We are, says Barry Dunn, at the tip of the tipping point.
“What's happening in this industry is absolutely unique in my lifetime,” says the Texas A&M-Kingsville executive director of the King Ranch Institute for Ranch Management. “This is a big change for all of us.”
He refers, of course, to ethanol and the effect it will have on cattlemen everywhere. “What the industry is going through right now has been compared with two other major events in agriculture. One is the introduction of hybrid seed corn in the 1930s and 40s, and the other is the invention of the moldboard plow in the 1850s.”
Those two innovations changed the face of agriculture forever. If Dunn is right, ethanol will be the third leg of an agricultural trifecta that will influence not only how you manage your ranch, but how your children and grandchildren fare in an uncertain business.
What's more, if Dunn is right, now is the time to step back and take a hard and long look at your operation and how it will fit into the new realities unfolding before your eyes. In short, Dunn says, it's time to create a vision.
“I think it's critical for your ranching operation to have a clear vision of the place you're trying to get to,” he says. “Having a clear vision allows people to rally around some strategies that are appropriate in the face of this very volatile business climate that this industry is in right now.”
There are three steps in creating a vision for your ranch — determine key scenarios for the industry, place yourself and your ranch in context with the environment those scenarios may create, and then develop strategies on how you'll adapt.
The first thing to do is look at some key scenarios you think will characterize the cattle business in the next few years.
“Look down the road and write out three or four scenarios — if the world goes this way, what might happen and how will that affect my business?”
For example, one of your scenarios might be a shift by consumers to an all-natural beef product. If you think this will happen, then ask yourself if your cattle are healthy enough and competitive enough to sell in a new marketplace. Are you able to source-verify your cattle, and if not, what do you need to do to provide buyers with that assurance?
Another scenario could be energy prices. If the price of oil goes to $80/barrel, what will that do to your feeder cattle basis? Feeder cattle located closer to the major feeding areas tend to enjoy a more positive basis than those from more remote places. But will the feeding industry shift in response to ethanol's affect on corn prices, and if it does, how will that affect you? Will the skyrocketing price of corn affect the price of feed supplements?
Put it in context
After you've considered some scenarios, place yourself and your ranch in context with the changing business environment around you. The cattle business is capital intensive and has, as a general rule, poor cash flows. In that kind of environment, Dunn thinks it's critically important that ranchers have an understanding of, among other things, changing consumer demand for beef, what might happen to supplement prices, where energy prices are headed and what direction the overall economy is going.
Apply the context of your situation to every scenario you envision, then develop strategies on how you're going to deal with them.
“So if supplements become very expensive, how can I run my operation with either reduced or no supplementation? A strategy for this scenario may be to change the time of calving or type of cattle you're raising so you don't need to supplement in the environment you've got,” Dunn says.
If higher oil prices are part of your scenario, “Perhaps a different marketing program than one that's been traditionally employed would be a way to handle it,” Dunn suggests. “There are value-based marketing programs that subsidize transportation costs. So that might be a way, if the scenario of high oil prices comes, to mitigate or buffer that rise in oil prices.”
Develop the vision
Once you've gone through those three steps, then begin to develop the vision you and your family or business partners have for the operation. Dunn points to a horse stable built on the King Ranch in 1908. Its architecture of Roman arches was different for the times, but it's still standing and functional 99 years later. And it will continue to withstand the harsh, hurricane-prone environment of South Texas for many more years.
“That's the kind of vision you need. You need a vision that you're going to be here and be very aggressive in targeting the consumer with the type of cattle you can raise,” Dunn says.
In Dunn's vision, that ranch will be more forage-based because of high feed costs, run as a low-cost and low-investment business, and nimble enough to respond to challenges that will come more quickly.
Those challenges will be largely driven by ethanol's far-reaching affect on cattlemen, Dunn believes.
“During the next few years, everyone in this business will have to be ready, willing and able to change,” he says. “To be ready to change means you have to say, for example, ‘Look, what I'm doing is not appropriate for this new feeding regime that we're going to have. I've got cattle that need to be fed 200 days for them to reach Choice and they'll weigh 1,400 lbs.’ And that might not be profitable.”
If the cost of corn stays at $4 or more, the industry will shift to shorter feeding periods, he says. So he suggests asking, “Can my cattle handle and be finished at 120 days, instead of the 180- to 200-day feeding period that I'm in?”
If those are the types of changes you foresee for your operation, then Dunn says you need to be in a financial position to make the changes.
“To do that, you must maintain liquidity and lower your costs. And you must challenge yourself to lower investments as much as you can,” he says.
That means asking two questions:
To lower costs, ask yourself if you can get by without (fill in the blank).
To lower investments, ask yourself if you can find a way not to need (fill in the blank).
“A good business is one that controls costs and seeks out the highest profits by doing a super job marketing cattle. It's not one or the other. It's got to be both,” Dunn says.
He adds that if he's wrong, if ranching remains the relatively high margin business it has been and you control costs and lower investments, then you'll just make that much more money.
“But if I'm right, and the costs of doing business continue to challenge ranchers but the gross income goes down because of the impact of the ethanol industry, then ranchers are ready to take it on the chin for a little bit while these new price plateaus figure themselves out.”
If “taking it on the chin” is your outlook for the next few years, Dunn says you not only need to be in a financial position to make changes, but in a mental position to make those changes. “I don't think fighting it is a strategy for success,” he says.
Establishing a vision for your operation isn't only important in rallying family, business partners and employees around a common set of goals, it's important in setting the course for your operation for the future.
“I think a vision to meet the challenges of a new cattle industry has to include well-thought core values, sound business principles and ongoing education. That's how you build a rock-solid business, a business with Roman arches that will stand up to the hurricanes of South Texas,” he says.