Ranchers know their choice of livelihood may not be an easy life filled with weekly paychecks, Christmas bonuses, unlimited labor and financial resources, but ranchers choose that live because that is the life for them. Ranchers would be bored to death living in a subdivision. Where would they park all of their trailers? Ranchers know there are many benefits to ranching for a living, but the real beauty of ranching is freedom of choice.
Ranchers are free to run their operation any way they want to. Ranchers work for themselves. Some ranchers have a cow/calf operation. Some cow/calf operations leave their bulls out year around and sell calves year around. Other cow/calf operations put their bulls out for a spring or fall calf crop, or both. Other ranchers choose to purchase weaned calves and raise them to yearlings. Some ranchers who raise yearling prefer to raise steers, to be put on feed. Others choose to raise heifers to be sold as replacement cattle. Some ranchers raise bulls to be sold as replacement bulls. Some ranchers raise commercial cattle and others raise registered cattle. Seed stock cattle are raised as replacement cattle. Beef cattle are raised for consumption. Dairy cattle are raised for milk and milk products. There are even ranchers that raise cattle for show animals. Some of the above ranchers vaccinate and worm their cattle annually, others never vaccinate or worm. Some have excellent nutrition programs, others do not. Some ranchers buy expensive good looking cattle, others by cheap, poor looking cattle. Some ranchers have great pastures and fences, others do not. Some ranchers overgraze, other do not. Some ranchers put their profits back into the ranch and others do not. Some ranches have alternate sources of revenue to subsidize their ranching costs and other ranches must operate at a profit to sustain. I doubt that any two operations are exactly the same.
The reason I point out all of the different ranching options, is that freedom of choice is important to ranchers. Ranch accounting is the same. Ranchers want the freedom to choose if they want to invest in accounting. All ranchers in the US have to keep up with enough accounting to pacify the IRS. They can do their own accounting or hire it done. I am an accounting major graduate, so of course I do my own accounting. Like many ranches, my wife and I have several revenue/cost streams. There is no way I could do all of this by myself. I track the costs of these revenue/cost streams, separately. I do comingle these revenue/cost streams in one bank account. My wife and I have a registered cow/calf operation, sell registered bulls and replacement heifers. We also raise our own hay for our cattle and sell the excess to local folks. We do most all of the work ourselves. Maintaining pasture consist of shredding, spraying weeds, and fence work. All of this costs is charged to the cow/calf revenue/cost streams. Raised animals and hay are not expensed until sold. That adds work to my accounting, but enables me to ensure we are selling our products for enough money to keep our operation profitable. To me, it is important to keep our ranch profitable. I don’t want to depend on subsidy of any kind.
We purchase bulk feed and medicines, which are assets. Some of the bulk inventory is for the cow/calf revenue/cost stream. That feed is expensed as fed and the medicines are expensed as used. We track our animals by the year they were born. Animals are tracked by heifers or bulls, until they are sold. Once sold, I total up all of the costs to raise that animal, add as much profit as the market will allow, and record revenue and costs {expenses} at that time.
Similar with the hay that we raise. We track hay by the year baled. Types of hay are tracked by round bales or square bales, until stacked. Once stacked, I total up all of the costs to produce those bales, add as much profit as the market will allow, and record revenue and expenses as sold or fed. On the hay we feed to our cattle, I record the revenue/cost to my hay operation and the expense to my cow/calf operation monthly. The monthly costs recorded to my raised animals is recorded as “Work in Process”, which is an asset. Those costs are not expensed until the animal is sold.
Costs to raise heifers and bulls, that we keep, are tracked until they are turned out for breeding. At that time, I total up all of the costs to raise those animals and sell them to myself for cost. I am able to expense all of those costs at that time.
To do accurate cost control work, I must use the accrual accounting method. The accrual method allows for bulk purchases and subsequent uses, to the various revenue/cost streams. When raising animals or hay, there are a lot of cost involved over the period of time involved. When I buy bulk fuel, I don’t expense that purchase to the hay. First of all, I have two hay revenue/cost streams. Second of all, some of that bulk fuel is used to mow pastures, which should be expensed to the cow/calf revenue/cost stream. When we bale our hay, the first cutting is all round bales that we keep for our own use. The second cutting is all square bales. We herbicide and fertilize as required. Round bale cost include net wrap, fuel, and equipment time. Square bale cost include tie wire, fuel, and equipment time. We stack all of our square bales in the barn or hay van, which takes a lot more equipment time. Typically, our square bales will have more herbicide and fertilizer cost than our round bales.
Equipment time is a big cost for any ranch. Equipment time includes all equipment such as trucks, trailers, mowers, hay cutters, rakes, and balers. Cattle working facilities and barns are not included. Equipment time is depreciated by the hour. I typically put 300 hours a year on each tractor and 100 hours a year on the hay equipment. I prorate each equipment’s annual depreciation by the total hours used that year. I then expense the depreciation, at the end of the year, to the correct revenue/cost stream. It is extremely important to include all maintenance costs when expensing to the correct revenue/cost stream. Minor or normal maintenance costs are expensed immediately. Major maintenance costs are depreciated over the added useful life, prorated per hour, and expensed to the correct revenue/cost stream. Do not charge equipment and maintenance to overhead.
I purchase bulk net wrap for my round bales. Normally I have net wrap left over at the end of the year. Because my books are kept on an annual basis, I only expense the net wrap that was actually used that year. The same is true for other bulk purchases. I always have left over herbicide, wormer, medicines, fuel, hydraulic oil, spare parts, and other items. On the cash method of accounting, all of those costs are expensed during the year purchased. With the accrual method of accounting, all of those costs are expensed during the year they are used. To have accurate cost records, only the actual expenses should be charged to the appropriate revenue/cost stream.
Even though I use the accrual accounting method for cost control purposes, I use the cash accounting method for tax purposes. All money spent during a tax year is expensed during that tax year. Also, for tax purposes, I use accelerated depreciation. Does not matter if I keep a tractor for twenty years, I depreciate the cost over three years. Accounting for federal income tax purposes is complete different than accounting for business management.
We all know a ranch, owned by a Doctor, with the philosophy to keep cost down, to maximize profits. In doing so, his ranch was poorly maintained and his cattle were poorly cared for, yet it appeared, he did make money. But did he really? Doctor Joe did not manage his ranch. That is his right. Doctor Joe’s cows may, or may not, had a calf every year. His calves may, or may not, weaned at the maximum weight. Doctor Joe probably lost more calves to death than necessary. Doctor Joe’s cows definitely suffered from flies and parasites. I would venture to say that Doctor Joe could had made a lot more money every year if he had spent a little more money every year. Similar to the hay business. Spending money on fertilizer, will actually make you more money, in increased yields and quality.
In summary, I am a proponent of intensive ranch management. I understand not everyone will agree with my philosophy. I am a numbers guy and enjoy that part of the business as much as I enjoy the physical part. The worst thing that anyone could do is ranch until they run out of money. Those lucky enough to have oil wells need to realize those assets are being depleted. Relying on any kind of subsidy is no guarantee for a long, successful future.
Brett Bickham, 5/25/2020
Owner, Bickham Ranch & Rule Accounting
Clifton, TX