The Economics of Ranching
Ranching is easy – right? All you have to do is watch the
cows eat grass and make you money. Wrong! Many people
dream of doing it, and if it was that easy
everyone would be doing it. So let’s take a look at
the economics of raising cattle and see why all ranchers
aren’t driving Cadillacs.
The first cost involved in raising cows is, of course, the
cows themselves. The price of a cow varies widely depending
on a number of factors including her size, her age, the
current cost of feed, whether or not she is bred and how
long you will have to feed her until you are able to sell
her next calf.
As I write this in the fall of 2007 cattle prices are near
record highs. But feed costs are also high due to drought,
high oil costs, and diversion of corn from feed to the
production of ethanol. Let’s just take the average cost of
an average cow that is bred to calve in the spring and call
To calculate the annual cost of buying that cow will take
some figuring. There is the annual payment to the bank,
which includes principle and interest; there is death loss;
and our salvage value when we sell her will be less than
half of what we paid for her. I figure that at 8.5%
interest and 2% death loss, our payment for the cow
will be about $154 per year.
And now we have to feed her.
In my part of Montana we plan on feeding hay for 5 months
out of the year. The cow will eat half a ton per month, and
this year the hay is going to cost at least $90 a ton. That
is $225 per year for hay.
Grass is cheaper. It will only cost $20 a month for the
other 7 months of the year – that’s $140 per year for
grass. As you can see, our costs are already adding
up. We have $519 invested in this cow for the first year,
and we don’t have a calf yet. We better get her bred!
A reasonably good bull will cost us $3500. The annual cost
of his purchase is about $734, but we will use him on 20
cows, so it will cost us $37 per cow to own the bull – and
another $23 per cow in feed cost for that bull. So $60
to get the cow bred.
Now I don’t know about you, but as much as I love the
business, I have to get paid for my time. One man should be
able to take care of 250 cows if he works steadily at it.
We’re asking for 7 days a week of feeding, and some long
days through calving time, so let’s pay him $25,000. And our
costs for workmen’s compensation and Social Security will
run nearly 50% more. That totals $150 per cow for labor.
And of course we have to have a pickup to feed with.
I’m sure that $350 per month is reasonable, divided by 250
cows – another $17 per cow.
Vet expense: vaccinations, parasite treatment, preg
testing, and the occasional ranch visit - $10/head.
Now lets add up these basic annual costs:
||$756 per head cost per cow
These are the major expenses. They don’t take into
account the little things like the cost of a horse with his
training, feed, and shoeing. There are supplies, fuel,
trips to see the banker. Corrals, working chutes, repairs.
Taxes, utilities, computer. Stock trailer, flat bed
trailer, and tractor. And interest.
Most ranchers go to the bank every year to borrow the money
to operate until the calves are sold in the fall. In bad
years he falls behind in his repayment, and in good years he
Now let’s look for a while at our income.
We’re hoping for a 600 pound calf. This year steers and
heifers of that weight will average maybe $1.10 a pound.
That’s a potential income of $660 per calf. But the heifers
don’t weigh as much as the steers, and we’ll have some that
don’t weigh up with the rest. We’d better figure on $600
per head. But only 90% of our cows will wean calves - $540
per head. We had to eartag those calves and vaccinate
twice. And there is trucking to town. That brings our
revenue down to $530 per head.
Wait a minute. We have a bare minimum annual cost for that
cow of $756, and a potential income of only $530 –
we’re losing $226 a head, and this is a good
year. What would it be like in a bad year?
Something is wrong with those calculations! Isn’t there?
No. Those are the real costs. In any other business a
banker would laugh at the prospect of loaning money with
those projections. But ranchers keep on raising cattle.
How can that be?
How that can be is that no rancher recognizes all of
the true costs of raising cattle. Every rancher has some
gimmick to reduce some of those costs, to ignore others, and
to find supplementary sources of revenue. Let’s start again
at the top.
Most ranchers have a basic cow
herd that is bought and paid for. If he were to sell those
250 cows he would have $300,000 to invest, and would likely
realize more cash income from a conservative investment of
that cash than he does after working all year at caring for
those cows and paying the costs involved in their care.
But a rancher doesn’t look at it that way. He looks only at
what he can make from running those cows, and isn’t
interested in alternative uses for that capital. Thus he
doesn’t account for the cost of the cows.
