November, I was relieved that we would finally have germination on our foothill rangelands - better late than never! Today, after two weeks of sunshine, I am indeed seeing a little green coming up through last year's dry forage. But the forecast isn't promising - as of this morning (November 30), we have no rain in our forecast here in Auburn for the next two weeks. The combination of dry weather, short days, and colder (for here, at least) temperatures indicates that we won't likely grow much grass during the month of December.
Drought planning begins with proactive strategies - a conservative stocking rate, for example, or a production calendar designed to match periods of high forage demand with rapid forage growth. One of the most important proactive strategies in our small-scale sheep operation is grazing planning. Over the years, we've trained our eyes to estimate the amount of forage we have available - measured in sheep days per acre. While our estimates are not 100 percent accurate all of the time, the simple act of looking ahead and estimating the quantity and quality of standing forage gives us a better idea of when we might need to adjust our plans.
The second element of our planning process is the idea of key dates. For me, establishing a date by which we need to make a decision forces us to actually make the decision. During the 2013-2014 drought, Glenn Nader (who preceded me as UCCE livestock and natural resources advisor in Sutter and Yuba Counties) said, "The only way you're gonna survive a drought is to make decisions." This advice, obviously, has stayed with me - indecision prolongs the pain (economic and otherwise) of drought. In our operation, we look at forage conditions, weather forecasts, and our production calendar when establishing a key date. For example, our ewes will enter the last trimester of gestation in early January. At this point, their nutritional demand will begin ramping up significantly as they approach their lambing dates. While we've saved enough dry forage to get by for the next 5-6 weeks (which we can utilize by supplementing the ewes' protein intake), late gestation will require a different strategy. A key date also requires us to think about a condition that must be met for a decision to be triggered. This December, that condition is rainfall. If we haven't received an inch of rain by December 31, and if there is no rain in the 2-week forecast on that date, we'll need to make a decision.
This brings us to the last element of our drought plan - what are our options if we're still dry on New Year's Eve? For me, these reactive strategies are far less palatable - they cost us money (as in more expenses, less revenue, or both). Here are the options that are currently on the table:
- Purchase enough hay to get the ewes through late gestation and into the beginning of lambing season.
- Look for byproduct or other alternative protein and energy sources to feed the ewes.
- Sell older ewes to reduce forage demand.
- Sell replacement ewe lambs to reduce forage demand.
- Allow body condition to decline until the forage begins to grow (which may reduce lamb survival and future reproductive success).
- Find additional rangeland pasture to graze (this would still require some supplemental nutrition).
Over the next several weeks, we'll brainstorm additional options. We'll work through the economic ramifications of each of these options. We may choose a combination - perhaps we'd sell a few sheep and purchase hay to sustain the rest of the flock. The point here is that we've given ourselves a deadline for taking action, and we'll work through the numbers associated with each decision.
In the meantime, we'll keeping hoping for rain....
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:
- 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.
I've been fortunate to have the opportunity to get a fair bit of formal education - from my undergraduate days at UC Davis studying agricultural economics to the online coursework I took while obtaining my master's degree at Colorado State University. The certificates that hang on the wall in my office attest to this formal education; my membership in professional societies (like the Society for Range Management and Western Association of Agricultural Economics) gives me access to continued learning. My formal (and continuing) education has driven my intellectual curiosity.
Thankfully, I've also had the opportunity to learn from experience - my own and that of others. Much of what I've learned through my own experiences has been from mistakes that I've made! In many cases, I've learned what NOT to do next time. I've also had the good fortune to learn from others - from mentors (ranchers and colleagues). This informal learning is interesting - while there are times when it confirms what I've learned from books or in classrooms, it often makes me question my formal instruction. And it certainly drives my intellectual curiosity, as well.
Early on during our shelter-at-home experience this spring, my friend Ryan Mahoney, a sheep producer from Rio Vista, approached me with the idea of starting a podcast about sheep production. While Ryan operates at a very large scale (and we have a much smaller operation), we felt like we could both learn from one another. We also felt like taping a podcast would give us something to do every Wednesday afternoon! And so Sheep Stuff Ewe Should Know was born! We've now produced 12 episodes in our first season, covering topics like risk management, the effects of COVID-19 on the sheep industry, and livestock guardian dogs.
"The best sheepherder gets the most out of the land by getting the most into the sheep."
As we continue producing Sheep Stuff Ewe Should Know, Ryan and I hope to interview other producers to learn from their experiences. We'll also be talking with experts in animal health, livestock nutrition, marketing, and business management - learning from their experiences, and having fun along the way!
You can check out our podcast HERE! And let us know what topics you'd like to learn more about!/span>