Calculating Change
Evaluate the financial implications of adopting more regenerative practices with the attitude of a scientist.
The ideals of increased soil health, lower input costs, higher grazing capacity, more wildlife on the land and healthier livestock in your herd make regenerative ranching an attractive proposition.
“Those are the headlines that get our attention; that’s what we all want for our ranches,” Noble Research Institute’s Dan Childs says. “But the key question is, how do we get there without mortgaging the farm?”
Childs is an ag economist and senior regenerative ranching advisor at Noble. He’s spent more than four and a half decades working with ranchers on financial and business planning while owning and operating his own ranch business.
“The best approach I’ve found is, you’ve got to do just a little bit at a time,” Childs says, beginning with a good look at your financials.
Start With A True Picture Of Your Financial Health
There’s a good reason your banker requires a profit and loss (P&L) statement and balance sheet before offering a line of credit, Childs says. Unfortunately, too many ranchers record those numbers solely to satisfy loan requirements and then leave the documents in their banker’s file cabinet. But those who take the power of their P&L and balance sheet into their own hands place themselves in a strong position to make clear decisions at the start of their regenerative journey.
“Those statements should be the beginning of evaluating the financial implications of adopting more regenerative practices,” Childs says. “We want to ask ourselves, ‘What’s our net farm income before we start down this journey, and do we have a record-keeping system in place that will support an enterprise analysis?’”
An enterprise analysis is a process business owners use to allocate income and expenses by enterprise to clearly evaluate the most profitable (or not!) parts of their ranching operation.
A typical cow-calf rancher might say he or she has only one enterprise, but Childs suggests ranchers think a little deeper about how money flows in and out of the business. Are weaned calves really the only source of income or expense on the ranch? Or do you also sell replacement heifers? Cull cows? Grow hay or some other forage crop to feed your cows? Run a trucking business on the side or help neighbors with artificial insemination?
Perhaps you truly identify only one enterprise in your business. That’s fine, Childs says, as long as you’re able to track the true profit or loss of your work.

Know Your Profitability Target, Then Experiment On Paper First
With this financial information in hand, Childs says, you’re in a prime position to evaluate where you can experiment with new practices that align your ranch with the principles of soil health and a more regenerative mindset.
Start by identifying an ideal yet realistic profit target. Locking in a true profit target allows us to look beyond production as our primary measure of success.
“Sometimes, perception is not really reality,” he says. “We think we did something right or wrong, but it’s the records that will substantiate and reinforce the truth.”
Perhaps in your opening financial evaluation, you’re rightfully proud of the calf check you cashed on sale day, but you see that purchased feed costs crippled your ability to show it as a profit. Do you need to cut those costs to get to your goal?
Pencil out what it might take to replace the 1,300-pound cows you culled this year with 1,000-pound cows instead. Estimate the difference in their feed costs, then analyze if you can stomach the smaller cow weaning a 450-pound calf instead of the 550-pound calf you’re accustomed to, in exchange for rolling out less hay next winter.
Make an honest analysis of your land’s forage capacity. Perhaps you conclude you’ve been historically overstocked, making up for overstocking with purchased feed to carry livestock through the winter. What if you reduced your cow herd by 20% to more accurately match the natural resources of your land? Now, with 20% fewer animals to stock, can you defer grazing some pasture to leave it as standing forage in the fall and make a serious reduction in or even eliminate the need to feed hay through the winter? Do those reductions add up to enough to cover the smaller calf crop?
“You can theorize whatever you’d like in these scenarios,” Childs says, “but you can’t make a very clear decision unless you project a budget that looks at the true profit potential.”
Evaluate These Three Budget Line Items With The Sharpest Pencil
As you evaluate different paths to profitability, Childs says he repeatedly sees three big categories of expenses that can sidetrack those plans. He cautions ranchers to look closely at each of these:

1. Spending on tax-evading assets:
“We farmers and ranchers think that if we pay taxes, we’ve committed a cardinal sin,” Childs says. But avoiding paying taxes is not a good-enough reason to carry a heavy fixed-asset inventory. In general, he advises ranchers to keep their fixed-asset inventory low.
“That’s your tractor and your skid-steer and your hay baler – the things that are going to cost you the same amount whether you have 50 cows or 500 cows. For most, if you can rent it or hire it, that’s a more cost-effective choice,” Childs says.

2. Supplemental feed costs:
This is often the heaviest line item on a rancher’s expense account.
“Whatever we can do to reduce feed in a livestock operation generally makes a pretty major impact on the bottom line,” Childs says. “It’s the easiest thing in the world to have a full hay barn to feed a cow out of, but it’s also the most costly. It’s much harder to manage stockpiled forage at a rate that will last your herd through the winter.”

3. Replacement females:
“Many guys will say, ‘I can’t buy the quality I can raise,’ and I understand that – that may be true,” Childs says. “But that doesn’t mean it’s profitable.
“If we’re really honest with our numbers, most will find we need to be a 300-to-500-head cow-calf operation before we can really justify raising our own replacements,” he says. “They’re very expensive to carry.”

Use Your Record-Keeping As A Conversation Starter Toward Success
Whether it’s from a banker, a business partner, a spouse or other family member, many ranchers need to earn the buy-in of other people before they make management changes. In many of these scenarios, a multi-year cash flow budget may be a necessary and powerful tool to show profit potential.
“You need to be able to show, ‘I want to make these changes, and this is how it’s going to pay off or work out,’” Childs says. “Lenders love customers who come in with that depth of planning and documentation. It shows that you’re serious about what you’re doing, you’ve done your research, and that you have good reason to have confidence in your decisions.”
The budget analysis similarly could provide a confidence boost to a younger generation wanting to introduce a new practice to a family operation.
If creating these budgeting tools sounds daunting, Childs says the new Noble Profitability Essentials course was created to help ranchers walk through enterprise accounting and cash flow budget exercises.
It’s important to understand that these practices really are the economic engine of an operation, Childs says. “If we can’t make it work with a pencil, it’s doubtful we’ll make it work in real life.”
Comment