Most ranchers put up their own hay. They plant the hay with
old equipment on land that is long since paid for, and
irrigate it and bale it themselves. So the only cost they
account for in haying is the cost of fuel, twine,
and repairs. He could sell the hay he put up for those
250 cows and be paid $56,000 – more than double what we
planned to pay out in labor, and he’d have all winter to lay
on the beach in Mexico.
Then there’s the grass… Again, the ranch has long since
been paid for. The rancher could take in cattle at $20 per
head per month and receive another $35,000 for his trouble,
but he assigns no value for the grass that his ranch
Cash for family living expenses may come from
a number of sources: town jobs for him and/or his
wife, income from hunting/fishing/guests, sale of
rocks/timber, sale of small parcels of land.
Let’s figure this out so far. Sell the cows and put the
money in Certificates of Deposit at 4.5% - $13,500 per
year. Sell the hay for $56,000, and the grass for $35,000.
He could be pocketing $100,000 a year by selling his assets
to someone else and just taking it easy.
But instead, the rancher
ignores the value of his cows, his hay, his grass, and his
time. Delete those four costs and he is left with money at
the end of the year - enough money to buy a new pickup one
year, a new tractor another, and a 4-wheeler in between. He
can build a new shed every 10 years, and roof the barn every
There was a time a generation ago when a man could build up
a small cow herd while working for wages, and eventually
lease some ground and go into business for himself. After
the cows and equipment were all paid for he could begin
buying land. But these days it takes more than just hard
work and determination to put a ranch together – it takes
money. Lot’s of money. There are plenty of people who have
inherited ranches and who couldn’t hold the operation
So how does a common rancher stay in business?
Appreciation in the value of his land. The cattle
operation itself has little, if any, margin – far less than
the potential income from selling the hay, grass, and cows
to someone else. But the value of the land keeps rising far
faster than the liability from raising cattle.
It is this continuous increase
in land value that makes the whole deal feasible. When the
market is down and the cash flow is in the negative, the
rancher can always borrow money on his land.
And so many ranchers go, year
after year, operating on borrowed money and continually
working to pay it back. After a few years of good prices
they may buy a new piece of farm equipment, and after a few
years of bad prices they may refinance the ranch.
There are exceptions of course.
If the ranch is big enough there are economies of scale.
And if the rancher is clever enough he can find ways to save
on feed and labor costs, raise bigger calves, and generally
operate more efficiently. There are some who honestly make
a good living in the cattle business.
But the real economic return in
the ranching business is in the increasing value of the
land. As the supply of land decreases and the demand
increases, prices have risen exponentially. There are few
places left in Montana where land can be purchased at a
price that is even remotely related to its productive
ability. And what value is that land to the rancher? The
only way to withdraw any of the wealth he has accumulated
over the years is to sell some or all of that which he has
worked so hard to build up.
And what about his children?
The ranch can only support one family, so the rest of the
kids must move to town. The one who stays on the ranch
earns only a fraction of the money that his town siblings
make, but the ranch is now worth millions. How do the town
kids get their share of the legacy? There is no way the son
on the ranch can buy out the interests of his siblings and
keep the ranch together, and there is no way that he can
continue to scratch out a living if a sells a portion of the
ranch to pay them off.
And then there is the estate
tax. A ranch that may be worth only $750,000 in its ability
to produce grass and hay for cattle is now worth
$7,500,000. Mom and Pop can give only $3.5M to the son tax
free. So when they die the IRS is after the son for half of
the remaining $4M.
Where can the son get $2M to
pay the inheritance tax? Not by raising cattle - I
guarantee it! The only place to get that kind of money is
to sell some or all of the ranch. And if he sells any of it
he can no longer make a living.
And one more ranch family is
What conclusions do we derive
from this little exercise? The first is that were a rancher
to win the lottery, he’d just keep on raising cattle until
the money was all gone.
A second conclusion is that
while the economics of every operation are different, in the
scenic areas of Montana it is rarely the cattle operation
that pays for the land, rather it is the land that pays for
And so it is only the very
wealthy who can afford to own a ranch in Montana.
Fortunately, any family that has been in the ranching
business for a generation or more is very wealthy, both in
the monetary sense: their land is worth millions - and in
the literal sense: their life and their work are one, and it
all plays out in the grandeur of the mountains and prairies
under “Montana’s Big Sky”.
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