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  • Writer's picturejphaskell

Turn Costs into Income

If you want to revolutionize your finances, you could think about the impact of turning things that usually cost you money, into source of income. At first blush, this might sound as strange as a pot shop in Muskokee, OK.

Years ago, I was introduced to this concept by accident. I was asked to consider grazing a piece of land owned by a state wildlife agency. It was critical mule deer winter range and was converting from brush to cheatgrass. The agency was willing to pay to graze invading cheatgrass thereby restoring the native brush community that would support the maximum number of Mule Deer and Sage Grouse.

Suddenly, one of my biggest costs became my second biggest source of income. You can imagine what that did to the bottom line. Even with some reduced animal performance.

While that example is extreme, are there other ways to convert costs to income?

  1. Some people sell hunts to capitalize on the elk that graze their meadows or raid their hay stacks.

  2. Do you spend money spraying weeds that you could have sheep or goats would eat for free? Even if you only eliminate the cost, you’re still ahead.

  3. If we’re riding good quality young horses on the ranch, they tend to increase in value, while a dirt bike that could do the same job declines in value.

If you’re a cow-calf producer and really want to change your finances, figure out how to get paid to add producing females into your herd. For most ranches, cow depreciation (or replacement cost) is one of the biggest costs. According to Dallas Mount of Ranching for Profit (Working Cows Podcast, episode #90), it costs ranches that do this well about $110 per cow to produce or acquire replacements. For ranchers that do it poorly, it costs a lot more.

But there is a completely different path.

Wally Olson, in his livestock marketing classes shows how you can capture appreciation in your herd and produce positive cash flow while adding producing females into your cow herd. We all know that heifer calves generally become more valuable as they grow and ultimately become pregnant cows. When we buy bred heifers, we are acutely aware of their value.

On the other hand, we often neglect to notice that she loses value as she ages beyond her prime years. We all know that a 10-year-old bred cow costs less than a 4-year-old. A lot less. Unfortunately, that loss in value is not usually a cash cost in our herd, so we don’t often account for it. That loss in value is depreciation. Depreciation is sneaky because it isn’t a cash cost. As cows grow old in our herd, no cash changes hands, so we tend to forget about the cost. The government uses this same trick when it deducts taxes from employee payroll. As a business owner, you write a check for payroll tax, so you know exactly how much it costs. Most employees have no idea. If we don’t have to write a check, we don’t feel the real cost. Banks use the same thinking when they encourage you to use your card instead of cash. Studies show that consumers will spend more (12-100%) if they’re using plastic (even if they have the money and pay their bill on time) than if they use cash. Don’t be fooled. Account explicitly for your non-cash costs so the real pain is obvious.

Depreciation is also tricky because we think of it as a tax benefit. But that’s a trap too. Losing money to save on taxes is a short road to nowhere.

What if you had a business where both the factory (the cow herd) and its products (calves) were systematically increasing in value. Imagine taking $200 in costs off of your cow’s backs and replacing it with $200 in profit. You’ve taken off her backpack and given her roller skates. If you do it right, that cow doesn’t have to pay for herself while carrying her replacement; they each cover their own costs.

I’ll work through a quick example from Wally Marketing Class. The data was gathered by Wally’s brother-in-law at a dispersal sale. All prices are same day, same sale. So there’s no inflation or deflation caused by changes in the market. This is one example, on one day. While changes in the markets change the absolute and relative magnitude of the numbers, the basic pattern holds.

A 550-pound heifer calf brought $814 and a bred yearling brought $1775. So, the ranch gained $961 in inventory value. The two-year-old’s averaged $1,845, gaining another $70 in value (bringing our total gain to $1,031). So, we can easily see the increase in inventory value. Of course, we had expenses along the way. And then we got a calf out of the two-year-old. If we’re using a good accounting system, we have tracked both the income from calf sales AND the appreciation in our inventory. But most of us use a cash accounting system, so we’re driving blind.

On the other end of the herd, cow prices decline from 5 or 6 years old until death or salvage. At that sale, the salvage value of cow was about $715. So, inventory value dropped from a peak of $1853 to $715, costing the ranch $1,138 per cow. What would it mean to your ranch to pick up $1,100 in value on 30% of your herd? How happy would you be if you had to write a check for each cow that lost value? I’ll bet if that was a cash cost, you’d be looking for a way to reduce it.

A few years ago, I had a novice irrigator tell me that water flowed toward the mountains. He wasn’t Mormon and I wasn’t Mormon enough to overcome his limited understanding of gravity. He didn’t get to irrigate for very long. Imagine a ranch where you could irrigate uphill and you reverse the charge on your expenses. That would be a place you could ranch a long time all the while “eating rainbow stew on a silver spoon underneath a sky of blue.”

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